Hello, in this post we will discuss the accounting standards concepts with expalanation. Read further to know more on the concepts.
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First-time Adoption of Indian Accounting Standards
You need to ensure that an entity’s first Ind AS financial statements, and its interim financial reports for part of the period covered by those financial statements, contain high-quality information that:
- It is transparent for users and comparable overall periods presented
- Provides a suitable starting point for accounting in accordance with Indian Accounting Standards and
- Can be generated at a cost that does not exceed the benefits.
The objective of Share-based payment is to specify the financial reporting by an entity when it undertakes a share-based payment transaction. In particular, it requires an entity to reflect in its profit or loss and financial position the effects of share-based payment transactions, including expenses associated with transactions in which share options are granted to the employees.
In this Accounting Standard, it is to improve the relevance, reliability, and comparability of the information that a reporting entity provides in its financial statements about a business combination and its effects
In order to accomplish that, this Ind AS establishes principles and requirements for how the acquirer:
- recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree;
- recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase1; and
- determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination
Here, it is to specify the financial reporting for insurance contracts by any entity that issues such contracts (described in this Ind AS as an insurer). It requires:
- Limited improvements to accounting by insurers for insurance contracts.
- the disclosure that identifies and explains the amounts in an insurer’s financial statements arising from insurance contracts and helps users of those financial statements understand the amount, timing and uncertainty of future cash flows from insurance contracts.
Non-current Assets Held for Sale and Discontinued Operations
This Indian standard has to specify the accounting for assets held for sale and the presentation and disclosure of discontinued operations. In particular, it requires:
- Assets that meet the criteria to be classified as held for sale to be measured at the lower of carrying amount and fair value costs less to sell, and depreciation on such assets to cease; and
- Assets that meet the criteria to be classified as held for sale to be presented separately in the balance sheet and the results of discontinued operations to be presented separately in the statement of profit and loss.
Exploration for and Evaluation of Mineral Resources
This Indian Standard requires:
- Limited improvements to existing accounting practices for exploration and evaluation expenditures.
- Entities that recognize exploration and evaluation assets to assess such assets for impairment in accordance with this Ind AS and measure any impairment in accordance with Ind AS 36, Impairment of Assets.
- Disclosures that identify and explain the amounts in the entity’s financial statements arising from the exploration for and evaluation of mineral resources and help users of those financial statements understand the amount, timing and certainty of future cash flows from any exploration and evaluation assets recognized.
Financial Instruments: Disclosures
The objective of this Standard is to require entities to provide disclosures in their financial statements that enable users to evaluate:
- the significance of financial instruments for the entity’s financial position and performance; and
- the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the reporting date, and how the entity manages those risks.
An entity shall disclose information to enable users of its financial statements to evaluate the nature and financial effects of the business activities in which it engages and the economic environments in which it operates
The objective of this Standard is to establish principles for presenting financial instruments as liabilities or equity and for offsetting financial assets and liabilities and for their assessment of the amounts, timing, and uncertainty of an entity’s future cash flows.
Consolidated Financial Statements
The objective of this statement is to present the financial statements of a parent and its subsidiary (ies) as a single economic entity. In other words, the holding company and its subsidiary (ies) are treated as one entity for the preparation of these statements. Consolidated profit / loss account and consolidated balance sheet are prepared for disclosing the total profit / loss of the group and total assets and liabilities of the group. As per this accounting standard, the consolidated balance sheet if prepared should be prepared in the manner prescribed by this statement.
The objective of this IAS is to establish principles for financial reporting by entities that have an interest in arrangements that are controlled jointly.
Disclosure of Interests in Other Entities
In this standard the objective is you have to evaluate:
- The nature of, and risks associated with, its interests in other entities; and
- The effects of those interests on its financial position, financial performance
and cash flows.
Fair Value Measurement
Fair value is a market-based measurement and not an entity-specific measurement. For some assets and liabilities, observable market transactions or market information might be available. The objective of fair value measurement in both cases is the same—to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market conditions.
Regulatory Deferral Accounts
The financial reporting requirements for regulatory deferral account balances that arise when an the entity provides goods or services to customers at a price or rate that is subject to rate regulation.
