CA.Pankaj Vasani IMT, Nagpur l Sept 5, 2010 Guest Speaker : Pankaj Vasani Session on Accounting...

CA.Pankaj VasaniIMT, Nagpur l Sept 5 , 2010

Guest Speaker :

Pankaj Vasani

Session on Accounting Standards & convergence to IFRS

Institute of Management Technology (IMT), Nagpur

September 5, 2008


Introduction of the guest faculty

Mr. Pankaj Vasani is a qualified Chartered Accountant and Lawyer, specializing in India and International taxes. He is currently the Head of Tax at Sapient Corporation Pvt. Ltd. Pankaj has vast experience and a strong track record in automotive, beverage, software and service industry. In his prior assignments, he has worked with Coca-Cola, Subros Ltd., and also in an advisory role. He is a master draftsman having excellent interpretative/ logical reasoning skills and is very well known in the tax fraternity. Pankaj has been a frequent contributor and speaker at various tax seminars/ conferences, and is also a guest faculty at B-schools.


History of accounting

Bible and Islamic Quran contains mention about Simple trade accounting.

Luca Pacioli (1445-1517) is to be credited for “birth of accountancy” It was because of his mathematical knowledge that “double accounting system” was introduced

The First book on accounting in English language was published in London by John Gouge (or Gough) in 1543 described as ‘A Profitable Treaty called the instrument’

--- It helped us to learn good order of keeping of the famous reconynge, called in Latin Dare and Habere, In English Debtors and Creditors

Fine art of accounting was present in India even in Vedic times. Rig-Vedas having references to words Kraya (sale),Vanij (Merchant), Sulka (Price)

As observed by Prof.Max Mueller there is very evidence of highly developed Hindu Accounting tradition in “Arthashatra” written by Kautilya around 300 B.C.


Agenda

Accounting Standards Convergence of Accounting Standards with IFRS


Financial reporting not an end

AS to bring qualitative improvement in FR

ICAI- leadership role-ASB

Legal recognition by Co Act & SEBI

To harmonize different

accounting policies and

practices in use in a country

Seek to bring about

uniformity in accounting practices

Reduce alternative- bound of rationality-

compatibility-informed decision

At par with IAS. ASI + Guidance note

Foreword

OBJECTIVE


Accounting Standard Board

ICAI constituted an Accounting Standards Board (ASB) on 21st April, 1977

Main function of ASB is to formulate accounting standards so that such standards may be established by the Council of the Institute in India.

ASB takes into consideration the applicable laws, customs, usages and business environment

The Institute is one of the Members of the International Accounting Standards Committee (IASC) and has agreed to support the objectives of IASC.

While formulating the Accounting Standards, ASB gives due consideration to International Accounting Standards, issued by IASC and tries integrate them, to the extent possible, in the light of the conditions and practices prevailing in India

ASB issues guidance notes on the Accounting Standards and give clarifications on issues arising therefrom - also reviews the AS at periodical intervals

The Institute of Chartered Accountants of India

Established by an Act of Indian Parliament

“The Chartered Accountants Act, 1949”


Determine broad area where AS is needed

Assisted by Study Groups

Hold dialogue with Govt, PSU & industry

Exposure draft prepared- for comments

Considers draft

Makes amendment; if

necessary

AS issued under the authority of Council

Response received - draft finalized

Council of the Institute

Procedure for issue of AS


APPLICABILITY OF ACCOUNTING STANDARDS

ICAI, not being a legislative body, can enforce compliance with its standards only by its members.

However, Section 211(3A) of the Companies Act requires companies to present their profit and loss accounts and balance sheets in compliance with the accounting standards

SEBI and the RBI also require compliance with the Accounting Standards issued by the ICAI

Insurance Regulatory and Development Authority (IRDA) (Preparation of Financial Statements and Auditor’s Report of Insurance Companies) Regulations, 2000 requires insurance companies to follow the Accounting Standards issued by the ICAI.

The statutory auditors of every company are required to report whether the AS have been complied with or not

Accounting Standard and Income Tax Act

Guidance Note on Audit u/s 44AB of Income Tax Act, requires all financial statements prepared under mercantile system of accounting to comply with all applicable mandatory accounting standards issued by the Institute.


Accounting Standards : 1 ~ 32


ACCOUNTING STANDARDS

5

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

Items and Changes in Accounting Policies AS 6 Depreciation Accounting AS 7 Construction Contracts (revised 2002) AS 8 Accounting for Research and Development AS 9 Revenue Recognition AS 10 Accounting for Fixed Assets

AS 11 The Effects of Changes in FEx Rates AS 12 Accounting for Government Grants AS 13 Accounting for Investments AS 14 Accounting for Amalgamations AS 15 (revised 2005) Employee Benefits AS 16 Borrowing Costs

AS 17 Segment Reporting AS 18 Related Party Disclosures 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 Discontinuing Operations AS 25 Interim Financial Reporting

AS 26 Intangible Assets AS 27 Financial Reporting of Interests in Joint Ventures AS 28 Impairment of Assets AS 29 Provisions, Contingent` Liabilities and Contingent

Assets

AS 30 Financial Instruments: Recognition and Measurement

AS 31 Financial Instruments: Presentation AS 32 Financial Instruments: Disclosures


ACCOUNTING STANDARD-1

DISCLOSURE OF ACCOUNTING POLICIES

– Applicable to: all enterprises since 1-4-93. – Deals with: the disclosure of significant accounting policies followed / method adopted in

preparing and presenting financial statements.

