Intermediate Course Study Material (Modules 1 to 3) Paper 1 Accounting Module - 1 BOARD OF STUDIES THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA © The Institute of Chartered Accountants of IndiaThis study material has been prepared by the faculty of the Board of Studies. The objective of the study material is to provide teaching material to the students to enable them to obtain knowledge in the subject. In case students need any Clarifications or have any suggestions to make for further improvement of the material contained herein, they may write to the Director of Studies, All care has been taken to provide interpretations and discussions in a manner useful for the students. However, the study material has not been specifically discussed by the Council of the Institute or any of its Committees and the views expressed herein may not be taken to necessarily represent the views of the Council or any of its Committees. Permission of the Institute is essential for reproduction of any portion of this material. © The Institute of Chartered Accountants of India All rights reserved. No part of this book may be reproduced, stored in a retrieval system, or transmitted, in any form, or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior permission, in writing, from the publisher. Edition : September, 2021 Website : wwwicai.org E-mail [email protected] Committee/ : Board of Studies Department ISBN No. Price (All Modules): @ Published by : The Publication Department on behalf of The Institute of Chartered Accountants of India, ICAI Bhawan, Post Box No. 7100, Indraprastha Marg, New Delhi 110 002, Indi Printed by © The Institute of Chartered Accountants of InBEFORE WE BEGIN ... Evolving role of a CA - Shift towards strategic decision making The traditional role of a chartered accountant restricted to accounting and auditing, has now changed substantially and there has been a marked shift towards strategic decision making and entrepreneurial roles that add value beyond traditional financial reporting. The primary factors responsible for the change are the increasing business complexities on account of plethora of laws, borderless economies consequent to giant leap in e-commerce, emergence of new financial instruments, emphasis on corporate social responsibility, significant developments in information technology, to name a few. These factors necessitate an increase in the competence level of chartered accountants to take up the role of not merely an accountant or auditor, but a global solution provider. Towards this end, the scheme of education and training is being continuously reviewed so that it is in sync with the requisites of the dynamic global business environment; the competence requirements are being continuously reviewed to enable aspiring chartered accountants to acquire the requisite professional competence to take on new roles. Skill requirements at Intermediate Level Under the Revised Scheme of Education and Training, at the Intermediate Level, you are expected to not only acquire professional knowledge but also the ability to apply such knowledge in problem solving. The process of learning should also help you inculcate the requisite professional skills, ie., the intellectual skills and communication skills, necessary for achieving the desired level of professional competence. Accounting is one of the core competence areas of chartered accountants. The paper of ‘Accounting’ at Intermediate level concentrates on conceptual understanding of the crucial aspects of accounting. The objective of the paper at this level is to acquire the ability to apply specific accounting standards and legislations to different transactions and events for preparation and presentation of financial statements of various business entities. The students are required to develop understanding of the Accounting Standards and gain ability to apply the provisions contained therein to practical situations © The Institute of Chartered Accountants of InKnow your syllabus and Study Materi The syllabus of Accounting has an appropriate mix of various topics of sole proprietorship, partnership and companies as the objective of the paper is to gain ability to solve simple problems related to different businesses entities. The Study Material of Accounting has been designed having regard to the needs of home study and distance learning students. The Study Material has been divided into fourteen chapters in line with the syllabus. It is important to read the Study Material thoroughly for understanding the coverage of syllabus in the paper of Accounting. The study material has been bifurcated into three modules for the easy handling and convenience of students. For bare text of Framework for Preparation and Presentation of Financial Statements and Accounting Standards, the students are advised to refer the “Accounting Pronouncements” which has been separately published by the Board of Studies. Framework of Chapters - Uniform Structure comprising of specific components Efforts have been made to present each topic of the syllabus in a lucid manner. Care has been taken to present the chapters in a logical sequence to facilitate easy understanding by the students. Sincere efforts have been taken to incorporate the relevant amendments in the Accounting Standards, Companies Act, 2013 and SEB! regulations in this study material. The content for each chapter/unit of the study Material has been structured in the following manner — Components of About the component each Chapter 1. | Learning Learning outcomes which you need to demonstrate Outcomes after learning each topic have been detailed in the first page of each chapter/unit. Demonstration of these learning outcomes would help you to achieve the desired level of technical competence 2.| Chapter/Unit | As the name suggests, the flow chart/table/diagram Overview given at the beginning of each chapter would give a broad outline of the contents covered in the chapter Content of each |The concepts and provisions of each accounting © The Institute of Chartered Accountants of Indiaunit/ chapter | standards/topics are explained in student-friendly manner with the aid of Examples/illustrations/diagrams/flow charts. These value additions would help you develop conceptual clarity and get a good grasp of the topic. Diagrams and Flow charts would help you understand the concept/application of accounting standard/topic in a better manner. 4, | Illustrations _| Illustrations would help the students to understand the involving application of concepts/provisions of accounting conceptual standards. In effect, it would test understanding of understanding | concepts/ provisions as well as ability to apply the concepts/provisions learnt in solving problems and addressing issues. 5. | Summary A summary of the chapter is given at the end to help you revise what you have learnt. It would especially facilitate quick revision of the chapter the day before the examination, 6. | Test Your | This section comprises of number of multiple choice Knowledge questions, theoretical questions and practical questions which would help students to evaluate what they have understood after studying the chapter. The questions given in this section have also been supplemented with the answers to help the students in evaluating their solutions so that they can know about their grey areas. We hope that these student-friendly features in the Study Material makes your learning process more enjoyable, enriches your knowledge and sharpens your application skills. Happy Reading and Best Wishes! © The Institute of Chartered Accountants of Inay SYLLABUS PAPER 1: ACCOUNTING (One paper - Three hours - 100 Marks) Objective: To acquire the ability to apply specific accounting standards and legislations to different transactions and events and in preparation and presentation of financial statements of various business entities. Contents: 1. Process of formulation of Accounting Standards including Ind AS (IFRS converged standards) and IFRSs; convergence vs adoption; objective and concepts of carve outs. 2. Framework for Preparation and Presentation of Financial Statements (as per Accounting Standards). 3. Applications of Accounting Standards: AS 1: Disclosure of Accounting Policies AS 2 : Valuation of Inventories AS 3: Cash Flow Statements AS 10 : Property, Plant and Equipment AS 11 : The Effects of Changes in Foreign Exchange Rates AS 12 : Accounting for Government Grants AS 13: Accounting for Investments AS 16 : Borrowing Costs 4. Company Accounts (i) Preparation of financial statements - Statement of Profit and Loss, Balance Sheet and Cash Flow Statement; i) Managerial Remuneration; (iii) Profit (Loss) prior to incorporation; (iv) Accounting for bonus issue and right issue; © The Institute of Chartered Accountants of India(v) Redemption of preference shares; (vi) Redemption of debentures. 5. Accounting for Special Transactions: (Investment; i) Insurance claims for loss of stock and loss of prof (ii) Hire- purchase and Instalment sale transactions. 6. Special Type of Accounting (i) Departmental Accounting; (ii) Accounting for Branches including foreign branches; i) Accounts from Incomplete Records. Note : If either new Accounting Standards (AS), Announcements and Limited Revisions to AS are issued or the earlier ones are withdrawn or new AS, Announcements and Limited Revisions to AS are issued in place of existing AS, Announcements and Limited Revisions to AS, the syllabus will accordingly include/exclude such new developments in the place of the existing ones with effect from the date to be notified by the Institute. © The Institute of Chartered Accountants of InSIGNIFICANT CHANGES IN 2021 EDITION Over 2020 EDITION Chapter Sections/Sub Sections wherein major updations have been done Chapter 3 - Unit 1 Unit updated in line with the scheme for applicability of Accounting Standards to Non- Preparation of __ Financial Statements of Companies Schedule III (given as Annexure at the end of chapter 4) Applicability of Accounting | company entities revised by the ICAI in March Standards 2021. Chapter 4 The chapter has been updated in line with the provisions of the Companies Act. It also incorporates the amendments in Schedule III to the Companies Act, 2013 Vide MCA notification dated 24th March, 2021. Chapters 5, 6, 7 and 8 The chapters have been updated in line with the provisions of the Companies Act. © The Institute of Chartered Accountants of IndiaCONTENTS MODULE | CHAPTER 1: Introduction to Accounting Standards CHAPTER 2: — Framework for Preparation and Presentation of Financial Statements CHAPTER 3: _ Overview of Accounting Standards MODULE I CHAPTER 4: Financial Statements of Companies CHAPTER 5: Profit or Loss Pre and Post Incorporation CHAPTER 6: — Accounting for Bonus Issue and Right Issue CHAPTER 7: Redemption of Preference Shares CHAPTER 8: Redemption of Debentures MODULE III CHAPTER 9: Investment Accounts CHAPTER 10: Insurance Claims for Loss of Stock and Loss of Profit CHAPTER 11: Hire Purchase and Instalment Sale Transactions CHAPTER 12: Departmental Accounts CHAPTER 13: Accounting for Branches Including Foreign Branches CHAPTER 14: Accounts from Incomplete Records © The Institute of Chartered Accountants of IndiaDETAILED CONTENTS: MODULE - 1 CHAPTER 1: INTRODUCTION TO ACCOUNTING STANDARDS 1.1-1.29 Learning Outcomes... Chapter overview Introduction. Standards Setting Proces How Many Accounting Standards Status of Accounting Standards. : Need for Convergence towards Global Standards .....ummnssnnnsnnsnae VIO International Accounting Standard Board... : International Financial Reporting Standards as Global Standards. Becoming IFRS Compliant . What are Carve Outs/ins in Ind AS? 0. Convergence to IFRS in India... W What are Indian Accounting Standards (ind AS). 