AS -1 DISCLOSURE OF ACCOUNTING POLICY

This statement deals with the disclosure of significant accounting policies followed
in preparing and presenting financial statements. All significant accounting
policies adopted in the preparation and presentation of financial statements should
be disclosed.

Accounting policies are the specific accounting principles and the methods of
applying those principles adopted by an enterprise in the preparation and
presentation of financial statements.

APPLICABLITY:

It is applicable to all level of enterprise.

Accounting Treatment:

 The view presented in the financial statements of an enterprise relating to

state of affairs and of the profit or loss can be significantly affected by the
accounting policies followed in the preparation and presentation of the
financial statements. 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.
 The preparation and presentation of the financial statements is required by
law in some cases.
 Disclosers of accounting policies is recommended by some institutions like
ICAI recommends issue of accounting policies like translation policies in
respect of foreign currency items.
 However, accounting policies are not at present regularly and fully disclosed
in all financial statements. Many enterprises include in the Notes to the
Accounts, descriptions of some of the significant accounting policies. But
the nature and degree of disclosure vary considerably between the corporate
and the non-corporate sectors and between units in the same sector.

The following are examples of the areas in which different accounting policies
may be adopted by different enterprises.
 Methods of depreciation, depletion and amortization.
o Straight Line Method.

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 o WDV Method.
 Treatment of expenditure during construction
 Conversion or translation of foreign currency items
 Valuation of inventories
o FIFO
o Weighted average
o Standard Cost
o Retail Method
 Treatment of goodwill
 Valuation of investments
 Treatment of retirement benefits
 Recognition of profit on long-term contracts
 Valuation of fixed assets
 Treatment of contingent liabilities.

The following have been generally accepted as fundamental accounting

assumptions:—
a. Going Concern
The enterprise is normally viewed as a going concern, that is, as continuing in
operation for the foreseeable future. It is assumed that the enterprise has neither the
intention nor the necessity of liquidation or of curtailingmaterially the scale of the
operations.
b. Consistency
It is assumed that accounting policies are consistent fromone period to another.
c. Accrual
Revenues and costs are accrued, that is, recognised as they are earned or incurred
(and not asmoney is received or paid) and recorded in the financial statements of
the periods to which they relate. (The considerations affecting the process of
matching costs with revenues under the accrual assumptionare not dealt with in
this Statement.)

Selection of Accounting policies

There is no single list of accounting policies which are applicable to all

circumstances. The differing circumstances in which enterprises operate in a
situation of diverse and complex economic activity make alternative accounting
principles and methods of applying those principles acceptable.

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The choice of the appropriate accounting principles and the methods of applying
those principles in the specific circumstances of each enterprise calls for
considerable judgment by the management of the enterprise. The objective is
financial statements should be prepared on the basis of such accounting policies,
which exhibit true and fair view of state of affairs of balance sheet and profit and
loss account.

Disclosure:
 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.
 Any change in an accounting policy which has a material effect should be
disclosed. 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.
 If a change is made in the accounting policies which has no material effect
on the financial statements for the current period but which is reasonably
expected to have a material effect in later periods, the fact of such change
should be appropriately disclosed in the period in which the change is
adopted.
 If the fundamental accounting assumptions, viz. Going Concern,
Consistency and Accrual are followed in financial statements, specific
disclosure is not required. If a fundamental accounting assumption is not
followed, the fact should be disclosed.
 Disclosure of accounting policies or of changes therein cannot remedy a
wrong or inappropriate treatment of the item in the accounts.

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 AS- 02 VALUATION OF INVENTORY

Objective:
To formulate the method of computation of cost of inventories/ stock to be shown
in balance sheet

However, this standard does not apply to the valuation of following inventories:
(a) WIP arising under construction contract (Refer AS – 7);
(b) WIP arising in the ordinary course of business of service providers;
(c) Shares, debentures and other financial instruments held as stock in trade; and
(d) Producers’ inventories of livestock, agricultural and forest products, and
mineral oils, ores .

Accounting Treatment:

Inventories are assets: held for sale in ordinary course of business; in the process
of production (WIP); in the form of materials or supplies to be consumed in the
production process or in the rendering of services.

1. Inventories should be valued at the lower of cost and net realizable value.
The cost of inventories should comprise
a) All costs of purchase
b) Costs of conversion
c) Other costs incurred in bringing the inventories to their present location and
condition.
The costs of purchase consist of
a) The purchase price
b) Duties and taxes (other than those subsequently recoverable by the enterprise
from the taxing authorities like CENVAT credit)
c) Freight inwards and other expenditure directly attributable to the acquisition.
Trade discounts (but not cash discounts), rebates, duty drawbacks and other similar
items are deducted in determining the costs of purchase.

