Accounting Standards and

Financial Reporting

Dr Kavitha Jayakumar - 6HC

kavitha.arjunan@christuniversity.in

MISSION VISION CORE VALUES

CHRIST is a nurturing ground for an individual’s Excellence and Service Faith in God | Moral Uprightness
holistic development to make effective contribution to Love of Fellow Beings
the society in a dynamic environment Social Responsibility | Pursuit of Excellence
 CHRIST
Deemed to be University

UNIT 2
Accounting Standards 1-2 (18 Hours)
Level of Knowledge: Basic and Conceptual
Meaning, Objectives, Advantages, disadvantages, Procedure for issuing Accounting
●

Standards by the ICAI, Scope of Accounting Standards: - Level-I Enterprises, Level- II

Enterprises and Level- III Enterprises. Accounting Standards as per Companies Act
2013 and Income Tax Act 1961 to be included. NACAS and its role under Companies
Act, 2013. IFRS, International Accounting Standards, IND AS and GAAP.
Disclosure of Accounting Policies AS -1
Scope, Need, Various areas where disclosure is mandatory, Change in Accounting
●

Policies .Comparison of AS-1 with IND AS-1.

Valuation of Inventories AS -2
Objective, Definition, Measurement of Inventory – Cost inventories, Exclusion from the
●

cost of inventories, Valuation of inventory – Specific identification method, First-in First-

out method, Weighted Average cost, Standard cost, Retail inventory method, Net
realizable value, Valuation of containers and empties, Disclosure in the financial
statement, Corporate Accounting practices (Problems).Comparison of AS-2 with IND
AS-2.

Excellence and
 CHRIST
Deemed to be University

Disclosure of Accounting Policies – AS 1

Excellence and
 CHRIST
Deemed to be University

What are Accounting Policies

● Refers to specific principles and methods adopted by

the organization in preparing and presenting financial
statements
● Accounting Policies are part of Financial Statement

Excellence and
 CHRIST
Deemed to be University

Areas where more than one methods of accounting treatment

available
● Method of Depreciation
● Conversion of foreign exchange currency
● Valuation of inventory
● Valuation of Fixed assets

Excellence and
 CHRIST
Deemed to be University

Notes on Accounts

● Explanation given by the management about financial statement

● Notes are integral part of financial statement
Example:
✔ Disclosure of details of contingent liability
✔ Disclosure of litigation about the claim recoverable, loans receivable etc.,

Excellence and
 CHRIST
Deemed to be University

Need for Disclosure of Accounting Policies

• Proper and better understanding

• Financial statements are affected by accounting
policies
• All significant accounting policies to be put up in one
place

Excellence and
 CHRIST
Deemed to be University

Fundamental Assumptions

• List of Fundamental Assumptions:

✔ Going Concern
✔ Consistency
✔ Accrual
• Money Measurement, Business entity, matching are not
fundamental assumptions
• If nothing mentioned then fundamental assumptions are
followed

Excellence and
 CHRIST
Deemed to be University

Underlying Assumptions

❑ Under Going concern, it is assumed that the entity will continue in

❑ Operation for the foreseeable future and has neither the intention nor the need to
liquidate or curtail materially the scale of its operations.

❑ Under Accrual basis, the effects of transactions are recognised on mercantile

basis i.e. when they occur (and not as cash or a cash equivalent is received or
paid) and they are recorded in the accounting records and reported in the financial
statement of the periods to which they relate.

❑ Under Consistency, same accounting policies are followed from one period to
another so that comparability of the financial statement can be achieved.

Excellence and
 CHRIST
Deemed to be University

Selection of Accounting Policies

● Points to be considered
1. Prudence
2. Substance over form
Economic reality v/s Legal form

Excellence and
 CHRIST
Deemed to be University

Changes in accounting policy

• Compliance with an Accounting Standard

• More appropriate presentation

Excellence and
 CHRIST
Deemed to be University

What are the principles to be followed when an enterprise is not a

going concern?
Are auditors required to qualify accounts of an enterprise that is not
a going concern?

Excellence and
 CHRIST
Deemed to be University

● The company should prepare the accounts on the basis that it is not going concern or
it will be closed in near future.
● All assets are to be valued on net realisable value.
● All liabilities should be valued at settlement price
● In addition to that liabilities may have to be provided in respect of employee
termination, premature termination of contracts, lease etc.
● Adequate disclosures / adjustments should be made the financial statement about
impending closure and the fact that accounts are prepared on that basis.

