Disclosure of Accounting Policies
Accounting Policies refer to specific accounting principles. Also, the method of applying those principles adopted by the enterprises in the preparation and presentation of the financial statements.
Valuation of Inventories
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.
Contingencies and Events occurring after the balance sheet date
In preparing the financial statement of a particular enterprise, accounting is done by following accrual basis of accounting and prudent accounting policies to calculate the profit or loss for the year and to recognize assets and liabilities in the balance sheet. While following the prudent accounting policies, the provision is made for all known liabilities and losses even for those liabilities / events, which are probable. Professional judgement is required to classify the like-hood of the future events occurring and, therefore, the question of contingencies and their accounting arises.
The objective of this standard is to prescribe the accounting of contingencies and the events, which take place after the balance sheet date but before approval of balance sheet by Board of Directors. The Accounting Standard deals with Contingencies and Events occurring after the balance sheet date.
Net Profit or Loss for the Period, Prior Period Items and change in Accounting Policies
The objective of this accounting standard is to prescribe the criteria for certain items in the profit and loss account so that comparability of the financial statement can be enhanced. Profit and loss account being a period statement covers the items of the income and expenditure of the particular period. This accounting standard also deals with change in accounting policy, accounting estimates, and extraordinary items.
It is a measure of wearing out, consumption or other loss of value of a depreciable asset arising from use, the passage of time. Depreciation is nothing but the distribution of the total cost of an asset over its useful life.
Accounting for long-term construction contracts involves a question as to when revenue should be recognized and how to measure the revenue in the books of the contractor. As the period of the construction contract is long, work of construction starts in one year and is completed in another year or after 4-5 years or so. Therefore the question arises how the profit or loss of construction contract by the contractor should be determined. There may be the following two ways to determine profit or loss:
- On year-to-year basis based on the percentage of completion or
- On completion of the contract.
The standard explains as to when the revenue should be recognized in profit and loss account. It also states the circumstances in which revenue recognition can be postponed.
Revenue means the gross inflow of cash, receivable or other consideration arising in the course of ordinary activities of an enterprise such as:-
- Sale of goods
- Rendering of Services, and
- Use of enterprises resources by other yielding interest, dividend, and royalties.
In other words, revenue is a charge made to customers / clients for goods supplied and services rendered.
Accounting for Fixed Assets
It is an asset, which is Held with intention of being used for the purpose of producing or providing goods and services. Not held for sale in the normal course of business. Expected to be used for more than one accounting period.
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;
Accounting for Government Grants:
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.
Accounting for Investments
Assets held for earning income by way of dividend, interest, and rentals, for capital appreciation or for other benefits.
Accounting for Amalgamation
This accounting standard deals with accounting to be made in books of transferee company in case of amalgamation. This accounting standard is not applicable to cases of acquisition of shares when one company acquires / purchases the share of another company and the acquired company is not dissolved and its separate entity continues to exist. The standard is applicable when the acquired company is dissolved and separate entity ceased exist and purchasing company continues with the business of an acquired company.
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.
Enterprises are borrowing the funds to acquire, build and install the fixed assets and other assets, these assets take time to make them usable or salable, therefore the enterprises incur the interest (cost on borrowing) to acquire and build these assets. The objective of the Accounting Standard is to prescribe the treatment of borrowing cost (interest + other costs) in accounting, whether the cost of borrowing should be included in the cost of assets or not.
An enterprise needs multiple products / services and operates in different geographical areas. Multiple products / services and their operations in different geographical areas are exposed to different risks and returns. Information about multiple products / services and their operation in different geographical areas are called segment information. Such information is used to assess the risk and return of multiple products / services and their operation in different geographical areas. Disclosure of such information is called segment reporting.
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 proper understanding of financial performance and financial position of the enterprise.
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.
Earning Per Share
Earning per share (EPS)is a financial ratio that gives the information regarding earning available to each equity share. It is the 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.
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.
Accounting for Taxes on Income
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. In simple words tax shall be accounted on an accrual basis; not on liability to pay basis.
Accounting for Investments in Associates in consolidated financial statements
The accounting standard was formulated with the objective to set out the principles and procedures for recognizing the investment in associates in the consolidated financial statements of the investor so that the effect of investment in associates on the financial position of the group is indicated.
The objective of this standard is to establish principles for reporting information about discontinuing operations. This standard covers “discontinuing operations” rather than “discontinued operation”. The focus of the disclosure of the Information is about the operations which the enterprise plans to discontinue rather than disclosing on the operations which are already discontinued. However, the disclosure about the discontinued operation is also covered by this standard.
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.
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.
Financial Reporting of Interest in joint ventures
Joint Venture is defined as a contractual arrangement whereby two or more parties carry on an economic activity under ‘joint control’. Control is the power to govern the financial and operating policies of an economic activity so as to obtain benefit from it. ‘Joint control’ is the contractually agreed sharing of control over economic activity.
Impairment of Assets
The dictionary meaning of ‘impairment of asset’ is weakening in the value of an asset. In other words, when the value of the asset decreases, it may be called impairment of an asset. As per AS-28 asset is said to be impaired when carrying an amount of asset is more than its recoverable amount.
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.
It is a liability, which is measurable only by using a substantial degree of estimation.
A liability is a present obligation of the enterprise arising from past events the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits.
Recognition and Measurement, issued by The Council of the Institute of Chartered Accountants of India, comes into effect in respect of Accounting periods commencing on or after 1-4-2009 and will be recommendatory in nature for an initial period of two years. This Accounting Standard will become mandatory in respect of Accounting periods commencing on or after 1-4-2011 for all commercial, industrial and business Entities except to a Small and Medium-sized Entity. The objective of this Standard is to establish principles for recognizing and measuring Financial assets, financial liabilities, and some contracts to buy or sell non-financial items. Requirements for presenting information about financial instruments are in Accounting Standard.
Financial Instrument presentation
The objective of this Standard is to establish principles for presenting financial instruments as liabilities or equity and for offsetting financial assets and 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. The principles in this Standard complement the principles for recognizing and measuring financial assets and financial liabilities in Accounting Standard Financial Instruments.
Financial Instruments, Disclosures and Limited revision to accounting standards
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.