Fundamental accounting assumption: Going Concern Consistency Accrual

Change in AP when: Reqd by statute Better/more appropriate presentation Compliance with AS

Disclosure of AP: One place Part of FS No remedy for wrong or inappropriate treatment Any change…

Consideration in selection of AP: Prudence Substance over form (actual happening Vs legal form) Materiality (information – influence- judgment)


ACCOUNTING STANDARD- 2

VALUATION OF INVENTORIES

– Applicability: to all enterprises since 1-4-1999 [originally issued in june-1981] – Deals with: accounting for inventories other than: AS-7, service providers; financial instruments held

as stock-in-trade; and Producers inventories of livestock, agricultural and forest products, …

AS-2 and International Accounting Standard (IAS)-2: both are similar

OBJECTIVE: Method of computation of cost of stock Determine value of C/stock - at which it

will be shown in BS – till it is not sold and recognized as revenue

INVENTORY: Inventories are assets consisting of :

Finished goods WIP & Raw Material other stores, spares, raw material &

consumables

Major point of valuation of inventory Determine cost of inventory (CP+CoA+ CoC) Determine NRV of inventory Lower taken

(SP-CP-CoS)

DISCLOSURE IN FS AP adopted for measuring inventory &

Cost Formula used Classification of inventory like

Finished, WIP & its Carrying cost



CASH FLOW STATEMENTS

– Applicability: Mandatory to Level III enterprises (since 1-4-2004) – Deals with / explains : cash movement under following heads

(sum of these 3 reflect inc/dec in cash & cash equivalent)

Note: Non-cash Transactions are to be excluded from cash flow statement

Cash flow from operating activities

Cash flow from financing activities

Cash flow from investing activities

Definitions

Cash: comprises cash on hand and demand deposits with banks.

Cash equivalents: short term, highly liquid investments having maturity of less than 3 months can readily be convertible into cash w/o risk of changes in value

Operating Activity

(Principal revenue producing activity)

Cash received from sale of good/service Cash received from royalty, fee, comm.. Cash payment for goods/services, tax payment Cash payment on behalf of employee

Investing activity (Acquiring/disposing long term asset & other investment)

Cash received from sale of FA/ITA Cash payment for acquiring FA & ITA Cash payment / investment in JV and other Co.

Financing activity(result in change in size/composition of owner’s capital/ borrowing of Org

Cash received from sale of share, issue of shares Cash payment for buy back of shares, interest/dividend payment



CONTINGENCIES AND EVENTS OCCURRING AFTER THE BALANCE SHEET DATE

– Applicability: Mandatory to all enterprises (since 1-4-1998) – Deals with : treatment in financial statements of contingency & events occurring after the balance

sheet date.

Contingency

Existing condition/situation Result of which is not know Result will be know on

happening/non-” Result may be gain/loss

E.g.: litigation, claim, obligation etc

Contingency must exist on a B.S date

No contingency- no provision /notes to a/c

Prudence- contingent loss only recognized

Events occurring after B.S

date

May have favorable/ un-” effect Occurs b/w date on which B.S made

and approved by BOD Requires either adjustment to

asset/liability or disclosure

E.g.: debtor insolvent, going concern, MV of investment, dividend etc.

Relate to event existing on BS date Do not relate to event existing on BS

date Events which take place after BS but

require adjustment in assets/liability Event after acceptance of a/c –

disclosure in board report

Following information should be provided in disclosure: the nature of the event; an estimate of the financial effect, or a statement that such an estimate cannot be made



NET PROFIT OR LOSS FOR THE PERIOD, PRIOR PERIOD ITEMS AND CHANGES IN ACCOUNTING POLICIES

5

– Applicability: Mandatory to all enterprises (since 1-4-1996) – Deals with : the following

Presenting P&L from ordinary activities, extraordinary items & prior period items in P&L a/c; a

accounting for changes in accounting estimates, and

disclosure of changes in accounting policies.

Ordinary activities Ordinary activities undertaken by an enterprise as part of its business and related activities arising due to these activities. All items of income and expense which are recognized in a period should be included in the determination of net profit or loss for the period unless an Accounting Standard requires or permits otherwise.

Prior period item “Material charges” or “credits” that arise in current period as a result of error and omission in past period Generally infrequent Separate disclosure – nature and amount- impact E.g. dep faulty calc or mathematical error

Extraordinary item Income/exp arising – distinct from ordinary activity – expected to be infrequent Vis-à-vis business ordinarily carried on.- Subjective - Abnormal not necessarily extraordinary E.g. Natural disaster, expropriation of asset by state, change in govt fiscal policy, business segment discontinuance Part of net P&L for the period – separate disclosure – size, nature & amount

Accounting estimate Many FS item cannot be measured with precision but can only be estimated E.g. provision for debtor/creditor, any liability , useful life of asset etc. Revision of estimate does not bring adjustment



DEPRECIATION ACCOUNTING

– Applicability: to all enterprises since 1-4-1995

– Deals with: depreciation accounting and applies to all depreciable assets

Depreciation: a measure of the wearing out, consumption or other loss of value of a depreciable asset arising from use, efflux, passing of time or obsolescence through technology and market changes.