In order to meet this objective, the Standard requires:
- Limited changes to the accounting policies that were applied in accordance with previous generally accepted accounting principles (previous GAAP) for regulatory deferral account balances, which are primarily related to the presentation of these accounts; and
- Disclosures that:
- identify and explain the amounts recognized in the entity’s financial statements that arise from rate regulation; and
- help users of the financial statements to understand the amount, timing and uncertainty of future cash flow from any regulatory deferral account balances that are recognized.
Revenue from Contracts with Customers
The objective of this Standard is to establish the principles that an entity shall apply to report useful information to users of financial statements about nature, the amount, timing, and uncertainty of revenue and cash flows arising from a contract with a customer.
Presentation of Financial Statements
This Standard prescribes the basis for the presentation of general purpose financial statements to ensure comparability both with the entity’s financial statements of previous periods and with the financial statements of other entities. It sets out overall requirements for the presentation of financial statements, guidelines for their structure and minimum requirements for their content.
The objective of this standard is to formulate the method of computation of cost of inventories / stock, determine the value of closing stock / inventory at which the inventory is to be shown in balance sheet till it is not sold and recognized as revenue.
Cash Flow Statements
Cash flow statement is additional information to the user of the financial statement. This statement exhibits the flow of incoming and outgoing cash. It assesses the ability of the enterprise to generate cash and to utilize the cash. Also, it is one of the tools for assessing the liquidity and solvency of the enterprise.
Accounting Policies, Changes in Accounting Estimates and Errors
The objective of this Standard is to prescribe the criteria for selecting and changing accounting policies, together with the accounting treatment and disclosure of changes in accounting policies, changes in accounting estimates and corrections of errors. The Standard is intended to enhance the relevance and reliability of an entity’s financial statements, and the comparability of those financial statements over time and with the financial statements of other entities.
Events after the Reporting Period
This standard prescribes:
- When an entity should adjust its financial statements for events after the reporting
- The disclosures that an entity should give about the date when the financial
statements were approved for the issue and about events after the reporting period.
The Standard also requires that an entity should not prepare its financial statements on a going concern basis if events after the reporting period indicate that the going concern the assumption is not appropriate.
This accounting standard prescribes the accounting treatment for taxes on income. Traditionally, the amount of tax payable is determined on the profit / loss computed as per income tax laws. According to this accounting standard, tax on income is determined on the principle of accrual concept. According to this concept, the tax should be accounted in the period in which corresponding revenue and expenses are accounted for. In simple words tax shall be accounted on an accrual basis; not on liability to pay basis.
Property, Plant, and Equipment
This Standard prescribes the accounting treatment for property, plant, and equipment so that users of the financial statements can discern information about an entity’s investment in its property, plant and equipment and the changes in such investment. The principal issues in accounting for property, plant, and equipment are the recognition of the assets, the determination of their carrying amounts and the depreciation charges and impairment losses to be recognized in relation to them.
Accounting for Leases
A lease is an arrangement by which the lesser gives the right to use an asset for a given period of time to the lessee on rent. It involves two parties, a lessor and a lessee and an asset which is to be leased. The lessor who owns the asset agrees to allow the lessee to use it for a specified period of time in return for periodic rent payments.
Accounting Standard has been revised by ICAI and is applicable in respect of accounting periods commencing on or after 1st April 2006. the scope of the accounting standard has been enlarged, to include accounting for short-term employee benefits and termination benefits.
Accounting for Government Grants and Disclosure of
Government Grants are assistance by the Govt. in the form of cash or kind to an enterprise in return for past or future compliance with conditions. Government assistance, which cannot be valued reasonably, is excluded from Govt. grants. Those transactions with Government, which cannot be distinguished from the normal trading transactions of the enterprise, are not considered as Government grants.
The following matters shall be disclosed:
- The accounting policy adopted for government grants, including the methods of presentation adopted in the financial statements.
- The nature and extent of government grants recognized in the financial statements and an indication of other forms of government assistance from which the entity has directly benefited.