12. History of IFRS Converged Indian Accounting Standards tind AS). 13. List of Ind AS... 14. Roadmap for Implementation of Indian Accounting Standards (Ind AS): A SMAPSHOt eernrnrneneen Summary .. Test Your Knowledge.. Been anawna CHAPTER 2: FRAMEWORK FOR PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS 2.12.34 Learning Outcomes 24 Chapter overview.. 122 1. Introduction. 22 2. Purpose of the Framework. 23 3. Status and Scope of the Framework... wn 23 © The Institute of Chartered Accountants of IndiaComponents of Financial Statements... Objectives and Users of Financial Statements Qualitative Characteristics... True and Fair View... 4 5. 6. Fundamental Accounting Assumptions. 7. 8. 9. Elements of Financial Statements. 10. _ Measurement of Elements of Financial Statements... 11. Capital Maintenance. Summary. Test Your Knowledge... CHAPTER 3: OVERVIEW OF ACCOUNTING STANDARDS 3.1- 3.162 UNIT-1: APPLICABILITY OF ACCOUNTING STANDARDS ..... . 3.1 - 3.26 Learning Outcomes... 3A Unit overview 3.2 1.1 Status of Accounting Standards... 1.2 Applicability of Accounting Standards... Summary on Test Your Knowledge crrornnnnn — UNIT-2: OVERVIEW OF ACCOUNTING STANDARDS Learning Outcomes Unit Overview... 2.1 AS1: Disclosure of Accounting Policies... 2.2 AS 2: Valuation of Inventory...... 2.3. AS 3: Cash Flow Statement. 2.4 AS 10: Property, Plant and Equipment 2.5 AS 11: The Effects of Changes in Foreign Exchange Rates...... 2.6 AS 12: Accounting for Government Grants... 2.7 AS 13: Accounting for Investments... 2.8 AS 16: Borrowing Costs Test Your Knowledge... © The Institute of Chartered Accountants of IndiaINTRODUCTION TO ACCOUNTING STANDARDS te [De1. INTRODUCTION lly Accepted Accounting Principles Gener Generally accepted accounting principles (GAAP) refer to a common set of accepted accounting principles, standards, and procedures that business reporting entity must follow when it prepares and presents its financial statements. GAAP is a combination of authoritative standards (set by policy boards) and the commonly accepted ways of recording and reporting accounting information. At international level, such authoritative standards are known as International Financial Reporting Standards (IFRS) at many places and in India we have authoritative standards named as Accounting Standards (ASs) and Indian Accounting Standard (Ind AS). © The Institute of Chartered Accountants of IndiaINTRODUCTION TO ACCOUNTING STANDARDS 13 Accounting Standards (ASs) are written policy documents issued by the Government with the support of other regulatory bodies e.g., Ministry of Corporate Affairs (MCA) issuing Accounting Standards for corporates in consultation with National Financial Reporting Authority (NFRA) covering the following aspects of accounting transaction or events in the financial statements: © recogni m5 * measurement; + presentation; and * disclosure. The ostensible purpose of the standard setting bodies is to promote the dissemination of timely and useful financial information to investors and certain other stakeholders, having an interest in the company's economic performance. Accounting Standards reduce the accounting alternatives in the preparation of financial statements within the bounds of rationality, thereby, ensuring comparability of financial statements of different enterprises. Accounting Standards deal with the following aspects: (i) __ recognition of events and transactions in the financial statements; (ii) measurement of these transactions and events; (iii) presentation of these transactions and events in the financial statements in a manner that is meaningful and understandable to the reader; and (iv) the disclosures relating to these transactions and events to enable the public at large and the stakeholders and the potential investors in particular, to get an insight into what these financial statements are trying to reflect and itating them to take prudent and informed business decisions. Accounting Standards deal with aspects of accounting events Recognition of | Measurement of | Presentation of events and | transactions and | transactions and transactions events events Disclosure requirements © The Institute of Chartered Accountants of IndiaThe following are the benefits of Accounting Standards: () Standardisation of alternative accounting treatments: Accounting Standards reduce or eliminate, to a reasonable extent, any confusing variations in the accounting treatment and presentation of economic events while preparing financial statements. The standard policies are intended to reflect a consensus on accounting policies to be used in different identified areas, e.g. inventory valuation, capitalisation of costs, depreciation and amortisation, etc. Since it is not possible to prescribe a single set of policies for any specific accounting area that would be appropriate for all enterprises, it is not enough to comply with the standards and state that they have been followed. In other words, one must also disclose the accounting policies used in preparation of financial statements. (Refer AS 1, Disclosure of Accounting Policies given in Accounting Pronouncements). For example, an enterprise should disclose which of the permitted cost formula (FIFO, Weighted Average, etc.) has actually been used for ascertaining inventory costs. (ii) Requirements for additional disclosures: There are certain areas where information is not statutorily required to be disclosed. However, accounting standards may call for appropriate disclosures of accounting policies followed and other required information in the financial statements which would be helpful for readers to understand the accounting treatment done for various items in those financial statements. (iii) Comparability of financial statements: In addition to improving credibility of accounting data, standardisation of accounting procedures improves comparability of financial statements, both intra-enterprise and \ter-enterprise. Such comparisons are very effective and most widely used tools for assessment of enterprise's financial health and performance by users of financial statements for taking economic decisions, e.g., whether or not to invest, whether or not to lend and so on. The intra-enterprise comparison involves comparison of financial statements of same enterprise over a number of years. The intra-enterprise comparison is possible if the enterprise uses same accounting policies every year in drawing up its financial statements © The Institute of Chartered Accountants of InINTRODUCTION TO ACCOUNTING STANDARDS SIR The inter-enterprise comparison involves comparison of financial statements of different enterprises for same accounting period. This is possible only when comparable enterprises use similar accounting policies in preparation of respective financial statements (or in case the policies are slightly different, the same are disclosed in the financial statements). The disclosure of accounting policies allows a user to make appropriate adjustments while comparing the financial statements of comparable enterprises. Benefits of Accounting | Comparability { of financial statements Since Accounting Standards are principle based, application of Accounting Standards becomes judgemental in case of complex business transactions. Accounting Standards have to be read in line with the legal requirements, ie., in case of any conflict, Statute would prevail over Accounting Standards. Another advantage of standardisation is reduction of scope for creative accounting. The creative accounting refers to twisting of accounting policies to produce financial statements favourable to a particular interest group. For example, it is possible to overstate profits and assets by capitalising revenue expenditure or to understate them by writing off a capital expenditure against revenue of current accounting period. Such practices can be curbed only by framing policies for capitalisation, particularly for the borderline cases where itis possible to have divergent views. The accounting standards provide adequate guidance in this regard. © The Institute of Chartered Accountants of In& 2. STANDARDS SETTING PROCESS The Institute of Chartered Accountants of India (ICAI), being a premier accounting body in the country, took upon itself the leadership role by constituting the Accounting Standards Board (ASB) in 1977. The ICAI has taken significant initiatives for the issuance of Accounting Standards to ensure that the standard-setting process is fully consultative and transparent, The ASB considered the International Accounting Standards (IASs)/International Financial Reporting Standards (IFRSs) while framing Accounting Standards (ASs) in India and tried to integrate them, in the light of the applicable laws, customs, usages and business environment in the country. The composition of ASB includes representatives of industries, associations of industries (namely, ASSOCHAM, Cll, FICCI), regulators, academicians, government departments, etc. Although ASB is a body constituted by the Council of the ICAI, it (ASB) is independent in the formulation of accounting standards. NFRA recommend these standards to the MCA. MCA has to spell out the accounting standards applicable for companies in India. The standard-setting procedure of ASB can be briefly outlined as follows: ¢ Identification of broad areas by ASB for formulation of AS. + Constitution of study groups by ASB to consider specific projects and to prepare preliminary drafts of the proposed accounting standards. The draft normally includes objective and scope of the standard, definitions of the terms used in the standard, recognition and measurement principles wherever applicable and presentation and disclosure requirements + Consideration of the preliminary draft prepared by the study group of ASB and revision, if any, of the draft on the basis of deliberations. Circulation of draft of accounting standard (after revision by ASB) to the Council members of the ICAI and specified outside bodies such as MCA, Securities and Exchange Board of India (SEB!), Comptroller and Auditor General of India (C&AG), Central Board of Direct Taxes (CBDT), Standing Conference of Public Enterprises (SCOPE), etc. for comments. + Meeting with the representatives of the specified outside bodies to ascertain their views on the draft of the proposed accounting standard + Finalisation of the exposure