2. The costs of conversion include direct costs and systematic allocation of fixed
and variable production overhead. Allocation of fixed overheads is based on the
normal capacity of the production facilities. Normal capacity is the production,

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 expected to be achieved on an average over a number of periods or seasons
under normal circumstances, taking into account the loss of capacity resulting
from planned maintenance.

Under Recovery:
Unallocated overheads are recognized as an expense in the period in which they
are incurred.
Example: Normal capacity = 20000 units
Production = 18000 units
Sales = 16000 units
Closing Stock = 2000 units
Fixed Overheads = Rs. 60000/-
Then, Recovery rate = Rs60000/20000 = Rs 3 per unit
Fixed Overheads will be bifurcated into three parts:
Cost of Sales : 16000 x 3 = 48000
Closing Stock : 2000 x 3 = 6000
Under Recovery : Rs. 6000 (to be charged to P/L)
(Apparently it seems that fixed cost element in closing stock should be
60000/18000*2000 =Rs 6666.67. but this is wrong as per AS-2)

Over Recovery:
In period of high production, the amount of fixed production overheads is allocated
to each unit of production is decreased so that inventories.
Example: Normal capacity = 20000 units
Production = 25000 units
Sales = 23000 units
Closing Stock = 2000 units
Fixed Overheads = Rs 60000/-
Than, Recovery Rate = Rs 60000/20000 = Rs 3 per unit
But, Revised Recovery Rate = Rs 60000/25000 = Rs. 2.40 per unit
Cost of Sales : 23000 x 2.4 = Rs. 55200
Closing Stock : 2000 x 2.4 = Rs. 4800

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Joint or by products:
In case of joint or by products, the costs incurred up to the stage of split off should
be allocated on a rational and consistent basis. The basis of allocation may be sale
value at split off point or sale value at the completion of production. In case of the
by products of negligible value or wastes, valuation may be taken at net realizable
value. The cost of main product is then joint cost minus net realizable value of by
product or waste.
The other costs are also included in the cost of inventory to the extent they
contribute in bringing the inventory to its present location and condition.
Interest and other borrowing costs are usually not included in cost of inventory.
However, AS-16 recommends the areas where borrowing costs are taken as cost of
inventory.
Certain costs are strictly not taken as cost of inventory.
(a) Abnormal amounts of wasted materials, labour, or other production costs;
(b) Storage costs, unless those costs are necessary in the production process prior
to a further production stage;
(c) Administrative overheads that do not contribute to bringing the inventories to
their present location and condition; and
(d) Selling and Distribution costs.

Cost of inventories in certain conditions:

The following methods may be used for convenience if the results approximate
actual cost.

Standard Cost: It takes into account normal level of consumption of material and
supplies, labour, efficiency and capacity utilization. It must be regularly reviewed
taking into consideration the current condition.

Retail Method: Normally applicable for retail trade. Cost of inventory is

determined by reducing the gross margin from the sale value of inventory.

Net Realisable Value: NRV means the estimated selling price in ordinary course
of business, at the time of valuation, less estimated cost of completion and
estimated cost necessary to make the sale.

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Comparison between net realizable value and cost of inventory
The comparison between cost and net realizable value should be made on item-by-
item basis. (In some cases, group of items-by-group of item basis)

For Example:
Cost NRV Inventory Value as per AS-2
Item A 100 90 90
Item B 100 115 100
Total 200 205 190

Raw Material Valuation

If the finished goods, to which raw material is applied, is sold at profit, RAW
MATERIAL is valued at cost irrespective of its NRV level being lower to its costs.

Disclosure:
 Accounting policy adoped in measuring inventories
 Cost formula used
 Classification of inventories like finished, WIP, raw materials, spare parts
and carrying amount.

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 AS - 04 CONTINGENCIES AND EVENTS OCCURRING
AFTER THE BALANCE SHEET DATE

Objective:
To prescribe the accounting of contingencies and events, which take place after
the balance sheet date but before approval of balance sheet by Board of
Directors.

Accounting Treatment:

Contingencies occurring after the balance sheet date:

A contingency is a condition or situation, the ultimate outcome of which, gain or
loss, will be known or determined only on the occurrence, or non-occurrence, of
one or more uncertain future events.

If it is likely that a contingency will result in

LOSS: It is prudent to provide for that loss in the financial statements.
PROFIT: Not recognized as revenue (However, when the realization of a gain is
virtually certain, then such gain is not a contingency and accounting for the gain is
appropriate.)

The estimates of the outcome and of the financial effect of contingencies are
determined
a) by the judgment of the management by review of events occurring after the
balance sheet date.
b) by experience of the enterprise in similar transaction
c) by reviewing reports from independent experts.
If estimation cannot be made, disclosure is made of the existence and nature of
the contingency.

Provisions for contingencies are not made in respect of general or unspecified

risks.