Excellence and
 CHRIST
Deemed to be University

The auditors need not review accounting polices unless there is

a change in the basis of accounting?

Excellence and
 CHRIST
Deemed to be University

● The auditor should review the appropriateness of account policy applied each
year irrespective of whether there were changes in accounting policy policies
or not because business is dynamic and environment is not static.
● The management is responsible in deciding the accounting policy. The
auditor is required to express his opinion on the financial statements.

Excellence and
 CHRIST
Deemed to be University

Can an enterprise apply different accounting policies for similar

items?

Excellence and
 CHRIST
Deemed to be University

Question:

ABC Ltd., with a an annual turnover of Rs 35 Lakhs and

borrowings of Rs 10 Lakhs during the pervious year wants to avail
the exemption from adopting accounting standards applicable to
companies for the year 31.03.2008. Advise the management
regarding the exemptions available.

Excellence and
 CHRIST
Deemed to be University

Solution:

● ABC Ltd is a small and medium enterprise as per Companies (AS) Rules
2006. The following relaxation and exemptions are available.
● AS 3 – Cash flow Statement are not mandatory
● AS 17 – Segment Reporting is not mandatory
● SME are exempted from some paragraphs of AS 19 – Leasing
● SMEs are exempted from disclosure of diluted EPS
● SMEs are exempted from certain requirements of AS 15 – Employee
Benefits.

Excellence and
 CHRIST
Deemed to be University
Comparison of AS 1 with Ind AS1

Ind AS 1: Presentation of FS AS 1: Disclosure of AP

Deals with presentation of financial Statements Deals with the Disclosure of AP

Scope is wider Scope is narrow

Allows deviation from a requirement of an AS No such requirements

Requires presentation and provides criteria for Such bifurcation is not required, however it is required
classification for current/non current assets/liabilities as the part of schedule III of the Companies Act 2013

Prohibits presentation of extraordinary items in P/L No such prohibition

statement or notes

Requires disclosure of judgments made by No such requirements

management while framing Accounting policies and
also about the key assumptions

Requires classification of expenses No specific restrictions

Excellence and
 CHRIST
Deemed to be University

Ind AS 1: Presentation of FS AS 1: Disclosure of AP

Requires presentation of B/L sheet as at the No such requirements

beginning of the period when an entity applies the
APs

Requires the financial statements to include a No such requirements

statement of changes in equity to be shown as a
part of B/L sheet

Excellence and
 CHRIST
Deemed to be University

AB Limited, has disclosed the significant accounting policies

adopted by it in preparation of the financial statements, in the
respective notes. Example, the accounting policy of revenue was
disclosed in the Note relating to Income from Operations. The
Finance Officer is of the opinion that, such a practice would give a
clear picture to the user of the financial statement. Is the Finance
Officer, right?

Answer: No As per para 25 of the Accounting standard, “The

disclosure of the significant accounting policies as such should form
part of the financial statements and the significant accounting
policies should normally be disclosed in one place.” Hence the
Finance Officer is not correct. The Company shall disclose the
entire set of accounting policies at one place.

Excellence and
 CHRIST
Deemed to be University

Multiplex Software Limited had a policy of depreciating computer hardware equipment

over a period of three years. But during the year 2012-13, it was decided by the
management of the Company that the same shall be depreciated over two years. On
enquiry by management, Mr G, the Finance Head, stated that the depreciation impact
on account of the same was amounting to ` 20 Lakhs. Further he states, as the amount
is material, the impact of the same shall be disclosed in the financial statements. Is his
contention, right?

Answer: Yes. Mr G’s contention is right. As per para 26 of the Accounting standard,
“Any change in the accounting policies which has a material effect in the current
period, or which is reasonably expected to have a material effect in later periods should
be disclosed. In the case of a change in accounting policies which has a material effect
in the current period, the amount by which any item in the financial statements is
affected by such change should also be disclosed to the extent ascertainable. Where
such amount is not ascertainable, wholly or in part, the fact should be indicated.”
Hence the same shall be disclosed.

Excellence and
ACCOUNTING STANDARD-2

VALUATION OF INVENTORIES
 PURPOSE
• Specifies the principals for valuing the inventory.