draft of the proposed accounting standard and its issuance inviting public comments. # Consideration of comments received on the exposure draft and finalisation © The Institute of Chartered Accountants of IndiaINTRODUCTION TO ACCOUNTING STANDARDS SEK of the draft accounting standard by the ASB for submission to the Council of the ICAI for its consideration and approval for issuance. ¢ Consideration of the final draft of the proposed standard by the Council of the ICAI and if found necessary, modification of the draft in consultation with the ASB is done. The accounting standard on the relevant subject (for non-corporate entities) is then issued by the ICAI. For corporate entities the accounting standards are issued by the Ministry of Corporate Affairs in consultation with the NFRA. Standard - Setting Process Identification of area | Constitution of study group Preparation of draft and its circulation Ascertainment of views of different bodies on draft Finalisation ae draft (E.D.) Comments received on exposure draft (E.D.) Modification of the draft Issue of AS Earlier, ASB used to issue Accounting Standard Interpretations (ASIs) which address questions that arise in course of application of standard. These were, therefore, issued after issuance of the relevant standard. Authority of the ASIs was same as that of the AS to which it relates. However, after notification of Accounting Standards by the Central Government for the companies, where the consensus portion of ASI was merged as ‘Explanation’ to © The Institute of Chartered Accountants of Indiathe relevant paragraph of the Accounting Standard, the Council of ICAI also decided to merge the consensus portion of ASI as ‘Explanation’ to the relevant paragraph of the AS issued by them. This initiative was taken by the Council of the ICAI to harmonise both the set of standards, ie, ASs issued by the ICAI for non- corporates and ASs notified by the MCA for corporates. It may be noted that as per Section 133 of the Companies Act, 2013, the Central Government may prescribe the standards of accounting or any addendum thereto, as recommended by the ICAI, constituted under section 3 of the Chartered Accountants Act, 1949, in consultation with and after examination of the recommendations made by NFRA. (G3. HOW MANY ACCOUNTING STANDARDS? The Institute of Chartered Accountants of India has, so far, issued 29 Accounting Standards. However, AS 6 on ‘Depreciation Accounting’ has been withdrawn on revision of AS 10 ‘Property, Plant and Equipment” and AS 8 on ‘Accounting for Research and Development’ has been withdrawn consequent to the issuance of AS 26 on ‘Intangible Assets’. Thus effectively, there are 27 Accounting Standards at present. The ‘Accounting Standards’ issued by the Accounting Standards Board establish standards which have to be complied by the business entities so that the financial statements are prepared in accordance with GAAP. In recent times there are various improvements/developments in the global accounting standards which have taken place. In India, Ind AS have become mandatory for certain class of companies as per the MCA roadmap. AS being the guidelines to prepare financial statements, have to keep pace with these changes in global accounting scenarios. Number of fundamental changes have been made in these AS so as to be globally aligned as far as possible. MCA vide notification date 30" March 2016 announced Companies (Accounting Standards) Amendment Rules, 2016. Various ASs i.e. AS 2, AS 4, AS 10, AS 13, AS 14, AS 21, AS 29 were revised vide this notification to make them in line with corresponding Ind AS to the extent possible. * Earlier AS 10 was on ‘Accounting for Fixed Assets’. © The Institute of Chartered Accountants of IndiaINTRODUCTION TO ACCOUNTING STANDARDS Sk The following is the list of Accounting Standards with their respective date of applicability 1 _| Disclosure of Accounting Policies 01/04/1993 2. | Valuation of Inventories (Revised) 01/04/1999 3_| Cash Flow Statement 01/04/2001 4 | Contingencies and Events Occurring after the Balance | 01/04/1998 Sheet Date (Revised) 5. | Net Profit or Loss for the Period, Prior Period Items and | 01/04/1996 Changes in Accounting Policies 7 | Construction Contracts 01/04/2002 9 | Revenue Recognition 01/04/1993 10 | Property, Plant and Equipment (Revised) 01/04/2016 11 |The Effects of Changes in Foreign Exchange Rates| 01/04/2004 (Revised) 12. | Accounting for Government Grants 01/04/1994 13. | Accounting for Investments (Revised) 01/04/1995 14 | Accounting for Amalgamations (Revised) 01/04/1995 15. | Employee Benefits 01/04/2006 16 | Borrowing Costs 01/04/2000 17. | Segment Reporting 01/04/2001 18 | Related Party Disclosures 01/04/2001 19 | Leases 01/04/2001 20 | Earnings Per Share 01/04/2001 21. | Consolidated Financial Statements (Revised) 01/04/2001 22 | Accounting for Taxes on Income 01/04/2006 23 | Accounting for Investments in Associates in| 01/04/2002 Consolidated Financial Statements © The Institute of Chartered Accountants of India24 | Discontinuing Operations 01/04/2004 25 | Interim Financial Reporting 01/04/2002 26 | Intangible Assets 01/04/2003 27 | Financial Reporting of Interests in Joint Ventures 01/04/2002 28 | Impairment of Assets 01/04/2008 29 | Provisions, Contingent Liabilities and Contingent Assets | 01/04/2004 (Revised) (G4. STATUS OF ACCOUNTING STANDARDS It has already been mentioned that the ASs are developed by the ASB of the ICAI. The Institute not being a legislative body can enforce compliance with its standards only by its members. Also, the standards cannot override laws and local regulations. The ASs are nevertheless made mandatory from the dates specified in respective standards and are generally applicable to all enterprises, subject to certain exceptions. The implication of mandatory status of an AS depends on whether the statute governing the enterprise concerned requires compliance with the ASs. The Companies Act had earlier notified 28 ASs and mandated the corporate entities to comply with the provisions stated therein. However, in 2016 the MCA withdrew AS 6. Hence there are now only 27 notified ASs as per the Companies (Accounting Standards) Rules, 2006 (as amended in 2016). (G5. NEED FOR CONVERGENCE TOWARDS GLOBAL STANDARDS The last decade has witnessed a sea change in the global economic scenario. The emergence of trans-national corporations in search of money, not only for fuelling growth, but to sustain on-going activities has necessitated raising of capital from all parts of the world, cutting across frontiers. © The Institute of Chartered Accountants of IndiaINTRODUCTION TO ACCOUNTING STANDARDS SL” Each country has its own set of rules and regulations for accounting and financial reporting. Therefore, when an enterprise decides to raise capital from the markets other than the country in which it is located, the rules and regulations of that other country will apply and this in turn will require that the enterprise is in a position to understand the differences between the rules governing financial reporting in the foreign country as compared to its own country of origin. Therefore, translation and reinstatements are of utmost importance in a world that is rapidly globalising in all ways. Further, the ASs and principles need to be robust so that the larger society develops degree of confidence in the financial statements, which are put forward by organisations. International analysts and investors would like to compare financial statements based on similar ASs, and this has led to the growing need for an internationally accepted set of ASs for cross-border filings. The harmonization of financial reporting around the world will help to raise confidence of investors, generally, in the information they are using to make their decisions and assess their risks. Also, a strong need was felt by legislation to bring about uniformity, rationalisation, comparability, transparency and adaptability in financial statements. Having a multiplicity of types of ASs around the world is against the public interest. If accounting for the same events and information produces different reported numbers, depending on the system of standards that are being used, then it is self-evident that accounting will be increasingly discredited in the eyes of those using the numbers, It creates confusion, encourages error and may facilitate fraud. The cure for these ills is to have a single set of global standards, of the highest quality, set in the interest of public. Global Standards facilitate cross border flow of money, global listing in different stock markets and comparability of financial statements. The convergence of financial reporting and ASs is a valuable process that contributes to the free flow of global investment and achieves substantial benefits for all capital market stakeholders. It improves the ability of investors to compare investments on a global basis and, thus, lower their risk of errors of judgment. It facilitates accounting and reporting for companies with global operations and eliminates some costly requirements like reinstatement of financial statements. It © The Institute of Chartered Accountants of Inhas the potential to create a new standard of accountability and greater transparency provides value to all market participants including regulators. It reduces operational challenges for accounting firms and focuses their values and expertise around an increasingly unified set of standards. It creates an unprecedented opportunity for standard setters and other stakeholders to improve the reporting model. For the companies with joint listings in both domestic and foreign country, the convergence is very much significant G6. INTERNATIONAL ACCOUNTING STANDARD BOARD (IASB) With a view of achieving the objective of setting global standards, the London based group namely the International Accounting Standards Committee (IASC), responsible for developing International Accounting Standards (\AS), was established in June, 1973. It is presently known as International Accounting Standards Board (IASB), The IASC comprises the professional accountancy bodies of over 75 countries (including the ICAI). Primarily, the IASC was established, in the public interest, to formulate and publish, IASs to be followed in the preparation and presentation of financial statements. IASs were issued to promote acceptance and observance of IASs worldwide. The members of IASC undertook a responsibility to support the standards developed by IASC and to propagate those standards in their respective countries. Between 1973 and 2001, the IASC released IASs. Between 1997 and 1999, the IASC restructured their organisation, which resulted in formation of IASB. These changes came into effect on 1st April, 2001. Subsequently, IASB issued statements about current and future standards. IASB publishes its Standards in a series of pronouncements called International Financial Reporting Standards (IFRS). However, IASB has not rejected the standards issued by the IASC. Those pronouncements continue to be designated as “International