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The existence and amount of guarantees and obligations arising from discounted
bills of exchange are generally disclosed by way of note even though the
possibility of loss is remote.

where a reasonable estimate of the loss is not practicable, the existence of the
contingency should be disclosed by way of note unless the possibility of loss is
remote.

Disclosure:
a) The nature of the contingency;
b) The uncertainties which may affect the future outcome;
c) An estimate of the financial effect or a statement that such an estimate cannot be
made.

Events Occurring after the Balance Sheet Date:

Events occurring after the balance sheet date are those significant events, both
favourable and unfavourable, that occur between the balance sheet date and the
date on which the financial statements are approved by the Board of Directors in
case of a company, and, by the corresponding approving authority in the case of
any other entity.
Two types of events can be identified:
Adjusting Event:
Those, which provide further evidence of conditions that, existed at the balance
sheet date
Actual adjustments in financial statements are required for adjusting event.
Exceptions:
1] Although, not adjusting event, Proposed dividend are adjusted in books of
account.
2] Adjustments are required for the events, which occur after balance sheet date
that indicates that fundamental accounting assumption of going concern is no
longer, appropriate.

Non-Adjusting Events:

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Those, hitch are indicative of conditions that arose subsequent to the balance sheet
date.
No adjustments are required to be made for such events. But, disclosures should be
made in the report of the approving authority of those events occurring after the
balance sheet date that represent material changes and commitments affecting the
financial position of the enterprise.

Such disclosure should provide following information:

 The nature of the events
 An estimate of the financial effect, or a statement that such an estimate
cannot be made.

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 AS - 05 NET PROFIT OR LOSS FOR THE PERIOD, PRIOR PERIOD
ITEMS AND CHANGES IN ACCOUNTING POLICY
All items of income and expense, which are recognized in a period, should be
included in the determination of net profit or loss for the period unless an
Accounting Standard requires or permits otherwise.

Objective:
 To prescribe the criteria for of certain items in profit and loss account so
that comparability of financial statement can be enhanced.
 It deals with changes in accounting policies, accounting estimates and
extrodinary items.

Net Profit or loss

The net profit or loss for the period comprises the following components, each of
which should be disclosed on the face of the statement of profit and loss:
 Profit or loss from ordinary activities; and
 Extraordinary items.

Ordinary Activities are any activities, which are undertaken by an enterprise as

part of its business, and such related activities in which the enterprise engages in
furtherance of, incidental to, or arising from, these activities.
When items of income and expenses within profit or loss from ordinary activities
are of such size, nature that their disclosure is relevant to explain the performance
of the enterprise for the period, the nature and amount of such items should be
disclosed properly. Examples of such circumstances are:
(Exceptional Items)
Disposal of items of fixed assets
Litigation settlements
Legislative changes having retrospective application
Disposal of long term investments
Reversal of provisions

Extraordinary items are income or expense that arises from events or transactions
that are clearly distinct from the ordinary activities of the enterprise and, therefore,
are not expected to recur frequently or regularly.

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Examples of events or transactions that generally give rise to extraordinary items
for most enterprises are
 Attachment of property of the enterprise;
 An earthquake

However, claims from policyholders arising from an earthquake do not qualify as

an extraordinary item for an insurance enterprise that insures against such risks.
Extraordinary items should be disclosed in the statement of profit and loss as a part
of net profit or loss for the period. The nature and the amount of each extraordinary
item should be separately disclosed in the statement of profit and loss in a manner
that its impact on current profit or loss can be perceived.

Disclosure
The nature and amount of prior period items should be disclosed in the statement
of profit of loss in a manner that their impact on current profit or loss can be
perceived

Changes in Accounting Policy:

Accounting policies are the specific accounting principles and the methods of
applying those principles adopted by an enterprise in the preparation and
presentation of financial statements.
A change in an accounting policy should be made only if the adoption of a
different accounting policy is required:
a) By statute
b) For compliance with an accounting standard
c) If it is considered that the change would result in a more appropriate
presentation of the financial statements of the enterprise.

Disclosure
Any change in accounting policy which has a material effect, should be disclosed.
Where the effect of such change is not ascertainable, the fact should be indicated.
If a change is made in the accounting policies which has no material effect on the
financial statements for the current period but which is reasonably expected to
have material effect in later periods, the fact of such change should be
appropriately disclosed in the period in which the change is adopted.
The following are not changes in accounting policies:

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a) The adoption of an accounting policy for events which differ in substance from
previously occurring events e.g. introduction of a formal retirement gratuity
scheme by an employer in place of ad hoc ex-gratia payments to employees on
retirement; and
b) The adoption of a new accounting policy for events or transactions which did
not occur previously or that were immaterial

Change in Accounting Estimate:

It means that estimate is revised due to changes in the circumstances/
conditions on which the estimate was based.