Depreciation includes amortization of assets whose useful life is predetermined – more than 1 year

No depreciation on land, but applicable on leasehold land

Depreciation as per St. line method: (Cost – scrap value) / estimated useful life

Depreciation as per WDV:

1-N (Scrap value/ cost)

N = estimated useful life

Note: Companies Act, under Schedule XIV gives minimum amount of depreciation and not the maximum An Organisation can provide more depreciation – disclosure- effect – reason Change in method- to be disclosed in notes

Disclosure

Total cost of each class of asset Total depreciation for the period

Accumulated depreciation Depreciation Method



CONSTRUCTION CONTRACTS

– Applicability: to all enterprises (since 01-04-02) – Deals with: the accounting treatment of revenue and costs associated with construction

contracts

Before the revision of this AS, there were two methods to determine profit. Percentage of completion method >> Post revision of AS only this to be used Completed contract method

Types of Contract :

Fixed price contract: in this 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.

Cost plus contract: in this the contractor is reimbursed for allowable or otherwise defined costs, plus percentage of these costs or a fixed fee

Construction contract: a contract specifically negotiated for construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design, technology and function or

their ultimate purpose or use. Like contract for construction of bridge, building, dam etc

revenue recognized in the period

methods used to determine the contract

methods used to determine the stage of completion of contracts in progress

aggregate amount of costs incurred and recognised profits

amount of advances received

amount of retentions gross amount due from customers

Disclosure



Accounting for Research and Development

In view of operation of AS 26, this Standard stands withdrawn



REVENUE RECOGNITION

– Applicability: to all enterprises (since 01-04-93) – Deals with: the bases for recognition of revenue

Revenue: the gross inflow of cash, receivables or other consideration arising in the course of the ordinary activities of an enterprise from

a. the sale of goods,

b. the rendering of services and

c. the use by others of enterprise resources yielding interest, royalties and dividends

Revenue recognition in case of Sale of Goods:

property in the goods has been transferred to the buyer for a consideration, Or

significant risks and rewards of ownership has been transferred to the buyer; and

seller retains no effective control of ownership of the goods transferred; and

no significant uncertainty exists regarding the amount of the consideration.

Revenue recognition in case of rendering of Services: when service is performed & no significant

uncertainty exists Performance is measured either: Completed service contract method: recognizes

revenue only when the rendering of services under a contract is completed or substantially completed, or

Proportionate completion method: recognizes revenue proportionately with the degree of completion of services under a contract.

Uncertainty - Provision

Postponed - disclosure

Revenue recognition in case of: Consignment sale – when agent sells Interest- when accrued Advertisement – when displayed to public Dividend: when Co. declares or individual has

right to receive etc



ACCOUNTING FOR FIXED ASSET

– Applicability: to all enterprises (since 01-04-93) – Deals with: accounting for FA

Fixed Assets: is an asset which is: Expected to be used for more than 1 accounting period Not held for sale in normal course of business Held with the intention of production of good or rendering of service

Gross book value:

historical cost .When this amount is shown net of accumulated depreciation, it is termed as net book value

Fair market value:

the price that would be agreed to in an open and unrestricted market between knowledgeable and willing parties dealing at arm's length who are fully informed and are not under any compulsion to transact

Valuation of FA in special cases: Hire Purchase – cost price Jointly held asset- Prorata cost Acquired at consolidated price – valuer’s value Dividend: when Co. declares or individual has

right to receive etc

Self made asset – only direct cost recorded – no profit margin

Asset exchanged: 3 scenarios

- Not similar asset – FMV of asset given up

- Similar asset- FMVof asset acquired/given or WDV

- Shares issued – FMV of share/asset – whichever higher

Gain/loss on sale of FA- generally recognized in PnL

FeX fluctuation – adjusted in cost of FA

Improvement cost – capitalised Repair – debit to PnL



ACCOUNTING FOR EFFECT OF CHANGES IN FOREIGN EXCHANGE RATE

– Deals in: accounting for transaction in foreign currency translating the FS of foreign branch

Reporting currency: currency of country where FS are prepared Foreign currency: currency other than reporting currency Average rate: mean of exchange rate during the period (week, fortnight, month etc) Closing rate: Exchange rate at BS date Forwards rate: agreed exchange rate b/w 2 parties for exchange of 2 currencies at a specified

future dateA transaction in a foreign currency should be recorded in the reporting currency by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction.

CHANGES IN EXCHANGE RATE SUBSEQUENT TO INITIAL RECOGNITION

Adjusted to the carrying amount of the fixed assets.

In case the fixed assets are revalued the necessary adjustments should be given effect to the revalued asset

TRANSLATION OF FS OF FOREIGN BRANCHES Revenue items, except opening and closing inventories

and depreciation- average rates. Opening inventories – rate at the commencement of the

accounting period. Closing inventories, Monetary items, - closing rate or

realisable value. Non monetary items - rate prevalent at the date of the

transaction. Fixed assets- rate prevalent at the date of the transaction Contingent Liabilities- closing rate, translation does not

result in any exchange difference



ACCOUNTING FOR GOVERNMENT GRANTS

– Applicability: Mandatory for all enterprises with respect from 01/04/1994

Government Grants are : assistance by government in cash or kind for past or future compliance with certain conditions

Contingency related to Govt. Grant

A contingency related to Govt. grant receivable and refundable should be treated in accordance with AS-4.