- Unfulfilled conditions and other contingencies attaching to government assistance that has been recognized.
The Effects of changes in Foreign Exchange Rates
Effect of Changes in Foreign Exchange Rate is applicable in Respect of Accounting Period commencing on 01-04-2004 and is mandatory in nature. This accounting Standard applicable to accounting for the transaction in Foreign currencies in translating in the Financial Statement Of foreign operation Integral as well as non- integral and also accounting for forward exchange. Effect of Changes in Foreign Exchange Rate, an enterprise should disclose the following aspects:
- Amount Exchange Difference included in Net profit or Loss;
- Amount accumulated in foreign exchange translation reserve;
- Reconciliation of opening and closing balance of Foreign Exchange translation reserve;
Borrowing costs that are directly attributable to the acquisition, construction bor production of a qualifying asset form part of the cost of that asset. Other borrowing costs are recognized as an expense.
Related Party Disclosure
Sometimes business transactions between related parties lose the feature and character of the arms-length transactions. Related party relationship affects the volume and decision of business of one enterprise for the benefit of the other enterprise. Hence disclosure of related party transaction is essential for a proper understanding of financial performance and financial position of the enterprise.
Separate Financial Statements
It is to prescribe the accounting and disclosure requirements for investments in subsidiaries, joint ventures, and associates when an entity prepares separate financial statements.
Accounting for Investments in Associates in consolidated financial statements
This prescribes the accounting for investments in associates and to set out the requirements for the application of the equity method when accounting for investments in associates and joint ventures.
Financial Reporting in Hyperinflationary Economies
This Standard shall be applied to the financial statements, including the consolidated financial statements, of any entity whose functional currency is the currency of a hyperinflationary economy.
Financial Instruments: Presentation
The objective of this Standard is to establish principles for presenting financial instruments as liabilities or equity and for offsetting financial assets and financial liabilities. It applies to the classification of financial instruments, from the perspective of the issuer, into financial assets, financial liabilities and equity instruments; the classification of related interest, dividends, losses and gains; and the circumstances in which financial assets and financial liabilities should be offset.
Earnings per Share
Earning per share (EPS)is a financial ratio that gives information regarding earning available to each equity share. It is a very important financial ratio for assessing the state of the market price of a share. This accounting standard gives a computational methodology for the determination and presentation of earning per share, which will improve the comparison of EPS. The statement is applicable to the enterprise whose equity shares or potential equity shares are listed in the stock exchange.
Interim Financial Reporting (IFR)
Interim financial reporting is the reporting for periods of less than a year generally for a period of 3 months. As per clause 41 of the listing agreement the companies are required to publish the financial results on a quarterly basis.
Impairment of Assets
It is to prescribe the procedures that an entity applies to ensure that its assets are carried at no more than their recoverable amount. An asset is carried at more than its recoverable amount if its carrying amount exceeds the amount to be recovered through use or sale of the asset. If this is the case, the asset is described as impaired and the Standard requires the entity to recognize an impairment loss. The Standard also specifies when an entity should reverse an impairment loss and prescribes disclosures.
Provisions, Contingent Liabilities, And Contingent Assets
The objective of this standard is to prescribe the accounting for Provisions, Contingent Liabilities, Contingent Assets, Provision for restructuring cost.
An Intangible Asset is an Identifiable non-monetary Asset without physical substance held for use in the production or supplying of goods or services for rentals to others or for administrative purpose.
The accounting treatment for intangible assets that are not dealt with specifically in another Standard. This Standard requires an entity to recognize an intangible asset if, and only if, specified criteria are met. The Standard also specifies how to measure the carrying amount of intangible assets and requires specified disclosures about intangible assets.
The objective of this Standard is to prescribe the accounting treatment for investment property and related disclosure requirements.
Agricultural activity is the management by an entity of the biological transformation and harvest of biological assets for sale or for conversion into agricultural produce or into additional biological assets.
The objective of this Standard is to prescribe the accounting treatment and disclosures
related to agricultural activity
This ends the post on concepts of accounting standards. Let us know your opinion by commenting below.
You can go through the list of Indian Accounting Standards here.