Accounting Standards’ (IAS), The standards issued by IASC till 31.03.2001 are known as |ASs and the standards issued by IASB since 01.04.2001 are known as IFRSs. © The Institute of Chartered Accountants of IndiaINTRODUCTION TO ACCOUNTING STANDARDS SER G7. INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) AS GLOBAL STANDARDS Interpretation ‘On IAS issued bysic The term International Financial Reporting Standards (IFRS) comprises IFRS issued by IASB; IAS issued by IASC; Interpretations issued by the Standard Interpretations Committee (SIC) and the IFRS Interpretations Committee of the IASB. IFRSs are considered as a “principles-based' set of standards. In fact, they establish broad rules rather than dictating specific treatments. Every major nation is moving toward adopting them to some extent. Large number of authorities permits public companies to use IFRS for stock-exchange listing purposes, and in addition, banks, insurance companies and stock exchanges may use them for their statutorily required reports. So, over the next few years, number of companies will adopt the international standards. This requirement will affect thousands of enterprises, including their sub: s, equity investors and joint venture partners. The increased use of IFRS is not limited to public-companies listing requirements or statutory reporting. Many lenders and regulatory and government bodies are looking to IFRS to fulfil local financial reporting obligations related to financing or licensing. © The Institute of Chartered Accountants of India8. BECOMING IFRS COMPLIANT ‘Any country can become IFRS compliant either by adoption process or by convergence process. Adoption would mean that the country sets a specific timetable when specific entities would be required to use IFRS as issued by the IASB. Convergence means that the country will develop high quality, compatible accounting standards and there would be alignment of the standards of different standard setters with a certain rate of compromise, by adopting the requirements of the standards either fully or partially. Ind AS are almost similar to IFRS but with few carve outs so as to make them suitable for Indian Environment. Convergence with IFRS will result i following benefits: + Improves investor confidence across the world with transparency and comparability + Improves inter-unit/ inter-firm/inter-industry comparison + Group consolidation will be easy with same standard by all companies in group irrespective of their global location + Acceptability of financial statements by stock exchanges across the globe, which will facilitate listing of Indian companies to international stock exchanges. © The Institute of Chartered Accountants of IndiaINTRODUCTION TO ACCOUNTING STANDARDS 1.15 So (G 9. WHAT ARE CARVE OUTS/INS IN IND AS? The Government of India in consultation with the ICAI decided to converge and not to adopt IFRS issued by the IASB. The decision of convergence rather than adoption was taken after the detailed analysis of IFRS requirements and extensive discussion with various stakeholders. Accordingly, while formulating Ind AS, efforts have been made to keep these Standards, as far as possible, in line with the corresponding IAS/IFRS and departures have been made where considered absolutely essential. These changes have been made considering various factors, such as > Various terminology related changes have been made to make it consistent with the terminology used in law, eg,, ‘statement of profit and loss’ in place of ‘statement of comprehensive income’ and ‘balance sheet’ in place of ‘statement of financial position’ > Removal of options in accounting principles and practices in Ind AS vis-a-vis IFRS, have been made to maintain consistency and comparability of the financial statements to be prepared by following Ind AS. However, these changes will not result into carve outs. > Certain changes have been made considering the economic environment of the country, which is different as compared to the economic environment presumed to be in existence by IFRS. These differences are due to differences in economic conditions prevailing in India. These differences which are in deviation to the accounting principles and practices stated in IFRS, are ‘commonly known as ‘Carve-outs’. Additional guidance given in Ind AS over and above what is given in IFRS, is termed as ‘Carve in’. © The Institute of Chartered Accountants of IndiaCre Prete’ Ca ee Dee eae Peon fGiickatnuneer ad Peer uc ceecrr) principles and practices in Ind AS vis od pea 10. CONVERGENCE TO IFRS IN INDIA In the scenario of globalisation, India cannot isolate itself from the accounting developments taking place worldwide. In India, so far as the ICAI, NFRA and various regulators such as SEBI and Reserve Bank of India (RBI) are concerned, the aim is to comply with the IFRS to the extent possible with the objective to formulate sound financial reporting standards for the purpose of preparing globally accepted financial statements. The ICAI, being a member of the International Federation of Accountants (IFAC), considered the IFRS and tried to integrate them, to the extent possible, in the light of the laws, customs, practices and business environment prevailing in India Due to the recent stream of overseas acquisitions by Indian companies, there is need for adoption of high quality standards to convince foreign enterprises about the financial standing as also the disclosure and governance standards of Indian acquirers. In India, the ICAI has worked towards convergence of global accounting standards by considering the application of IFRS in Indian corporate environment. Recognising the growing need of full convergence of Ind AS with IFRS, ICAI constituted a Task Force to examine various issues involved. Full convergence involves adoption of IFRS in the same form as that issued by the IASB. ‘© The Institute of Chartered Accountants of IncINTRODUCTION TO ACCOUNTING STANDARDS 1.17 For convergence of Ind AS with IFRS, the ASB in consultation with the MCA, decided that there will be two separate sets of accounting standards viz. (i) Ind AS converged with the IFRS - standards which are being converged by eliminating the differences of the Ind AS vis-a-vis IFRS and (ii) Existing notified AS. eens Cnr) roar eri) Application ein os convergence Ml considering tolFRS; Mi fegaland other |W decision to conditions AY ‘have wo Penny eee inindia fl accounting standa not adoption Indian Accounting Standards (Ind AS) Account Gia. wuat ARE INDIAN ACCOUNTING STANDARDS (IND AS)? Ind AS are IFRS converged standards issued by the Central Government of India under the supervision and control of ASB of ICAI and in consultation with NFRA. NFRA recommends these standards to the MCA. MCA has to spell out the accounting standards applicable for companies in India Ind AS are named and numbered in the same way as the corresponding IAS. However, for Ind AS corresponding to IFRS, one need to add 100 to the IFRS number e g. for IFRS 1 corresponding Ind AS number is 101. Iie TE wcrc ante Rte Lely Globalization and | T'ansparency of | Comparability of || Enhanced financial financial Disclosure statements statements requirements Libreralization © The Institute of Chartered Accountants of India& 12.HISTORY OF IFRS-CONVERGED INDIAN ACCOUNTING STANDARDS (IND AS) First Step towards IFRS The ICAI being the accounting standards-setting body in India, way back in 2006, initiated the process of moving towards the IFRS issued by the IASB with a view to enhance acceptability and transparency of the financial information communicated by the Indian corporates through their financial statements. This move towards IFRS was subsequently accepted by the Government of India Government of India - Commitment to IFRS Converged Ind AS As per the original roadmap for implementation of IFRS-converged Ind AS issued by the Government of India, initially Ind AS were expected to be implemented from the year 2011. However, keeping in view the fact that certain issues including tax issues were still to be addressed, the Ministry of Corporate Affairs decided to postpone the date of implementation of Ind AS. In 2014, the then Hon'ble Union Finance Minister of India, Late Shri Arun Jaitely, in his Budget Speech in July 2014 stated that - "There is an urgent need to converge the current Indian accounting standards with the International Financial Reporting Standards (IFRS). | propose for adoption of the new Indian Accounting Standards (Ind AS) by the Indian companies from the financial year 2015-16 voluntarily and from the financial year 2016-17 on a mandatory basis. Based on the international consensus, the regulators will separately notify the date of implementation of Ind AS for the Banks, Insurance companies etc. Standards for the computation of tax would be notified separately”. Pursuant to the above announcement, various steps were taken to facilitate the implementation of IFRS-converged Indian Accounting Standards (Ind AS). Moving in this direction, the Ministry of Corporate Affairs (MCA) has issued the Companies (Indian Accounting Standards) Rules, 2015 vide Notification dated February 16, 2015 including the revised roadmap of implementation of Ind AS for companies other than Banking companies, insurance Companies and NBFCs. As per the Notification, Ind AS converged with IFRS shall be implemented on voluntary basis from 1st April, 2015 and mandatorily from 1st April, 2016. Further, the MCA on March 30, 2016, had also notified the Roadmap for implementation of Ind AS for Scheduled Commercial Banks, Insurance companies and NBFCs from 1st April, 2018 onwards and also amendments to Ind AS in line with the amendments made in IFRS/IAS vide Companies (Indian Accounting Standards) Amendment Rules, 2016. © The Institute of Chartered Accountants of IndiaINTRODUCTION TO ACCOUNTING STANDARDS SI However, IRDAI vide press release dated June 28, 2017 had deferred the implementation of Ind AS for the Insurance Sector in India for a period of two years, whereby the effective date was deferred to FY 2020-21. Thereafter, vide circular dated January 21, 2020, IRDAI has deferred Implementation of Ind AS in the Insurance Sector till further notice. Additionally, the insurance companies are no longer required to submit proforma Ind AS financial statements to IRDAI on quarterly basis as was required earlier. The Reserve Bank of India vide its circular dated April 05, 2018 had deferred the implementation of Ind AS for Schedule Commercial Banks (SCBs), excluding Regional Rural Banks (RRBs) by one year ie,, to be made effective from 1st April, 2019 onwards. However, vide circular dated 22nd March, 2019, the implementation of Ind AS for Scheduled Commercial Banks (SCBs) has been further deferred until further notice by the Reserve Bank of India. One of the most significant steps in moving towards to Ind AS taken by the ICAI was to provide a stable platform to the Indian entities for smoother and for effective implementation of Ind AS it has been decided to converge early by notifying Ind AS corresponding to IFRS 9, Financial Instruments (effective from January 01, 2018) issued by the IASB. The ICAI continues with its march towards continuous convergence with IFRS Standards at all times and closely monitors the amendments in IFRS Standards with timely incorporation of those changes in Ind ASs The |ASB issued IFRS 15 Revenue from Contracts with Customers with effect from January 01, 2078 and IFRS 16 Leases with effect from January 01, 2019. Consequently to keep in pace with the global standards, ICAI formulated Ind AS 115 Revenue from Contracts with Customers which was notified by MCA in March, 2018 effective for F.Y. 2018-19 onwards and Ind AS 116 Leases, which was notified by MCA in March, 2019 for F.Y. 2019-20 onwards. G 13. List OF IND AS The following is the list of Ind AS vis-a-vis IFRS and AS: 101 IFRS 1 First Time Ado = be Indian Accounting Standards 102 ifrS2 [Share Based Payment | GN |Guidance Note on [Accounting for! © The Institute of Chartered Accountants of IndiaEmployee Share-based Payments, 103 iFRS3 [Business Combinations| AS 14 | Accounting for! |Amalgamations 104 [iFRS4 [insurance Contracts =| 105 IFRS 5 Non-current Assets} AS 24 |Discontinuing Held for Sale and Operations Discontinued Operations 106 iFRS6 — [Exploration for and| GN15 |Guidance Note on Evaluation of Mineral Accounting for Gil and Resources Gas Producing Activities 107 IFRS 7 Financial Instruments: | - 7 Disclosures 108 __[IFRS8 [Operating Segments_| AS 17_|Segment Reporting 109 [IFRS9 [Financial instruments - | 110 IFRS 10 [Consolidated Financial| AS 21 |Consolidated Financial Statements Statements 111 |ifRS 11 [Joint Arrangements | AS 27 Financial Reporting of] Interests in Joint! Ventures 112 IFRS 12 Disclosure of Interests = a in Other Ent 113 IFRS 13, Fair Value ~ fa Measurement 114 IFRS 14 [Regulatory Deferral] GN Accounting for Rate! Accounts Regulated Activities 115 |irrs15 [Revenue from] AS7 Construction Contract ‘contracts with! S9_ |Revenue Recognition customers 116 [IFRS 16 _ [Leases AS19_|Leases © The Institute of Chartered Accountants of IndiaINTRODUCTION TO ACCOUNTING STANDARDS SRL 317 |iFRS17__ Insurance Contracts is under|(it will formulat | replace ion __|IFRS 4) 1 IAS 1 Presentation of| AS1 [Disclosure of Financial Statements [Accounting Policies D 1AS2 inventories AS2_ |Valuation of Inventories 7 IAST7 ‘Statement of Cash| AS3 |Cash Flow Statements Flows 8 IAS 8 Accounting Policies,|_ ASS Net Profit or Loss for ‘Changes in Accounting the Period, Prior period Estimates and Errors Items and Changes in Accounting Policies 10 1aS10 Events after the| AS4 |Contingencies and Reporting Period Events Occurring After the Balance Sheet date 2 1AS 12 income Taxes ‘AS 22 Accounting for Taxes on Income 16 14S 16 |Property, Plant and] AS10 |Property, Plant and Equipment Equipment 19 1AS 19 _|Employee Benefits AS 15 [Employee Benefits 20 1S 20 | Accounting for] AS 12 [Accounting for! ‘Government Grants, Government Grants and Disclosure of Government Assistance 21 IAS 21 |The Effects of Changes] AS 11. |The Effects of Changes in Foreign Exchange in Foreign Exchange Rates Rates 23 IAS 23 | Borrowing Costs AS 16 [Borrowing Costs 24 IAS 24 Related Party] AS 18 |Related Party Disclosures Disclosures © The Institute of Chartered Accountants of India27 1AS 27 |Separate Financial] - | - Statements 28 IAS 28 Investment [Accounting for Associates and Joint] Investment in Ventures Associates, in Consolidated Financial Statements 29 1AS 29 |Financial Reporting in] - — |- Hyperinflationary Economies 32 14S 32 {Financial Instruments:| - — |- Presentation 33 IAS 33__| Earnings per Share AS 20 _|Earnings per Share 34 14S 34 interim Financial| AS 25 |interim Financial Reporting Reporting 36 IAS 36 _|Impairment of Assets _| AS 28 _| Impairment of Assets 37 IAS 37 Provisions, Contingent} AS 29 Provisions, Contingent and Liabilities and Contingent Assets Contingent Assets 38 IAS 38 Intangible Assets AS 26 _|Intangible Assets 40 IAS 40 Investment Property | AS 13. [Accounting for Investments a las 41 | Agriculture -o/- (G14. ROADMAP FOR IMPLEMENTATION OF INDIAN ACCOUNTING STANDARDS (IND AS): A SNAPSHOT For Companies other than Banks, NBFCs and Insurance Companies Phase I: 1st April 2015 or thereafter (with Comparatives): Voluntary Basis for any company (other than Banks, NBFCs and Insurance companies) and its holding, subsidiary, Joint venture (JV) or Associate Company. © The Institute of Chartered Accountants of IndiaINTRODUCTION TO ACCOUNTING STANDARDS SR ‘1st April 2016: Mandatory Basis (@) Companies listed/in process of listing on Stock Exchanges in India or Outside India having net worth of INR 500 crore or more; (b) Unlisted Companies having net worth of INR 500 crore or more; (©) Parent, Subsidiary, Associate and JV of above. Phase II: 1st April 2017: Mandatory Basis (a) All companies which are listed/or in process of listing on Stock Exchanges in India or outside India not covered in Phase | (other than companies listed on SME Exchanges); (b) Unlisted companies having net worth of INR 250 crore or more but less than INR 500 crore; (©) Parent, Subsidiary, Associate and JV of above. Special Points to Consider * Companies listed on SME exchange are not required to apply Ind AS. Such companies shall continue to apply existing ASs unless they choose otherwise. * Once Ind AS are applicable, an entity shall be required to follow the Ind AS for all the subsequent financial statements i.e. there is no looking back once the Ind AS are adopted by companies. * Companies not covered by the above roadmap shall continue to apply Accounting Standards notified in Companies (Accounting Standards) Rules, 2006. For Scheduled Commercial Banks (Excluding RRBs), Insurers/Insurance Companies and Non-Banking Financial Companies (NBFCs) Phase |: | From 1st April, 2018 (with comparatives) ‘*NBFCs (whether listed or unlisted) having net worth INR 500 crores or more ‘* Holding, Subsidiary, JV and Associate companies of above NBFC other than those already covered under corporate roadmap shall also apply from said date © The Institute of Chartered Accountants of IndiaPhase Il: | From 1st April, 2019 (with comparatives) ‘© NBFCs whose equity and/or debt securities are listed or are in the process of listing on any stock exchange in India or outside India and having net worth less than INR 500 crores + NBFCs that are unlisted having net worth INR 250 crores or more but less than INR 500 crores ‘* Holding, Subsidiary, JV and Associate companies of above companies other than those already covered under corporate roadmap shall also apply Ind AS from the said date, Applicable to both Consolidated and Indivi jual Financial Statements > NBFC having net worth below INR 250 crores and not covered under the above provisions shall continue to apply ASs specified in Annexure to Companies (Accounting Standards) Rules, 2006. > Adoption of Ind AS is allowed only when required as per the roadmap. > — Voluntary adoption of Ind AS is not allowed. > Scheduled Commercial Banks (SCBs) excluding Regional Rural Banks (RRBs) were initially required to implement Ind AS from 1 April 2018. However, RBI (Reserve Bank of India) vide a press release dated 5 April 2018, deferred the implementation of Ind AS by one year ie. to be effective from 1 April 2019 instead of 1 April 2018. > — Further, the RBI through a notification dated 22 March 2019, deferred the Ind AS implementation till further notice. This was because the amendments recommended by the RBI are still under consideration of the Government of India, therefore, RBI took a decision to defer the applicability of Ind AS till further notice. > Urban Cooperative banks (UCBs) and Regional Rural banks (RRBs) are not required to apply Ind AS. > MCA had outlined the road map for implementation of Ind AS by insurers/insurance companies from 1 April 2018. © The Institute of Chartered Accountants of IndiaINTRODUCTION TO ACCOUNTING STANDARDS SR > IRDAI (Insurance Regulatory and Development Authority of India) deferred the implementation of Ind AS in the insurance sector in India for a period of two years whereby the effective date was deferred to 1 April 2020. However, insurance companies were required to submit proforma Ind AS financial statements to IRDAI on a quarterly basis effective 31 December 2016 (vide circular dated 28 June 2017). > — Further, IRDAI in its meeting held on 20 December 2019 decided to implement Ind AS 109, Financial Instruments and Ind AS 117 simultaneously, along with other applicable Ind AS. In India, Ind AS 117 (converged with IFRS 17) is still at an exposure draft stage and will be updated based on the amendments made to IFRS 17. Once Ind AS 117 is notified in India by MCA, IRDAI would be in a position to notify the regulation on preparation of Ind AS compliant financial statements and modify other regulations that may be impacted due to the implementation of Ind AS 117. > — Therefore, the effective date of implementation of Ind AS for insurance companies is not yet finalized and it would be finalized after the finalisation of IFRS 17 by IASB. > IRDA, vide circular dated 21 January 2020, has deferred implementation of Ind AS in the insurance sector till further notice. The circular dated 28 June 2017 was also withdrawn by IRDAI along with the requirement of, proforma Ind AS financial statements being submitted on a quarterly basis as directed in that circular. SUMMARY © The Institute of Chartered Accountants of IndiaTEST YOUR KNOWELDGE MCQs 1. Accounting Standards for non-corporate entities in India are issued by (@) Central Govt. (b) State Govt. (©) Institute of Chartered Accountants of India. 2. Accounting Standards (2) Harmonise accounting policies and eliminate the non-comparability of financial statements. (b) Improve the reliability of financial statements. (©) Both (a) and (b). 3. __Itis essential to standardize the accounting principles and policies in order to ensure (a) Transparency. (b) Consistency. (©) Both (a) and (b). 4, Which committee is responsible for approval of accounting standards and their modification for the purpose of applicability to companies? (a) NRA. © The Institute of Chartered Accountants of IndiaINTRODUCTION TO ACCOUNTING STANDARDS NSE (b) MCA (Central Government Advisory Committee. 5. Global Standards facilitate (@) Cross border flow of money. (b) Comparability of financial statements. (©) Both (@) and (b). 6. Additional guidance given in Ind AS over and above what is given in IFRS are called (a) Carve-outs. () Carve-ins. (©) Carve clarifications. 7. IASB stands for (@) International Accounting Standards Bureau (b) _ International Advisory Standards Board (©) _ International Accounting Standard Board. 8. IFRS stands for (@) International Financial Reporting System (b) International Finance Reporting Standard (©) International Financial Reporting Standard. 