Government grants may be received in following ways:

Grants related to acquisition of fixed assets

Grants related to revenue Grants related to promoter’s contribution Grants related to compensation for

expenses

Disclosures: The accounting policy adopted The nature and extent of govt. grants

recognized in the financial statements

Government Grants should be recognized where there is reasonable assurance that :

the enterprise will comply with the conditions attached to them; and

the grants will be received.

Amount of Grant: Monetary Grant: Amount earned should be the

value of grant.

Non- Monetary Grant:

++ Where grants are given at concessional rate, then such assets are accounted for at their acquisition cost.

++ Where grants are given free of cost, then such assets are recorded at nominal value

Government grants can be accounted either by using capital approach or by using income approach Capital approach: The grant is treated as part of shareholder’s funds. Income approach: The grant is taken to income over one or more periods to match them with the related costs



ACCOUNTING FOR INVESTMENT

– Applicability: mandatory to all enterprises (since 01-04-93) – Deals with: Accounting for investments in the financial statements of enterprises and

related disclosure requirements

INVESTMENTS are assets held by an enterprise for earning income by way of dividends, interest, and rentals, for capital

appreciation, or for other benefits to the investing enterprise.

Assets held as stock-in-trade are not ‘investments’CARRYING AMOUNT OF INVESTMENTS

Current Investments - At Lower of cost or fair value.

Long term investments - At Cost.

Any reduction in the carrying amount should be charged to the profit and loss statement However, in case of a permanent decline, provision for diminution shall be made DISPOSAL OF INVESTMENT When any investments is sold, the difference between the carrying amount and net sale proceeds should be charged or credited to the profit and loss statement

In case of partial disposal, the carrying amount to be allocated to that part is to be determined on the basis of the average carrying amount of the total holding of the investment

DISCLOSURE Classification of investments, Accounting policies used Amounts included in PnL for

interest, dividends, rentals Realisability of investments

or the remittance of income and proceeds of disposal

INVESTMENTS TYPE: Long term investment Short term investment



ACCOUNTING FOR AMALGAMATION

– Deals with: Accounting for amalgamationsTreatment of any resultant goodwill or reserves

It does not deal with acquisition by one company of another company in consideration for payment in cash or by issue of shares

TYPES OF AMALGAMATION NATURE OF MERGER

- Pooling of interest method NATURE OF PURCHASE

- Purchase method

PURCHASE METHOD The assets & liabilities are

recorded either at existing carrying values or by allocating the consideration on the basis of Fair values on the date of amalgamation.

The reserves of the transferor company, other than the statutory reserves, should not be included in the financial statements of the transferee company

POOLING OF INTEREST METHOD The assets, liabilities and reserves are recorded at their

existing carrying amounts Uniform set of accounting policies is adopted The difference between the share capital issued and the share

capital of the transferor company should be adjusted in reserves.



ACCOUNTING FOR RETIREMENT BENEFIT

– Deals with: the accounting treatment of the cost of the retirement benefits in the financial statements of employers

Retirement benefit schemes are: Legal contractual arrangement Where employer provides benefit to

employee On leaving service, retirement or at

death

Liability arises at the due date for the payment of liability

These benefits do not accrue at the time of death, resignation etc

Disclosure: Method by which retirement benefit costs for the period have been defined When accounting is made as per actuarial valuation, date on which such valuation

was conducted

Retirement Benefits consists of :

1. Provident Fund

2. Superannuation / Pension (20 years)

3. Gratuity (5 yrs)

4. Leave Encashment Benefit (leave not taken ~ cash)

5. Other Retirement Benefits

There are 3 stages of payment of expense

Expense arise Enforceable claim against the Co. Payment of expense



BORROWING COST

– Applicability: mandatory to all enterprises

– Deals with: whether the cost of borrowing should be included in cost of asset or not

Borrowing costs are interest and other costs incurred by an enterprise in connection with the borrowing of funds

Qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale E.g. construction process, patent etcRECOGNITION Capitalize borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset

These should be capitalized only if:

++ it is probable that they will result in future economic benefits to the enterprise and

++ costs can be measured reliably

++ other borrowing costs to be expensed off.

DISCLOSURE The accounting policy adopted for borrowing costs. The amount of borrowing costs capitalised during

the period

BORROWING COST Interest and commitment charges on bank & other short term

borrowings Amortisation of discounts or premiums relating to

borrowings Amortisation of ancillary costs incurred in connection with

the arrangement of borrowings Finance charges of assets acquired under finance leases or

under other similar arrangements Exchange differences arising from foreign currency

borrowings to the extent that they are regarded as an adjustment to interest costs



SEGMENT REPORTING

– Deals with: Reporting financial information about: Different types of products and services an enterprise produces, and Different geographical areas in which it operates.