Disclosure:
The nature and amount of a change in an accounting estimate which has a material
effect in the current period, or which is expected to have a material effect in
subsequent periods, should be disclosed. If it is impracticable to quantify the
amount, this fact should be disclosed. The effect of a change in an accounting
estimate should be classified using the same classification in the statement of profit
and loss as was previously for the estimate.
For example, the effect of a change in an accounting estimate that was previously
included as an extraordinary item is reported as an extraordinary item.

Clarifications:
A) Change in accounting estimate does not bring the adjustment within the
definitions of an extraordinary item or a prior period item.
B) Sometimes, it is difficult to distinguish between a change in an accounting
policy and a change in accounting estimate. In such cases, the change is treated as
a change in an accounting estimate, with appropriate disclosures.

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 AS - 06 DEPRECIATION ACCOUNTING

Objective:
To know the exact vlue of depreciation i.e, how much should be depreciated from
assets.

This accounting standard is not applied on the following items.

 Forests and plantations
 Wasting assets
 Research and development expenditure
 Goodwill.
 Live stock –cattle, animal husbandry.

Accounting Treatment:

Depreciation is a measure of the wearing out, consumption or other loss of value

of a depreciable asset arising from use, passage of time or obsolescence through
technology and market changes. Depreciation is allocated so as to charge a fair
proportion of the depreciable amount in each accounting period during the
expected useful life of the asset. Depreciation includes amortisation of assets
whose useful life is predetermined.

 Depreciation = Cost – Scrap value at the end of useful life

Estimated useful life in No. of years

The depreciable amount of a depreciable asset should be allocated on a systematic

basis to each accounting period during the useful life of the asset.

Depreciable assets are assets which

[1] are expected to be used during more than one accounting period; and
[2] have a limited useful life; and
[3] are held by an enterprise for use in the production or supply or for
administrative purposes

Depreciable amount of a depreciable asset is its historical cost, or other amount

substituted for historical cost less the estimated residual value.

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Useful life is the period over which a depreciable asset is expected to be used by
the enterprise. The useful life of a depreciable asset is shorter than its physical life.
Selected depreciation method should be applied consistently from period to period.

There are two method of depreciation:

1] Straight Line Method (SLM)
2] Written Down Value Method (WDVM)

Note: A combination of more than one method may be used.

The depreciation method selected should be applied consistently from period to

period. The change in method of depreciation should be made only if:
 The adoption of the new method is required by statute.
 For compliance with an accounting standard.
 If it is considered that change would result in a more appropriate preparation
of financial statement.

Procedure to be followed in case if there is change in method of depreciation

 Depreciation should be recomputed applying the new method from the dateof
its acquisition/installation till the date of changes of method.
 Difference between the total depreciation under the new method and
accumulated depreciation under the old method till the date of changes may
be surplus/ deficiency.
 Such resultant surplus is credited to profit and loss account under the
“Depreciation written back”.

Where the historical cost of a depreciable asset has undergone a change due
to increase or decrease in the long term liability on account of exchange
fluctuations, price adjustments, changes in duties or similar factors, the
depreciation on the revised unamortised depreciable amount should be
provided prospectively over the residual useful life of the asset.

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Disclosure:
a) The historical cost
b) Total depreciation for each class charged during the period
c) The related accumulated depreciation
d) Depreciation method used (Accounting policy)
e) Depreciation rates if they are different from those prescribed by the statute governing the
enterprise.
f) Effect of revalutation of fixed assets on the amount of depreciation.

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 AS - 07 CONSTRUCTION CONTRACT

Objective:
The primary objective is the allocation of ‘contract revenue’ and ‘contract cost’ to
the accounting period in which construction work is performed.

Applicability:
 It is applicable in accounting for construction contracts in contract’s
financial statements.
 This accounting standard does not apply to the customer (contractee) .

A Construction contract is a contract specifically negotiated for the construction

of an asset or a combination of assets that are closely interrelated or interdependent
in terms of their design, technology and function or their ultimate purpose or use.

Recognition of contract revenue and contract cost

When the outcome of a construction contract can be estimated reliably, contract
revenue and contract cost should be recognized as revenue and expenses by
reference to the stage of construction. (This accounting standard recommends the
use of percentage of completion method)
When the outcome of a construction contract cannot be estimated reliably,
Revenue should be recognized only to the extent of contract costs incurred
of which recovery is probable. (i.e. Revenue recognized = Costs Incurred )
Contract costs should be recognized as an expense in the period in which
they are incurred.

The outcome of a construction contract can be estimated reliably when all the
following conditions are satisfied:
a) Total contract revenue can be measured reliably;
b) The receipt of revenue is probable;
c) The contract costs to complete the contract can be measured reliably;
d) The stage of completion at the reporting date can be measured reliably;
e) The contract costs attributable to the contract can be clearly identified.
Contract Revenue should comprise:
-the initial amount of revenue agreed in the contract; and
-variations in amount to be received
to the extent that it is probable that they will result in revenue; and

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 -they are capable of being reliably measured.