9. Phase | of Ind AS was applicable to: (a) _Alllisted companies in India or outside India (b) Companies with turnover INR 500 crores or more (©) Companies with net worth INR 00 crores or more. Theoretical Questions 1. Explain the objective of “Accounting Standards” in brief. State the advantages of setting Accounting Standards 2. Briefly explain the process of issuance of Indian Accounting Standards. © The Institute of Chartered Accountants of India3. Explain the significance of emergence of IFRS as Global Standards 4, What do you mean by Carve outs/ins in Ind AS? Explain. ANSWER/HINTS MCQs ibe G) ts (ee = Ch) eG) 7 © &® © % © Theoretical Questions 1 ‘© The Institute of Chartered Accountants of In Accounting Standards are the written policy documents issued by Government relating to various aspects of measurement, treatment, presentation and disclosure of accounting transactions and events. Following are the objectives of Accounting Standards’ a. Accounting Standards harmonize the diverse accounting policies and practices followed by different companies in India b. Accounting Standards facilitates the preparation of financial statements and make them comparable. Accounting Standards give a sense of faith and reliability to the users. The main advantage of setting accounting standards are as follows: a. Accounting Standards makes the financial statements of different companies comparable which helps investors in decision making b. Accounting Standards prevent any misleading accounting treatment. Accounting Standards prevent manipulation of data by the management. Due to the recent stream of overseas acquisitions by Indian companies, there is need for adoption of high quality standards to convince foreign enterprises about the financial standing as also the disclosure and governance standards of Indian acquirers. The Government of India in consultation with the ICAI decided to converge and not to adopt IFRSs issued by the IASB. The decision of convergence rather than adoption was taken after the detailed analysis of IFRSs requirements and extensive discussion with various stakeholders.INTRODUCTION TO ACCOUNTING STANDARDS 2 The ICAI has worked towards convergence of global accounting standards by considering the application of IFRS in Indian corporate environment. Recognising the growing need of full convergence of Ind AS with IFRS, ICAI constituted a Task Force to examine various issues involved Ind AS are issued by the Central Government of India under the supervision and control of ASB of ICAI and in consultation with NFRA. NFRA recommends these standards to the MCA and MCA has to spell out the accounting standards applicable for companies in India. 3. Global Standards facilitate cross border flow of money, global listing in different bourses and comparability of financial statements. Global Standards improve the ability of investors to compare investments on a global basis and thus lowers their risk of errors of judgment. It facilitates accounting and reporting for companies with global operations and eliminates some costly requirements say reinstatement of financial statements. 4. Certain changes have been made in Ind AS considering the economic environment of the country, which is different as compared to the economic environment presumed to be in existence by IFRS. These differences are due to differences in economic conditions prevailing in India. These differences which are in deviation to the accounting principles and practices stated in IFRS, are commonly known as ‘Carve-outs’. Additional guidance given in Ind AS over and above what is given in IFRS, is termed as ‘Carve © The Institute of Chartered Accountants of IndiaFRAMEWORK FOR PREPARATION AND PRESENTATION OF BA FINANCIAL STATEMENTSG1. INTRODUCTION The development of accounting standards or any other accounting guidelines need a foundation of underlying principles. (ASB) of ICAI issued a framework in July, 2000 which provides the fundamental basis for development of new standards as also for review of existing standards. The principal areas covered by the framework are as follows: (@) Components of financial statements; (b) Objectives of financial statements; (©) Assumptions underlying financial statements; (d) Qualitative characteri of financial statements; (e) Elements of financial statements; (f) Criteria for recognition of elements in financial statements; (9) Principles for measurement of financial elements; (h) Concepts of Capital and Capital Maintenance. © The Institute of Chartered Accountants of Indiarramework iS Ra G 2. PURPOSE OF THE FRAMEWORK The framework sets out the concepts underlying the preparation and presentation of general-purpose financial statements prepared by enterprises for external users. The main purpose of the framework is to assist (@) Enterprises in preparation of their financial statements in compliance with Accounting Standards and in dealing with the topics not yet covered by any Accounting Standard, (b) ASB in its task of development and review of Accounting Standards, (ASB in promoting harmonisation of regulations, Accounting Standards and procedures relating to the preparation and presentation of financial statements by providing a basis for reducing the number of alternative accounting treatments permitted by Accounting Standards, (d) Auditors in forming an opinion as to whether financial statements conform to the Accounting Standards, (e) Users in interpretation of financial statements, (f) those who are interested in the work of ASB with information about its approach to the formulation of Accounting Standards. (G3. STATUS AND SCOPE OF THE FRAMEWORK The framework applies to general-purpose financial statements (hereafter referred to as ‘financial statements’ usually prepared annually for external users, by all commercial, industrial and business enterprises, whether in public or private sector. The special purpose financial reports, for example computations prepared for tax purposes are outside the scope of the framework. Nevertheless, the framework may be applied in preparation of such reports, to the extent not inconsistent with their requirements. Nothing in the framework overrides any specific Accounting Standard. In case of conflict between an Accounting Standard and the framework, the requirements of the Accounting Standard will prevail over those of the framework. (G4. COMPONENTS OF FINANCIAL STATEMENTS A complete set of financial statements normally consists of a Balance Sheet, a Statement of Profit and Loss and a Cash Flow Statement together with notes, other © The Institute of Chartered Accountants of Indiastatements and explanatory materials that form an integral part of the financial statements. All components of the financial statements are interrelated because they reflect different aspects of same transactions or other events. Although each statement provides information that is different from each other, none in isolation is likely to serve any single purpose nor can anyone provide all information needed by a user. The major information contents of different components of financial statements are explained as below: Balance Sheet portrays value of economic resources controlled by an enterprise. It also provides information about liquidity and solvency of an enterprise which is useful in predicting the ability of the enterprise to meet its financial commitments as they fall due. Statement of Profit and Loss presents the result of operations of an enterprise for an accounting period, i.e,, it depicts the performance of an enterprise, in particular its profitability Cash Flow Statement shows the way an enterprise has generated cash and the way they have been used in an accounting period and helps in evaluating the investing, financing and operating activities during the reporting period. Notes and other statements present supplementary information explaining different items of financial statements. For example, they may contain additional information that is relevant to the needs of users about the items in the balance sheet and statement of profit and loss. They include various other disclosures such as disclosure of accounting policies, segment reporting, related party disclosures, earnings per share, etc. (G5, OBJECTIVES AND USERS OF FINANCIAL STATEMENTS The objective of financial statements is to provide information about the financial position, performance and cash flows of an enterprise that is useful to a wide range of users in making economic decisions. The framework identifies seven broad groups of users of financial statements. ‘© The Institute of Chartered Accountants of Inrramework i i All users of financial statements expect the statements to provide useful information needed to make economic decisions. The financial statements provide information to suit the common needs of most users. However, they cannot and do not intend to provide all information that may be needed, e.g. they do not provide non-financial data even if they may be relevant for making decisions. The aforesaid users use financial statements in order to satisfy some of their information needs. These needs may include the following: a) Investors - The providers of risk capital are concerned with the risk inherent in, and return provided by, their investments. They are also interested in information which enables them to assess the ability of the enterprise to pay dividends. b) Employees - Employees and their representative groups are interested in information about the stability and profitability of their employers. They are also interested in information which enables them to assess the ability of the enterprise to provide remuneration, retirement benefits and employment opportunities ©) Lenders - Lenders are interested in information which enables them to determine whether their loans, and the interest attaching to them, will be paid when due. d) Suppliers and other trade creditors - Suppliers and other creditors are interested in information which enables them to determine whether amounts ‘owing to them will be paid when due. Trade creditors are likely to be erested in an enterprise over a shorter period than lenders unless they are dependent upon the continuance of the enterprise as a major customer. e) Customers - Customers have an interest in information about the continuance of an enterprise, especially when they have a long term involvement with, or are dependent on, the enterprise for their goods and services. ‘© The Institute of Chartered Accountants of Inf) Governments and their agencies - Governments and their agencies are interested in the allocation of resources and, therefore, the activities of enterprises. They also require information in order to regulate the activities of enterprises and determine taxation policies, and to serve as the basis for determination of national income and similar statistics. 