BENEFIT TO USERS Better understanding of the performance of the enterprise; Assess the risks and returns of the enterprise. Make more informed judgments about the enterprise

BUSINESS SEGMENT is a distinguishable component of an enterprise

that is engaged in providing an individual product or service or a group of related products or services and that is subject to risks and returns that are different from those of other

business segments.

GEOGRAPHICAL SEGMENT is a distinguishable component of an enterprise

that is engaged in providing products or services within a particular economic environment and

that is subject to risks and returns that are different from those of components operating in other economic environments

APPLICABILITY:

Accounting period commencing on or after April 1, 2001 in respect of following enterprises:

LISTED ENTERPRISES or those which are in the process of Listing Enterprises with annual turnover more than Rs. 50 crores



RELATED PARTY DISCLOSURE

– Applicability: Mandatory for all enterprises with respect from 01/04/2004– Deals with: Related party relationships; and transactions between a reporting enterprise and its

related parties.

RELATED PARTY: Ability to - Control ; or Exercise significant influence in making

financial and/or operating decisions

RELATIONSHIP COVERED Control of another enterprise (parent); Control by another enterprise (subsidiary); Under common control (fellow subsidiary); Associates/ joint ventures/ co-venturer; Investor in respect of which the enterprise

is an associate; Individuals owning, directly or indirectly,

voting power that gives them control or significant influence and their relatives;

Key management personnel and their relatives

SIGNIFICANT INFLUENCE Participation in financial and/or operating

policy decisions but not control; May be gained by - Share ownership Statute; and agreement Assumed to exist in case of holding of

20% or more voting power directly or indirectly.

CONTROL Ownership, directly or indirectly, of more

than 50% of the voting power Control of composition of board of

directors of a company A substantial interest in voting power

(20% or more)

NOT RELATED PARTY Two companies simply because they have a director in

common. A single customer, supplier, franchise/ distributor Providers of finance, trade unions, public utilities, government

departments and government agencies in the course of their normal dealing



ACCOUNTING FOR LEASE

– Applicability: leases commencing on and from 1st April 2001 – Deals with: accounting policies & disclosures for lessees & lessors

Lease : A lease is an agreement, whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time

CLASSIFICATION OF LEASES

Finance lease is a lease that transfers substantially all the risks and rewards incident to ownership of an asset. Title may or may not eventually be transferred

Operating lease is a lease other than a finance lease

EXAMPLE OF FINANCE LEASE Ownership transferred by end of lease term. Lease contains bargain purchase option. Lease term for major part of asset’s economic

life. Present value of minimum lease payments

amounts to at least substantial all of asset’s fair value.

Leased asset of specialized nature that only lessee can use without major modifications being made

Accounting for finance lease Accounting for operating lease Sale and buy back transaction

Classification depends on substance of the transaction rather than the form of the contract

Basic criteria providing guidance in determining whether these risks and rewards have been transferred



EARNING PER SHARE

– Applicability: Mandatory w.e.f. 1.04.2001 in respect of Cos listed in India– Objective: Comparability enhancement

Different enterprises, same period Different periods, same enterprise

An enterprise should present BASIC & DILUTED EPS on the face of the statement of profit and loss account for each class of equity shares that has a different right to share in the net profit for the period. EPS to be calculated & presented even in case of losses.

Basic EPS = Net profit/loss for the period attributable to equity shareholders

/ Weighted Average No. of Equity Shares

Diluted EPS= Adjusted Net profit/loss for the period attributable to equity shareholders.

/ Weighted Average No. of (Equity Shares + Dilutive Potential Equity Shares)

BONUS ISSUE, SHARE SPLIT, REVERSE SHARE SPLIT etc RIGHTS ISSUE



CONSOLIDATED FINANCIAL STATEMENT

– Applicability: to all enterprises (since 01-04-93) – Deals with: principles and procedures for preparation and presentation of consolidated financial

statements

APPLICABLE TO FOLLOWING ENTERPRISES Group of enterprises under the control of a parent Investments in subsidiaries

COMPOSITION OF CONSOLIDATED FINANCIAL STATEMENTS Consolidated balance sheet, Consolidated statement of profit and loss, Notes, additional statements and explanatory material

that outline an essential part thereof

NOTE: Consolidated financial statements are presented, to the extent possible, in the same format as adopted by the parent for its separate financial statements

CONSOLIDATION PROCEDURES

BASIC PROCEDURE: The financial statements of the parent and its subsidiaries should be combined on a ONE-TO-ONE BASIS by grouping together the like items of assets, liabilities, income and expenses.

OTHER PROCEDURE

The holding company should eliminate its cost of investment in each of its subsidiaries

If cost of investment > holding’s share in equity --------- GOODWILL

If cost of investment < holding’s share in equity ---------- CAPITAL RESERVE

EXCLUDED CASES Amalgamations Investments in associates Investments in joint ventures



ACCOUNTING FOR TAXES ON INCOME

– Applicability: to all enterprises (since 01-04-06) – Seeks to: redress the distortions caused by traditional method of accounting for income-taxes

by requiring the adoption of deferred tax accounting in respect of timing differences

Accounting income and taxable income for a period are seldom the same

ACCOUNTING INCOME (LOSS)

Net profit or loss for a period as per profit and loss statement.