• Disclosure of the specific policies adopted by the

management for the valuation of inventory.
 SCOPE
This statement should be applied in accounting for inventories other
than:

• Work in progress arising under construction contracts, including

directly related service contracts.

• Work in progress arising in the ordinary course of business of service

providers.

• Shares, debentures and other financial instruments held as

stock-in-trade; And.

• Producers’ inventories of livestock, agricultural and forest products,

and mineral oils, ores and gases to that extent that they are measured
at net realisable value in accordance with well established practices
in those industries.
 RELEVANT DEFINITIONS
• Inventories are assets :
▪ held for sale in the ordinary course of business.
▪ in the process of production for such sale.
▪ in the form of materials or supplies to be consumed in the
production process or in the rendering of services.

• Net Realisable Value is the estimated selling price in the

ordinary course of business less the estimated costs of completion
and the estimated cost necessary to make the sale.
 Inventories consist of the following
Held for sale in ordinary course of business (
FINISHED GOODS)

In the process of production of such sale

(raw material and WIP)

In the form of materials or supplies to be consumed in

production process or in rendering services
(stores,spares, raw material, consumables)

Spares which can be used only in connection with an item of

fixed assets and whose use is irregular , such machinery spares
are accounted for in accordance with AS 10’ accounting for PPE ‘
Accounting for machinery
Spares
● Machinery spares , which are not specific
to a particular item of FA but can be used
generally for various items of FA
● SHOULD be treated as inventories for the
purpose of AS-2 charged to the statement
of Profit & loss account
● Whether to capitalize machinery spare
under AS—10 or not will depend on the
facts and circumstances of each case.
 However, the machinery spare of the
following types should be capitalized being
the nature of capital spares/ insurance spares:
1)Machinery spares which are SPECIFIC to a
particular item of fixed assets ie it can be
used only in connection with a particular
item of FA
2)2) Their use is expected to be IRREGULAR.
3) e.g in office , there are other assets , spares
parts used in such assets are irregular in use.
When the related fixed asset is
discarded or sold
WDV - disposal
value

Of the spares should

be written off
MEASUREMENT OF
INVENTORIES
Major points for valuation of inventories:

Determination Determination Comparing

of cost of of NRV cost & NRV
inventories
 VALUATION
• Inventories should be valued at the lower of Cost and
Net Realisable Value.

The Practice of writing down inventories below cost to

Net Realizable Value is consistent with the view that
assets should not be carried in excess of amounts
expected to be realized from their sale or use.
What is cost of Inventories?
Cost of Purchase
Purchase Price
+ Duties and Taxes
+ Freight Inward
+ Other cost directly associated
Total (A)
Recoveries Duties & Taxes recoverable
Trade discounts
Rebate
Duty drawback
Total (B)
Cost of Inventory (A) – (B)
 COST OF INVENTORY
The cost of inventories should comprise:

• Cost of purchase: includes:

• Duties and taxes (other than those subsequently
recoverable by the enterprise from the taxing authorities
like MODVAT).
• Freight inwards and other expenditure directly attributable
to the acquisition.
• Cost of conversion: includes:
• Labour Costs directly related to the production of finished
goods
• Fixed and variable production overheads that are
incurred in converting materials into finished goods.
• Other costs: included only to the extent they are incurred
in bringing the inventories to their present location and
condition.
EXCLUSIONS FROM THE COST

• Abnormal wastages of materials, labour or other production costs.

• Storage costs, unless they are necessary in the production process.

• Administrative overheads which do not contribute to bringing the

inventories to their present location and condition.

• Selling and distribution overheads.

 Cost Formula

Specific Where specific Cost of

identification identification inventories in
method method is certain
NOT conditions
applicable
 Specific identification method for
determining cost of inventory
directly linking the cost with specific items

In case of purchase of item specifically segregated for specific

project & is not ordinarily interchangeable.

purchase of item for specific project X which

is not ordinarily inter
changeable
In case of goods or services produced & segregated for specific Project

Goods Produced Segregated for

Services specific project
 Where specific identification
method is NOT applicable
• Following Cost formulas can be used:

• FIFO.