9) Public - Enterprises affect members of the public in a variety of ways. For example, enterprises may make a substantial contribution to the local ‘economy in many ways including the number of people they employ and their patronage of local suppliers. Financial statements may assist the public by providing information about the trends and recent developments in the prosperity of the enterprise and the range of its activities. (G 6. FUNDAMENTAL ACCOUNTING ASSUMPTIONS As per the framework, there are three fundamental accounting assumptions: These are assumptions, ie,, the users of financial statements believe that the same has been considered while preparing the financial statements. That is why, as long as financial statements are prepared in accordance with these assumptions, no separate disclosure in financial statements would be necessary. If nothing has been written about the fundamental accounting assumption in the financial statements, then it is assumed that they have already been followed in their preparation of financial statements. However, if any of the above-mentioned fundamental accounting assumption is not followed then this fact should be specifically disclosed Let us discuss these assumptions in detail (a) Going Concern: Financial statements are normally prepared on the assumption that an enterprise will continue in operation in the foreseeable future and neither there is an intention, nor there is a need to materially curtail the scale of operations. ‘© The Institute of Chartered Accountants of Inrramework "ES A Financial statements prepared on going concern basis recognise among other things the need for sufficient retention of profit to replace assets consumed in operation and for making adequate provision for settlement of its liabilities. If any financial statement is prepared on a different basis, e.g. when assets of an enterprise are stated at net realisable values in its financial statements, the basis used should be disclosed. Mlustration 1 Balance sheet of a trader on 31 March, 20X1 is given below: Capital 60,000 | Property, Plant and 65,000 Equipment Profit and Loss Account 25,000 | Stock 30,000 10% Loan 35,000 | Trade receivables 20,000 Trade payables 10,000 | Deferred costs 10,000 Bank 5,000 1,30,000 1,30,000 Additional information: (a) The remaining life of Property, Plant and Equipment is 5 years. The pattern of use of the asset is even. The net realisable value of Property, Plant and Equipment on 37.03.X2 was *60,000. () The trader's purchases and sales in 20X1-X2 amounted to 4 lakh and 74.5 lakh respectively. () The cost and net realisable value of stock on 31.03.X2 were ¥ 32,000 and 40,000 respectively. (4) Expenses (including interest on 10% Loan of 3,500 for the year) amounted to 14,900. (©) Deferred cost is amortised equally over 4 years. () Trade receivables on 31.03.X2 is ® 25,000, of which % 2,000 is doubtful. Collection of another # 4,000 depends on successful re-installation of certain product supplied to the customer. (9) Closing trade payable is # 12,000, which is likely to be settled at 5% discount. (h) Cash balance on 31.03.X2 is #37, 100. (There is an early repayment penalty for the loan #2,500. © The Institute of Chartered Accountants of IndiaYou are required to prepare Profit and Loss Accounts and Balance Sheets of the trader in both cases (i) assuming going concern (ii) not assuming going concern. Solution Profit and Loss Account for the year ended 31st March, 20X2 To Opening Stock] 30,000} —_ 30,000) By Sales 4,50,000| 4,50,000 To Purchases 4,00,000 | 4,00,000| By Closing| 32,000} 40,000 Stock To Expenses 14,900) 14,900} By Trade = 600 payables To Depreciation | 13,000} 5,000 To Provision for doubtful 2,000} 6,000 debts To Deferred cost | 2,500) 10,000 To Loan penalty -| 2,500 To Net Profit} 19,600} 22,200 (bf) 4,82,000| 4,90,600 4,82,000| 4,90,600 Balance Sheet as at 31st March, 20X2 Capital 60,000] 60,000 | Property, Plant| 52,000] 60,000 and Equipment Profit & Loss A/c | 44,600) 47,200 | Stock 32,000] 40,000 10% Loan 35,000 | 37,500 | Trade receivables 23,000] 19,000 (less provision) Trade payables 12,000 11,400 | Deferred costs 7,500, Nil Bank 37,100 | _ 37,100 1,51,600 | 1,56,100 1,51,600 | 1,56,100 © The Institute of Chartered Accountants of Indiarramework "iL (b) Accrual Basis: According to AS 1, revenues and costs are accrued, that is, recognised as they are earned or incurred (and not as money is received or paid) and recorded in the financial statements of the periods to which they relate. Further Section 128(1) of the Companies Act, 2013 makes it mandatory for companies to maintain accounts on accrual basis only. It is not necessary to expressly state that accrual basis of accounting has been followed in preparation of a financial statement. In case, any income/ expense is recognised on cash basis, the fact should be stated. Let's understand the impact of both approaches of accounting by way of an example. Example 1 (@) A trader purchased article A on credit in period 1 for *50,000. () He also purchased article B in period 1 for €2,000 cash. (The trader sold article A in period 1 for *60,000 in cash. (d) He also sold article B in period 1 for # 2,500 on credit. Profit and Loss Account of the trader by two basis of accounting are shown below. A look at the cash basis Profit and Loss Account will convince any reader of the irrationality of cash basis of accounting. Cash basis of accounting Cash purchase of article B and cash sale of article A is recognised in period 1 while purchase of article A on payment and sale of article B on receipt is recognised in period 2. Profit and Loss Account Period 1 | To Purchase 2,000 | Period 1 | By Sale 60,000 To Net Profit 58,000 pa 60,000 60,000 Period 2 | To Purchase 50,000 | Period 2 | By Sale 2,500 ByNet Loss | 47.500 50,000 50,000 © The Institute of Chartered Accountants of IndiaAccrual basis of accounting Credit purchase of article A and cash purchase of article B and cash sale of article A and credit sale of article B is recognised in period 1 only. Profit and Loss Account Period 1 | To Purchase 52,000 | Period 1 | By Sale 62,500 To Net Profit 10,500 62,500 | 62,500 (© Consistency: It is assumed that accounting policies are consistent from one period to another. The consistency improves comparability of financial statements through time. According to Accounting Standards, an accounting policy can be changed if the change is required () _ byastatute or (ii) by an Accounting Standard or (iii) for more appropriate presentation of financial statements. Gr. QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENTS The qualitative characteristics are attributes that improve the usefulness of information provided in financial statements. The framework suggests that the financial statements should observe and maintain the following four qualitative characteristics as far as possible within limits of reasonable cost/ benefi These attributes can be explained as: 1. Understandability: The financial statements should present information in a manner as to be readily understandable by the users with reasonable knowledge of business and economic activities and accounting. © The Institute of Chartered Accountants of Indiarramework "ES 2. Relevance: It is not right to think that more information is always better... A mass of irrelevant information creates confusion and can be even more harmful than non-disclosure. The financial statements should contain relevant information only. Information, which is likely to influence the economic decisions by the users, is said to be relevant. Such information may help the users to evaluate past, present or future events or may help in confirming or correcting past evaluations. The relevance of a piece of information should be judged by its materiality. A piece of information is said to be material if its misstatement (.e,, omission or erroneous statement) can influence economic decisions of a user taken on the basis of the financial information. Materiality depends on the size and nature of the item or error, judged in the specific circumstances of its misstatement. Materiality provides a threshold or cut-off point rather than being a primary qualitative characteristic which the information must have if it is to be useful Further it is important to know the constraints also on Relevant and Reliable Information to better understand the qualitative characteristics of financial statements. Following are some of the constraints: a) Timeliness If there is undue delay in the reporting of information it may lose its relevance. Management may need to balance the relative merits of timely reporting and the provision of reliable information. To provide information on a timely basis it may often be necessary to report before all aspects of a transaction or other event are known, thus impairing reliability. Conversely, if reporting is delayed until all aspects are known, the information may be highly reliable but of little use to users who have had to make decisions in the interim. In achieving a balance between relevance and reliability, the overriding consideration is how best to satisfy the information needs of users, b) Balance between Benefit and Cost The balance between benefit and cost is a pervasive constraint rather than a qualitative characteristic. The benefits derived from information should exceed the cost of providing it. The evaluation of benefits and costs is, however, substantially a judgmental process. The preparers and users of financial statements should be aware of this constraint. © The Institute of Chartered Accountants of In3. Reliability: To be useful, the information must be reliable; that is to say, they must be free from material error and bias. The information provided are not likely to be reliable unless: (2) Transactions and events reported are faithfully represented, (b) Transactions and events are reported on the principle of ‘substance over form (discussed later in AS-1)' (© The reporting of transactions and events are neutral, i.e. free from bias. (d) Prudence is exercised in reporting uncertain outcome of transactions or events. (€) The information in financial statements must be complete. 