(Contract can of two kinds: Fixed Price contract and Cost Plus contract)
Contract Costs should comprise:
(a) costs that relate directly to the specific contract;
(b) costs that are attributable to contract activity in general and can be allocated to
the contract.

 At any stage of contract, when it is probable that total contract costs will exceed
total contract revenue, the expected loss should be recognized as an expense
immediately. The amount of such loss is determined irrespective of:
-whether or not work has commenced on the contract;
- the stage of completion of contract activity; or
- whether outcome of contract is estimated or not

 When an uncertainty arises about the collectability of an amount already

included in contract revenue, and already recognized in the statement of profit
and loss, the uncollectable amount or the amount in respect of which recovery
has ceased to be probable is recognized as an expense rather than an adjustment
of the amount of contract revenue.

 Contract costs that relate to future activity, are recognized as an asset provided
it is probable that they will be recovered. Such asset is classified as Contract
WIP.

 The stage of completion of a contract may be determined by following ways;

- Surveys of work done
- Completion of physical proportion of the contract work
- The proportion that contract costs incurred for work performed upto
- The reporting date bear to the estimated total contract costs

 When a contract covers a number of assets, the construction of each asset

should be treated as a separate construction of each asset should be treated as
separate construction contract when
- separate proposals have been submitted for each asset;
- each asset has been subject to separate negotiation
- The costs and revenues of each asset can be identified.

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 A group of contracts, whether with a single customer or with several customers,
should be treated as a single construction contract when
- The group of contracts is negotiated as a single package;
- The contracts are very closely interrelated.
-The contracts are performed concurrently or in a continuous sequence.

The recognition of revenue and expenses in construction contract is based on

reliable estimate. This estimate may vary from one accounting year to another
accounting year. The effect of change in estimate should be treated as per AS-5.
i.e. It should not be treated as prior period item or extraordinary item.

Disclosure:
 The method used to determine the stage of completion of contract in
progress.
 The method used to determine the contract revenue
 The amount of Contract Revenue recognized as revenue
 Contract costs incurred + Recognised Profit – Recognised Loss
 Amount of advances received.
 Gross amount due from customers for contract work.
 Gross amount due to customers .

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 AS - 09 REVENUE RECOGNITION

Objective:
The standard explains when the revenue should be recognized in profit and loss
account and also states the circumstances in which revenue recognisation can be
postponed.

The above accounting standard is not applicable for:

Revenue arising from construction contracts
Revenue arising from hire purchase, lease agreements
Revenue arising from Government grants and subsidies
Revenue of Insurance companies arising from insurance contracts
Profit or loss on sale of fixed assets
Realized or unrealized gains resulting from changes in foreign exchange rates

Revenue is the gross inflow of cash, receivables or other consideration

arising in the course of the ordinary activities of an enterprise from the sale of
goods, from the rendering of services, and from the use by others of enterprise
resources yielding interest, royalties and dividends.

Revenue Includes:
- Proceeds from sale of goods
- Proceeds from rendering of services
- Interest, royalty and dividends.

Sale of goods
- Revenue from sales should be recognized when
- All significant risks and rewards of ownership have been transferred to the buyer
from the seller.
- Ultimate reliability of receipt is reasonably certain.

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Rendering of Services
Revenue from service transactions is usually recognized as the service is
performed, either by proportionate completion method or by the completed service
contract method.

Proportionate Completion Method – This is a method of accounting, which

recognizes revenue in the statement of profit and loss proportionately with degree
of completion of services under a contract. Revenue is recognised by reference to
the performance of each act. The revenue recognised under this method would be
determined on the basis of contract value, associated costs, number of acts or other
suitable basis.

Completed Service Contract Method – This is a method of accounting, which

recognises revenue in the statement of profit and loss only when the rendering of
services under a contract is completed or substantially completed. Revenue under
this method is recognised on completion or substantial completion of the job.

Revenue from Interest: - Recognised on time proportion basis

Revenue from Royalties: - Recognised on accrual basis in accordance with the

terms of the relevant agreement.

Revenue from Dividends: - Recognised when right to receive is established

Subsequent Uncertainty In Collection: - When the uncertainty relating to

collectability arises subsequent to the time of sale or the rendering of services, it is
more appropriate to make a separate provision to reflect the uncertainty rather than
to adjust the amount of revenue originally recorded.

Disclosure: An enterprise should disclose the circumstances in which revenue

recognition has been postponed pending the resolution of significant uncertainties.