TAXABLE INCOME (TAX LOSS)

Income (loss) for a period determined in accordance with the tax laws

Differences between the two are on account of: Permanent Differences are the differences between taxable income and accounting income for a

period that originate in one period and do not reverse subsequently.

Examples:Expenditure disallowed as per Income Tax Act (Forever)Excess expenditure allowed by Income Tax Act, 1961 in respect of Scientific Expenditure

Timing Differences are the differences between taxable income and accounting income for a period that originate in one period and are capable of reversal in one or more subsequent periods.

Examples: Depreciation rate/method different as per Accounts and Income tax Calculation Expenditure of the nature mentioned in Section 43B (e.g. sales tax charged in account on accrual

basis but not paid; such sales tax will be an allowable expenditure in the year of payment and a disallowable expenditure in the year in which accrued)

CURRENT TAX

The amount that is expected to be paid to the taxation authorities.

DTA/DTL: At the tax rates and tax laws that have been enacted at the balance sheet date.



ACCOUNTING FOR CONSOLIDATED FINANCIAL STATEMENT

– Applicability: to all enterprises (since 01-04-02) – Deals with: to set out principles and procedures for recognizing, in the consolidated financial

statements, the effects of the investments in associates on the financial position and operating results of a group.

Consolidated financial statements are the financial statements of a group presented as those of a single enterprise



DISCONTINUING OPERATION

– Covers: discontinuing operation and not discontinued operation

DICONTINUING OPERATION is a component of an enterprise:

(a) that the enterprise, pursuant to a single plan, is:

- disposing of substantially in its entirety (example – demerger)

- disposing of piecemeal (selling and settling assets and liabilities one by one)

- terminating through abandonment; and

(b) That represents a separate major line of business or geographical area of operations; and

(c) That can be distinguished operationally and for financial reporting purposes.

NOT DICONTINUING OPERATION Planned change in product line Abrupt/unplaned change in product line

EXAMPLE: gradual or evolutionary phasing out of a product line or class of service; discontinuing, even if relatively abruptly, several products within an ongoing line

of business; shifting of some production or marketing activities for a particular line of

business from one location to another; closing of a facility to achieve productivity improvements or other cost savings; Selling shares of subsidiary whose activities are similar to those of the parent or

other subsidiaries. (In case of Consolidated Financial Statements)



INTERIM FINANCIAL REPORTING

– Applicability: to all enterprises (since 01-04-02) – Deals with: reporting for period < 1 year. Clause 41 of listing agreement provides to publish

financial result on quarterly basis

Timely and reliable interim financial reporting improves the ability of investors, creditors, and others to understand an enterprise's capacity to generate earnings and cash flows, its financial condition and liquidity

Interim period is a financial reporting period shorter than a full financial year.

Interim financial report means a financial report containing either a complete set of financial statements or a set of condensed financial statements (as described in this Statement) for an interim period

During the first year of operations of an enterprise, its annual financial reporting period may be shorter than a financial year. In such a case, that shorter period is not considered as an interim period

Minimum Components of an Interim Financial Report

A. condensed balance sheet;

B. condensed statement of profit and loss;

C. condensed cash flow statement; and

D. selected explanatory notes



INTANGIBLE ASSET

– Applicability: to all enterprises (since 01-04-04) – Deals with: accounting for intangible assets that are not dealt with specifically in another

Accounting Standard

An intangible asset is an identifiable non-monetary asset, without physical substance, held for use in the production or supply of goods or services, for rental to others, or for administrative purposes.

An asset is a resource:

A. controlled by an enterprise as a result of past events; and

B. from which future economic benefits are expected to flow to the enterprise.

Monetary assets are money held and assets to be received in fixed or determinable amounts of money.

Non-monetary assets are assets other than monetary assets.

Research is “original” and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding.

Development : Converts result of research into marketable product



FINANCIAL REPORTING OF INTEREST IN JOINT VENTURE

– Scope: Applicable in accounting for

interests in joint ventures and reporting of joint venture assets, liabilities, income and expenses in the financial statements

of venturers and investors

A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity, which is subject to joint control

A venturer is a party to a joint venture and has joint control over that joint venture.

An investor in a joint venture is a party to a joint venture and does not have joint control over that joint venture.

Proportionate consolidation is a method of accounting and reporting whereby a venturer's share of each of the assets, liabilities, income and expenses of a jointly controlled entity is reported as separate line items in the venturer's financial statements.

FORMS OF JV jointly controlled operations, jointly controlled assets, and jointly controlled entities.



IMPAIRMENT OF ASSET

– OBJECTIVE To identify the assets which are sick / unhealthy To ensure that enterprise assets are carried at not more than their recoverable amount

If carrying amount < = Recoverable amount : Asset is not impaired

If carrying amount > Recoverable amount : Asset is impaired

Impairment Loss = Carrying Amount – Recoverable Amount

AS-28 applies to all assets other than

1. Inventories(AS-2)2. Assets arising from construction contract (AS-7)3. Financial assets/Investments(AS-13)4. Deferred tax assets(AS-22)

Treatment of impairment loss:

An impairment loss should be recognized against the revaluation reserve, if any, and balance, if any, as an expense in the P/L A/c

Impairment loss for a Cash Generating Unit should be allocated in the following order Goodwill, if any. Balance, if any, to individual assets in proportion to their carrying cost



PROVISION, CONTINGENT LIABILTY AND CONTINGENT ASSET

PROVISION:

A provision is a liability which can be measured only by using a substantial degree of estimation.