4, Comparability: Comparison of financial statements is one of the most frequently used and most effective tools of financial analysis. The financial statements should permit both inter-firm and intra-firm comparison, One essential requirement of comparability is disclosure of financial effect of change in accounting policies. However, the need for comparability should not be confused with mere uniformity and should not be allowed to become an impediment to the introduction of improved accounting standards. It is not appropriate for an enterprise to continue accounting in the same manner for a transaction or other event if the policy adopted is not in keeping with the qualitative characteristics of relevance and reliability. It is also inappropriate for an enterprise to leave its accounting policies unchanged when more relevant and reliable alternatives exist. (G8, TRUE AND FAIR VIEW Financial statements are required to show a true and fair view of the performance, financial position and cash flows of an enterprise. The framework does not deal directly with this concept of true and fair view, yet application of the principal qualitative characteristics and appropriate accounting standards normally results in financial statements portraying true and fair view of information about an enterprise. G9, ELEMENTS OF FINANCIAL STATEMENTS The framework classifies items of financial statements in five broad groups depending on their economic characteristics, ‘© The Institute of Chartered Accountants of Inrramework "ES. a Elements of | Statements Gains and losses differ from income and expenses in the sense that they may or may not arise in the ordinary course of business. Except for the way they arise, economic characteristics of gains are same as income and those of losses are same as expenses. For these reasons, gains and losses are not recognised as separate elements of financial statements. Let us discuss each element of financial statement in deta 1. Asset: An asset is a resource controlled by the enterprise as a result of past events from which future economic benefits are expected to flow to the enterprise. The following points must be considered while recognising an asset: (@) The resource regarded as an asset, need not have a physical substance. The resource may represent a right generating future economic benefit, e.g. patents, copyrights, trade receivables. An asset without physical substance can be either intangible asset, e.g, patents and copyrights or monetary assets, eg. trade receivables. The monetary assets are money held and assets to be received in fixed or determinable amounts of money. (b) An asset is a resource controlled by the enterprise. This means it is possible to recognise a resource not owned but controlled by the enterprise as an asset, ie., legal ownership may or may not vest with the enterprise. Such is the case of financial lease, where lessee recognises the asset taken on lease, even if ownership lies with the lessor. Likewise, the lessor does not recognise the asset given on finance lease as asset in his books, because despite of ‘ownership, he does not control the asset. (©) A resource cannot be recognised as an asset if the control is not sufficient. For this reason specific management or technical talent of an employee cannot be recognised because of insufficient control. When the control over a resource is protected by a legal right, e.g. copyright, the resource can be recognised as an asset. (d)_ To be considered as an asset, it must be probable that the resource generates future economic benefits. If the economic benefits from a resource is expected to expire within the current accounting period, it is not an asset. For © The Institute of Chartered Accountants of Indiae) (f) 2. example, economic benefits, i.e. profit on sale, from machinery purchased by an enterprise who deals in such kind of machinery is expected to expire within the current accounting period. Such purchase of machinery is therefore booked as an expense rather than capitalised in the machinery account. However, if the articles purchased by a dealer remain unsold at the end of accounting period, the unsold items are recognised as assets, i.e. closing stock, because the sale of the article and resultant economic benefit, i.e, profit is expected to be earned in the next accounting period, To be considered as an asset, the resource must have a cost or value that can be measured reliably. When flow of economic benefit to the enterprise beyond the current accounting period is considered improbable, the expenditure incurred is recognised as an expense rather than as an asset. Liability: A liability is a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow of a resource embodying economic benefits. The following points may be noted: @ A liability is a present obligation’, i.e. an obligation the existence of which, based on the evidence available on the balance sheet date is considered probable. For example, an enterprise may have to pay compensation ifit loses a damage suit filed against it. The damage suit is pending on the balance sheet date. The enterprise should recognise a liability for damages payable by a charge against profit if itis probable that the enterprise will lose the suit and if the amount of damages payable can be ascertained with reasonable accuracy. The enterprise should create a provision for damages payable by charge against profit, if probability of losing the suit is more than not losing it and if the amount of damages payable can be ascertained with reasonable accuracy. In other cases, the company reports the damages payable as ‘contingent liability’, which does not meet the definition of liability. Accounting standards define provision as a liability, which can be measured only by using a substantial degree of estimation. * Present obligation may be legally enforceable as a consequence of a binding contract or statutory requirement or they may arise from normal business practice, custom and a desire to maintain good business relations or act in an equitable manner. © The Institute of Chartered Accountants of Inrramework ES a (b) It may be noted that certain provisions, e.g. provisions for doubtful debts, depreciation and impairment losses, represent diminution in value of assets rather than obligations. These provisions should not be considered as liability. (QA liability is recognised only when outflow of economic resources in settlement of a present obligation can be anticipated and the value of outflow can be reliably measured. Otherwise, the liability is not recognised. For ‘example, liability cannot arise on account of future commitment. A decision by the management of an enterprise to acquire assets in the future does not, of itself, give rise to a present obligation. An obligation normally arises only when the asset is delivered or the enterprise enters into an irrevocable agreement to acquire the asset. Example 2 A Ltd. has entered into a binding agreement with P Ltd. to buy a custom-made machine for 740,000. At the end of 20X1-X2, before delivery of the machine, A Ltd. had to change its method of production. The new method will not require the machine ordered and it will be scrapped after delivery. The expected scrap value is nil. A liability is recognised when outflow of economic resources in settlement of a present obligation can be anticipated and the value of outflow can be reliably measured. In the given case, A Ltd. should recognise a liability of ®40,000 to P Ltd. When flow of economic benefit to the enterprise beyond the current accounting period is considered improbable, the expenditure incurred is recognised as an expense rather than as an asset. In the present case, flow of future economic benefit from the machine to the enterprise is improbable. The entire amount of purchase price of the machine should be recognised as an expense. The accounting entry is suggested below. Loss on change in production Method r. | 40,000 To P Ltd. 40,000 (Loss due to change in production method) Profit and loss A/c Dr. | 40,000 To Loss on change in production method 40,000 (loss transferred to profit and loss account) 3. Equity: Equity is defined as residual interest in the assets of an enterprise after deducting all its liabilities. It is important to avoid mixing up liabilities with © The Institute of Chartered Accountants of Indiaequity. Equity is the excess of aggregate assets of an enterprise over its aggregate liabilities. In other words, equity represents owners’ claim consisting of items like capital and reserves, which are clearly distinct from liabilities, i. claims of parties other than owners. The value of equity may change either through contribution from / distribution to equity participants or due to income earned /expenses incurred. 4, Income: Income is increase in economic benefits during the accounting period in the form of inflows or enhancement of assets or decreases in liabilities that result in increase in equity other than those relating to contributions from equity participants. The definition of income encompasses revenue and gains. Revenue is an income that arises in the ordinary course of activities of the enterprise, e.g, sales by a trader. Gains are income, which may or may not arise in the ordinary course of activity of the enterprise, e.g. profit on disposal of Property, Plant and Equipment. Gains are showed separately in the statement of profit and loss because this knowledge is useful in assessing performance of the enterprise. Income eared is always associated with either increase of asset or reduction of liability. This means, no income can be recognised unless the corresponding increase of asset or decrease of liability can be recognised. For example, a bank does not recognise interest earned on non-performing assets because the corresponding asset (increase in advances) cannot be recognised, as flow of economic benefit to the bank beyond current accounting period is not probable. Thus Balance sheet of an enterprise can be written in form of: A-L=E Where: A = Aggregate value of asset L = Aggregate value of liabilities E = Aggregate value of equity Example 3 Suppose at the beginning of an accounting period, aggregate values of assets, liabilities and equity of a trader are #5 lakh, €2 lakh and €3 lakh respectively. Also suppose that the trader had the following transactions during the accounting period. © The Institute of Chartered Accountants of Inrramework "ES A (a) Introduced capital 20,000. (6) Earned income from investment 78,000. (0) A liability of # 31,000 was finally settled on payment of # 30,000. Balance sheets of the trader after each transaction are shown below: Opening 5.00 — 200 = 3.00 (@ Capital introduced 520 - 200 = 3.20 () Income from investments 5.28 - 200 = 3.28 (©) __ Settlement of liability 498 - 169 = 3.29 The example given above explains the definition of income. The equity increased by 29,000 during the accounting period, due to (i) Capital introduction # 20,000 and (ii) Income earned € 9,000 (Income from investment + Discount earned). Incomes therefore result in increase in equity without introduction of capital Also note that income earned is accompanied by either increase of asset (Cash received as investment income) or by decrease of liability (Discount earned). 5. Expense: An expense is decrease in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrence of liabilities that result in decrease in equity other than those relating to distributions to equity participants. The definition of expenses encompasses expenses that arise in the ordinary course of activities of the enterprise, e.g. wages paid. Losses may or may not arise in the ordinary course of activity of the enterprise, e.g. loss on disposal of Property, Plant and Equipment. Losses are separately shown in the statement of profit and loss because this knowledge is useful in assessing performance of the enterprise. Expenses are always incurred simultaneously with either reduction of asset or increase of liability. Thus, expenses are recognised when the corresponding decrease of asset or increase of liability are recognised by application of the recognition criteria stated above. Expenses are recognised in Profit & Loss A/c by matching them with the revenue generated. However, application of matching concept should not result in recognition of an item as asset (or liability), which does not meet the definition of asset or liability as the case may be. © The Institute of Chartered Accountants of India