EXAMPLES

1] On sale, buyer takes title and accepts billing but delivery is delayed at buyer’s
request
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- Revenue should be recognised notwithstanding that physical delivery has not
been completed.
2] Delivery subject to installations and inspections
- Revenue should not be recognised until the customer accepts delivery and
installation and inspection are complete. However, when installation process is
very simple, revenue should be recognised. For example, Television sale subject to
installation.
3] Sale on approval
- Revenue should not be recognised until the goods have been formally accepted or
time for rejection has elapsed or where no time has been fixed, a reasonable time
has elapsed.
4] Sales with the condition of ‘money back if not completely satisfied’
- It may be appropriate to recognize the sale but to make suitable provision for
returns based on previous experience.
5] Consignment sales
- Revenue should not be recognised until the goods are sold to a third party.
6] Installment sales
- Revenue of sale price excluding interest should be recognised on the date of sale.
7] Special order and shipments
- Revenue from such sales should be recognized when the goods are identified and
ready for delivery.
8] Where seller concurrently agrees to repurchase the same goods at a later date
- The sale should not be recognised, as this is a financial arrangement.
9] Subscriptions received for publications
- Revenue received or billed should be deferred and recognised either on a straight-
line basis over time or where the items delivered vary in value from period to
period, revenue should be based on the sales value of the item delivered.
10] Advertisement commission received
- It is recognised when the advertisement appears before public.
11] Tuition fees received
- Should be recognised over the period of instruction.
12] Entrance and membership fees
Entrance fee is generally capitalized
If the membership fee permits only membership and all other services or products
are paid for separately, the fee should be recognised when received. If the
membership fee entitles the member to services or publications to be provided
during the year, it should be recognised on a systematic and rational basis having
regard to the timing and nature of all services.
13] Sale of show tickets
- Revenue should be recognised when the event takes place.
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 AS - 10 ACCOUNTING FOR FIXED ASSETS
This accounting standard deals with accounting for fixed assets in the
balance sheet.

Fixed Asset is an asset held with the intention of being used for the
purpose of producing or providing goods or services and is not held for
sale in the normal course of business. (It is expected to be used for more
than one accounting period.)

This accounting standard is not applied on the following items.

 Forests and plantations
 Wasting assets
 Research and development expenditure
 Goodwill.
 Live stock –cattle, animal husbandry.

The cost of fixed asset includes:

 Purchase price
 Import Duties and other non-refundable taxes
 Direct cost incurred to bring the asset to its working condition
 Installation cost
 Professional fees like fees of architects
 General overhead of enterprise when these expenses are specifically
attributable to acquisition/preparation of fixed assets
 Any expenses before the commercial production, including cost of
test run and experimental production
 Any expenses before the asset is ready for use not put to use
 Loss on deferred payment arising out of foreign currency liability
 Price adjustment, changes in duties and similar factors

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The cost of fixed asset is deducted with:
Trade discounts and rebates
Sale proceeds of test run production

Amount of government grants received/receivable against fixed assets

(See AS- 12)
Gain on deferred payment arising out of foreign currency liability
Similarly, historical cost of self constructed fixed assets will
include:
All cost which are directly related to the specific asset
All costs that are attributable to the construction activity should be
allocated to fixed assets
Any internal profit included in the cost should be eliminated.

Any expenses incurred on asset between date of ready for use and put to
use is either charged to P&L A/c or treated as deferred revenue
expenditure to be amortised in 3-5 years after commencement of
production.
When fixed asset is acquired in exchange for another asset, the cost of
the asset acquired should be recorded
either at, fair market value
or at, the net book value of the assets given up

For this purpose, fair market value may be determined by reference

either to the asset given up or to the asset acquired, whichever is more
clearly evident.
Fixed asset acquired in exchange for shares or other securities should be
recorded at FMV of assets given up or asset acquired, whichever is more
clearly evident. (i.e the option of recording the asset at net book value of
asset given up is closed)

Fair market value is the price that would be agreed to in an open and
unrestricted market between knowledgeable and willing parties dealing
at arm’s length distance.

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Subsequent expenditures related to an item of fixed asset should be
added to its book value only if they increase the future benefits from the
existing asset beyond its previously assessed standard of performance.
Material items retired from active use and held for disposal should be
stated at the lower of their net book value and net realizable value and
shown separately. Fixed assets should be eliminated from the financial statements
on disposal or when no further benefit is expected from its use and disposal.
Profit/loss on such disposal or writing off is recognized in the profit and loss
account.

REVALUATION
When the fixed assets are revalued, these assets are shown at revalued price.
Revaluation of fixed assets should be restricted to the net recoverable amount of
fixed asset.
When a fixed asset is revalued, an entire class of assets should be revalued or
selection of assets for revaluation should be made on a systematic basis. That basis
must be disclosed.