Treatment : A provision should be recognized when: An enterprise has a present obligation as a result of past

event It is probable that an outflow of resources embodying

economic benefits will be required to settle the obligation; and

A reliable estimate can be made of the amount of the obligation.

CONTINGENT LIABILITY:

A contingent liability is: A possible obligation that arises from past events and; existence of which will be confirmed by the occurrence or non

occurrence of future events not wholly within the control of the enterprise

Treatment:

An enterprise should not recognize a contingent liability. It should be disclosed in financial statements unless the possibility of outflow is remote.

CONTINGENT ASSETS:

A contingent assets is : a possible asset that arises from past events existence of which will be confirmed only by the occurrence or non-occurrence of one or

more uncertain future events not wholly within the control of the enterprise.

Treatment:

(Prudence) - An enterprise should not recognize a contingent asset. An enterprise should not be disclosed in financial statements.

It may be disclosed in the report of approving authority, where an inflow is probable



Financial Instruments: Recognition and Measurement


Financial Instruments: Presentation


Financial Instruments: Disclosures


Financial instruments

Embedded Derivatives

Derivatives

AS 30, 31, 32 Hedging


Financial instruments

AS 30

Recognition

and Measurement

derecognizing of

of financial

financial instruments

instruments

AS 31

Derivatives

and Presentation

hedge

accounting

AS 32

Disclosure


Market trends as reflected in AS 30, 31 and 32

Key principles of the Standards

Harmonisation of markets

Increased complexity

Detailed disclosures

Use of fair values

All derivatives are recognized on the

balance sheet

Most financial assets measured

at fair value

Measurement of the hedging instrument is the basis for

Reduction of options hedge accounting


Convergence of Accounting Standards

with IFRS

Why, When, What & How


IFRS - International Financial Reporting Standards

International Financial Reporting Standards (IFRS) are: “principles-based” Standards, Interpretations and Framework (SIF) adopted by the International Accounting Standard Board (IASB).

The principle-based standards have distinct advantage that the transactions can not be manipulated easily to achieve a particular accounting

IFRSs lay down treatments based on the economic substance of various events and transactions rather than their legal form.

The application of this approach may result into events and transactions being presented in a manner different from their legal form.

To illustrate, as per IAS 32, preference shares that provide for mandatory redemption by the issuer are presented as a liability

International Financial Reporting Standards comprise: International Financial Reporting Standards (IFRS)—standards

issued after 2001 • International Accounting Standards (IAS)—standards issued

before 2001 • Interpretations originated from the International Financial

Reporting Interpretations Committee (IFRIC)—issued after 2001 • Standing Interpretations Committee (SIC)—issued before 2001 • Framework for the Preparation and Presentation of Financial

Statements

IASB is based in London

Its overall objective is to create a sound foundation for future accounting standards that are principles-based, internally consistent and internationally converged.

The IASB and the US FASB (the boards) are undertaking the project jointly


IFRS Structure

The term “IFRSs” currently comprises of:

>> 9 IFRSs, 29 IASs (originally 41), 18 IFRIC and 11 SIC interpretations, plus the Framework

There are 15 new standards and major projects for which exposure drafts are issued

Final SME standard have been issued in July 2009. 8 existing standards are being amended for which exposure drafts are issued

IFRS 1 First-time Adoption of International Financial Reporting Standards

IFRS 2 Share-based Payment

IFRS 3 Business Combinations

IFRS 4 Insurance Contracts

IFRS 5 Non-current Assets Held for Sale and Discontinued Operations

IFRS 6 Exploration for and Evaluation of Mineral Resources

IFRS 7 Financial Instruments: Disclosures

IFRS 8 Operating Segments

IFRS 9 Financial Instruments - Assets

IAS 1(2007) Presentation of Financial Statements

IAS 2 Inventories

IAS 7 Statement of Cash Flows

IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

IAS 10 Events after the Reporting Period

IAS 11 Construction Contracts

IAS 12 Income Taxes

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 23 Borrowing Costs

IAS 24 Related Party Disclosures

IAS 26 Accounting and Reporting by Retirement Benefit Plans

IAS 27(2008) Consolidated and Separate Financial Statements

IAS 28 Investments in Associates

IAS 29 Financial Reporting in Hyperinflationary Economies

IAS 31 Interests in Joint Ventures

IAS 32 Financial Instruments: Presentation

IAS 33 Earnings per Share

IAS 34 Interim Financial Reporting

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


Non-financial Disclosures

The Framework recognizes financial statements do not provide all the information required for decisions

To achieve, the objective the financial reports may include additional information in the form of non-financial disclosures - that is useful to a wide range of users in making economic decisions

Such disclosures are usually contained in Management Report

To deal with the aspect, the IASB is developing a separate IFRS on Management Commentary

Recently, a discussion paper on the subject has been issued


The Global Move Towards IFRS

Europe2005

Australia 2005

Canada2009/11

South Africa2005

United States (2014/15/16?)