• Weighted average.
Cost of inventories in certain
conditions
● When it is impractical to calculate the cost
Following
methods

Standard Cost Retail Method

Standard Cost
● It takes into account
Normal level
✔ of consumption of material and supplies
✔ labour
✔ Efficiency
✔ capacity utilization
 Retail Method
• It is used in retail business:
• when it is difficult to ascertain cost of individual
item.
• When item of inventories are rapidly changing
items, having similar margins & no other method of
cost can be used.
●Cost of inventory is determined by reducing from
the sales value inventories the approximate % of
gross margin. Sales value - % gross margin [ takes
into consideration the inventory that has been
marked down to below its original selling price]
 NET REALISABLE VALUE
• Inventories are written down to net realisable value on an
item-by-item basis except where it is appropriate to group similar
or related items.

• An assessment of net realisable value is made as at each balance

sheet date.

• The valuation takes into consideration cost and selling price

fluctuations directly relating to events occurring after the balance
sheet date to the extent that such events confirm the conditions
existing at the balance sheet date.
● The NRV of the material & other supplies
held for use in production of finished
goods is estimated as under:
● If the finished product in which raw
material & supplies used is sold at cost or
above cost.
● then the estimated realisable value of raw
material & supplies is considered more
than its cost. •
Therefore inventories of raw material will
be valued at cost
 Then estimated RV of
the raw material and
Shirt is the finished product supplies will be
It is sold at cost or considered more than
cost .
above cost Therefore inventories of
raw material will be
valued at cost
● If the finished product in which raw
material & supplies used is sold at cost or
above cost.
● then the estimated realizable value of raw
material & supplies is considered more
than its cost.
● Therefore inventories of raw
material will be valued at cost
 • Then estimated RV of
the raw material /
Shirt is the finished supplies is equal to
product replacement price of
It is sold below raw material or supplies
cost
• Therefore inventories of
raw material will be
valued at Replaced
price.
 1. Raw material was purchased at Rs. 100
per kg. price of raw material is on the
decline. The finished goods in which the raw
material is incorporated are expected to be
sold at below cost. 10,000 kgs of raw
material is in stock at the year end.
Replacement cost is Rs. 80 per kg. How will
you value the inventory?
●In this case, the stock of 10000 kgs of raw
material will be valued at Rs. 80 per kg.
● The finished goods, if on stock , should be
valued at cost or NRV whichever is less
2. Cost of production of product D is given
below:
Raw material per unit Rs 120
Wages per unit Rs 80
Overhead per unit Rs 50
Total RS 250
As on the balance sheet date the replacement
cost of raw material is Rs 110 per unit. There
were 1000 units of raw material on 31- 3- 14.
Calculate the value of closing stock of raw
material in the following conditions:
a) If the finished product is sold at the rate of Rs.
275 per unit, what will be the value of closing
stock of raw material.
sol- The value of closing stock would at cost i.e
RS 120 per unit.
Total value would be 1000 x Rs 120 = Rs
120000.
b) If the finished product is sold at the rate of
Rs.230 per unit, what will be value of closing
stock of raw material?
● The closing stock would be valued at replaced
value Rs. 110 per unit.
● the total value would be Rs 110,00
3. The company sells IMFL & beer to the
customers, some of the customers consumed the
beer in the bars run by it .while leaving the bar,
the consumers left the empty bottles in the bars
and the company take the possession of these
empty bottles. The empty bottles are disposed
off by the company. The company has laid
down detailed procedures for the maintenance
of the records, tenders to be called for the
disposal of the empty bottles
a) Whether the stock of empty bottles is an asset of the
company.
b) b) If so, whether the stock of empty bottles existing as
on the date of the balance sheet is to be considered
as inventories of the company.
● The stock of empty bottles is an asset of
the company being a resource controlled
by the company as a result of past events
from which future economic benefits are
expected to flow to it.
● The stock of empty bottles existing at the
balance sheet date is the inventory of the
company.
● It will be valued at the lower of cost and
NRV, also the same is not considered as
income hence the cost of bottles is NIL,
the total stock should be reflected at the
nominal value of Re 1 in the balance sheet.
DISCLOSURE REQIREMENTS
•Accounting policies adopted in measuring
inventories.
•Cost formula used.
•Total carrying amount of inventories.
•Classification of the above into raw materials and components,
work in progress, finished goods, stores and spares, and loose
tools.
 CHRIST
Deemed to be University

Thank You

Excellence and