Accounting treatment of revaluation under different situation: When

revaluation is made upward
Fixed Assets A/c Dr.
To Revaluation Reserve

When revaluation is made downward

P&L A/c Dr
To Fixed Assets

When revaluation is made upward subsequent to previous upward

revaluation
Fixed Assets A/c Dr.
To Revaluation Reserve

When revaluation is made downward subsequent to previous upward

revaluation
Revaluation Reserve A/c Dr. (To the extent of carrying amount of R.R)
P&L A/c Dr. (Balancing Figure)
To Fixed assets

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When revaluation is made upward subsequent to previous downward
revaluation
Fixed assets A/c Dr.
To P&L A/c (To the extent of previous downward revaluation)
To Revaluation Reserve (Balancing Figure)

When revaluation is made downward subsequent to previous downward

revaluation
P& L A/c Dr.
To Fixed Assets

Accounting treatment on disposal of Fixed Assets:

On sale of fixed assets
Bank A/c Dr.
P & L A/c Dr. (If Loss)
To Fixed Assets
To P & L A/c (If Profit)

On sale of fixed assets where upward revaluation has taken place

On disposal of a previously revalued item of fixed asset, the difference
between net disposal proceeds and the net book value is normally charged or
credited to the profit and loss account except that, to the extent such a loss is
related to an increase which was previously recorded as a credit to revaluation
reserve and which has not been subsequently reversed or utilized, it is charged
directly to that account. The amount standing in revaluation reserve following the
retirement or disposal of an asset which relates to that asset may be transferred to
general reserve.

If Loss If Profit

Bank A/c Dr. Bank A/c Dr.

Revaluation Reserve A/c Dr. To Fixed Assets A/c
P& L A/c Dr. To P/L A/c
To Fixed Assets
Revaluation Reserve A/c Dr. Revaluation Reserve A/c Dr.
To General Reserve To General Reserve

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 In the case of fixed assets owned by the enterprise jointly with others, the
extent of the enterprise’s share in such assets, and the proportion of the original
cost, accumulated depreciation and WDV should be stated in the B/S.

Alternatively, the pro rata cost of such jointly owned assets may be grouped
together with similar fully owned assets with an appropriate disclosure thereof.

Only purchased goodwill should be recorded in books.

Disclosure:

 Gross and net book value of fixed assets at the beginning and end of period
showing additions and disposals.

 Expenditure incurred on account of fixed assets in the course of instruction or

acquisition.

 Revalued amounts substituted for historical costs of fixed assets, the method
adopted to compute the same and whether an external valuer was involved.

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 AS - 12 ACCOUNTING FOR GOVERNMENT GRANTS
This Statement deals with accounting for government grants.Government grants
are sometimes called by other names such as subsidies, cash incentives, duty
drawbacks, etc.

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

Government refers to government, government agencies and similar bodies

whether local, national or international.

Government grants are assistance by government in cash or kind to an enterprise

for past or future compliance with certain conditions. They exclude those forms of
government assistance which cannot reasonably have a value placed upon them
and transactions with government which cannot be distinguished from the normal
trading transactions of the enterprise.

Government grants may be received in following ways.

Grants related to acquisition of fixed assets
Grants related to revenue
Grants related to promoter’s contribution
Grants related to compensation for expenses

Amount of Grant:

 Monetary Grant: In the form of money/ cash directly.

Grants related to revenue

Government grants related to revenue should be recognised on a systematic basis

in the profit and loss account over the periods necessary to match with the related
costs, which they are intended to compensate.

 Non- Monetary Grant:

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Grants related to capital

Disclosures:

 The accounting policy adopted for Governments including the method of presentation in the financial statement.

 The nature and extent of government grants recognized in the financial statements including grants of non monetary assets at concessional
rate or free of cost.
AS - 13 ACCOUNTING FOR INVESTMENTS (REV. ’03)

Applicability: Mandatory for all enterprises.

Investments are classified as :

Current Investment is intended to be held for not more than one year and readily realisable.
Long term Investment is an investment other than a current investment.
The carrying amount of current investments is lower of cost and fair value.

It is prudent to carry investments individually at the lower of cost and fair value. But, such comparison can also be made category-wise.
The carrying amount of long-term investments is carried at cost. However, when there is permanent decline in the value of a long-term
investment, the carrying amount is reduced to recognize the decline. The carrying amount of long-term investments should be determined on
individual basis.
Any reduction or reversal of reduction in value of investment is adjusted through P&L A/c.

Cost of Investments:
The cost of an investment should include acquisition charges such as brokerage, fees and duties.
If an investment is acquired-
by issue of shares or other securities; then the investments should be valued at the fair value of the issued security. (i.e. Issue price
determined by statutory authority)
By exchange of another asset; then the investments should be valued at fair value of the asset given up or asset acquired, whichever is
more clearly evident.

Investment Property:

Investment Property is investment in land or buildings that is not intended to be occupied substantially for use by, or in the operations of, the
investing enterprise. An investment property is classified as long-term investment.

Ex: If a company purchases land or building not for its business use but for earning the rent by letting the land or building: the land or building,
the land or building is not fixed assets but it is an investment or even if building is not let out but is held with the intention to earn capital
appreciation, then it s an investment.