Current or anticipated requirement or option to use IFRS (or equivalent)

Brazil2010

China 2007

India 2011

Chile 2009

Japan(2016)


IFRS Adoption

• Approximately 100 countries have adopted or are in the process of adoption

• Status of adoption by some countries which compete with India for capital allocation:

China Similar to IFRS (effective for listed entities 2007)

Brazil 2010

Russia Currently applicable for banks.

South Korea 2011

USA 2014/15/16

UK 2005

Nepal 2011 (as per action plan released)


BIGGEST STAMP OF APPROVAL

Securities and Exchange Commission (SEC), United States of America have permitted Foreign Private Issuers to file IFRS compliant financial statements (as promulgated by the IASB) without reconciliation to US GAAP

SEC has issued a proposed roadmap to assess whether US domestic registrants should be permitted to use IFRS

IFRS Adoption…contd.


Convergence of Accounting Standards

What is Convergence ?

Convergence means eliminating the differences between Indian GAAP and IFRS

and/or

aligning Indian GAAP more closely to IFRS

and/or

may be even adopting IFRS as it is.


WHY IFRS

To bring uniformity in reporting systems globally

Indian companies are listed on overseas stock exchanges and have to recast their accounts to be compliant with GAAP requirements of those countries

Foreign companies having subsidiaries in India are having to recast their accounts to meet Indian & overseas reporting requirements which are different

Foreign Direct Investors (FDI), overseas financial institutional investors (FII) are more comfortable with compatible accounting standards

ICAI has decided to implement IFRS in India.

The Ministry of Corporate Affairs has also announced its commitment to convergence to IFRS by 2011.


In October 2007, ICAI issued concept paper giving the approach and roadmap for convergence

Various study groups have been formed The convergence exercise will be taken up in phases - listed and bigger

companies initially, smaller public companies thereafter, and eventually all private companies/SMEs

The ministry of Company affairs has appointed two working groups, headed by Mr. Y.H. Malegam and Mr. Mohandas Pai to finalise the roadmap to IFRS convergence.

SEBI Committee on Disclosures and Accounting Standards (SCODA) is the standing Committee - Voluntary adoption of International Financial Reporting Standards (IFRS) by listed entities having overseas subsidiaries or by all listed entities.

Convergence Project in India


On January 22, 2010 : MCA has released Road Map for convergence with IFRS – For large Companies

On April 5, 2010 : Amendment to listing Agreement provides the option of adoption of International Financial Reporting Standards (IFRS) by listed entities having subsidiaries while declaring Consolidated results/financial statements

Standalone results will be as per the existing Indian GAAP

Convergence Project in India…contd.

IFRS in India – Phase I - 1st April, 2011

The following categories of companies will convert their opening balance sheets in compliance with the notified accounting standards which are convergent with IFRS. These companies are:-

a. Companies which are part of NSE – Nifty 50

b. Companies which are part of BSE - Sensex 30

c. Companies whose shares or other securities are listed on stock exchanges outside India

d. Companies, whether listed or not, which have a net worth in excess of Rs.1,000 crores

IFRS in India – Phase II - 1st April, 2013

The companies, whether listed or not, having a net worth exceeding Rs. 500 crores but not exceeding Rs. 1,000 crores

IFRS in India – Phase III - 1st April, 2014

Listed companies which have a net worth of Rs. 500 crores or less


Convergence with IFRSs in India

While formulating ASs, ICAI comply IFRSs as far as possible

The Preface to the Statements of Accounting Standards, issued by the ICAI, recognizes the same

While formulating ASs, the ICAI makes changes from IFRSs only in those cases where these are unavoidable, particularly, considering legal and/ or regulatory framework prevailing in the country


IFRS –THE GREY AREAS

While IFRS compliance date has been declared by the ICAI, there are several areas which are still not in consonance with such implementation and several accounting standards and statutes will need amendment.

Full & unreserved compliance with IFRS is the objective. However, not many entities are aware about the significance or ramifications thereof, which may lead to a rush for compliance later with some undesirable consequences.

The onus will be on the management to comply with the requirements and the auditors will only have to comment on whether the management has properly complied with the norms or not.


IFRS –THE PLAIN AREAS

IFRS is itself a moving target, with changes being introduced continually…

There are not many trained resources to effect the requisite change.

There is a lack of awareness and understanding of the requirements and implications of IFRS transition and compliance

Communicating the change and managing the transition properly attains importance in this regard.

Training the organizational components will be a huge task.


IFRS – IMPACT

IFRS implementation affects several areas of the business entity, such as:

presentation of accounts, accounting policies and

procedures, the way legal documents are

drafted, the way the entity looks at its

assets and their usage, Its communications with its

stakeholders and also the way it conducts its business.


Steps for transition

Scope the impact

Think of business issues

Plan the implementation

Design and implement systems

Implement business decisions

Parallel run and test systems

Train staff


IFRC & DIRECT TAX CODE (DTC)


Thank you!

OPEN HOUSE – ASK ME!

CA.Pankaj Vasani IMT, Nagpur l Sept 5, 2010 Guest Speaker : Pankaj Vasani Session on Accounting...

Documents

Transcript of CA.Pankaj Vasani IMT, Nagpur l Sept 5, 2010 Guest Speaker : Pankaj Vasani Session on Accounting...