Disposal of Investments:

 On disposal, the difference between the carrying amount and the disposal proceeds, net of expenses, is recognized in the profit and
loss statement.

 When only a part of total investment is disposed of the carrying amount of that part of investment is determined on the basis of the
average carrying amount of the total inveatments.

Reclassification of Investments - Long-term to short-term: Transfers from one class to another class are made at lower of cost and carrying
amount at the date of transfer. Current to long-term: Transfers are made at lower of cost and fair value at the date of transfer.

Disclosure:
1] Accounting policies for determination of carrying amount
2] Classification of Investments
3] The amounts included in Profit and loss statement
profits or losses on disposal and changes in carrying amount of current and long term investments interest, dividends (showing
separately dividends from subsidiary) and rentals on investments showing separately such income from current and long term investments.
Gross Income should be disclosed (i.e. The amount of TDS should be shown under advance taxes paid)

4] Aggregate amount of quoted and unquoted investments giving the aggregate market value of quoted investments.

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 AS-14 Accounting for Amalgamation
This statement deals with accounting for amalgamations and the treatment of any resultant goodwill or
reserves. This statement is directed principally to companies although some of its requirements also apply to
financial statements of other enterprises

Non – Applicability
This statement does not deal with cases of acquisitions which arise when there is a purchase by
one company (referred to as the acquiring company) of the whole or part of the shares, or the
whole or part of the assets, of another company (referred to as the acquired company) in
consideration for payment in cash or by issue of shares or other securities in the acquiring
company or partly in one form and partly in the other. Thedistinguishing feature of an acquisition
is that the acquired company is not dissolved and its separate entity continues to exist.

Applicability

 This accounting standards deal with accounting to be made in the books of Transferee
Company in case of amalgamation.

 The standard is applicable where acquired company is dissolved and separate entity ceased to
exist and purchasing company continues with the business of acquired company.

Amalgamation means an amalgamation as per the provisions of the Companies Act, 1956 or
any other statute which may be applicable to companies. The section 391 to 394 of Companies
Act, 1956 governs the provisions of amalgamation.

Transferor company means the company which is amalgamated into another company.

Transferee company means the company into which a transferor company is amalgamated.

Reserve means the portion of earnings, receipts or other surplus of an enterprise (whether
capital or revenue) appropriated by the management for a general or a specific purpose other
than a provision for depreciation or diminution in the value of assets or for a known liability.

Types of Amalgamation
An amalgamation may be either –

(a) an amalgamation in the nature of merger, or

(b) an amalgamation in the nature of purchase.

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(a) An amalgamation should be considered to be an amalgamation in the nature of merger when all the
following conditions are satisfied:

(i) All the assets and liabilities of the transferor company become, after amalgamation, the assets and liabilities
of the transferee company.

(ii) Shareholders holding not less than 90% of the face value of the equity shares of the transferor company
(other than the equity shares already held therein, immediately before the amalgamation, by the transferee
company or its subsidiaries or their nominees) become equity shareholders of the transferee company by virtue
of the amalgamation.

(iii) The consideration for the amalgamation receivable by those equity shareholders of the transferor company
who agree to become equity shareholders of the transferee company is discharged by the transferee company
wholly by the issue of equity shares in the transferee company, except that cash may be paid in respect of any
fractional shares.

(iv) The business of the transferor company is intended to be carried on, after the amalgamation, by the
transferee company.

(v) No adjustment is intended to be made to the book values of the assets and liabilities of the transferor
company when they are incorporated in the financial statements of the transferee company except to ensure
uniformity of accounting policies.

When an amalgamation is considered to be an amalgamation in the nature of merger, it should be

accounted for under the pooling of interests

The Pooling of Interests Method

 In preparing the transferee company’s financial statements, the assets, liabilities and reserves (whether
capital or revenue or arising on revaluation) of the transferor company should be recorded at their existing
carrying amounts and in the same form as at the date of the amalgamation. The balance of the Profit and
Loss Account of the transferor company should be aggregated with the corresponding balance of the
transferee company or transferred to the General Reserve, if any.

 The difference between the amount recorded as share capital issued (plus any additional consideration in
the form of cash or other assets) and the amount of share capital of the transferor company should be
adjusted in reserves.

 At the time of the amalgamation, the transferor and the transferee companies have conflicting accounting
policies, a uniform set of accounting policies should be adopted following the amalgamation. The effects
on the financial statements of any changes in accounting policies should be reported in accordance with
Accounting Standard (AS) 5 ‘Prior Period and Extraordinary Items and Changes in Accounting Policies’

(b) An amalgamation should be considered to be an amalgamation in the nature of purchase

when the conditions for merger are not satisfied.

When an amalgamation is considered to be an amalgamation in the nature of purchase, it should be

accounted for under the purchase method.

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The Purchase Method

 Any excess of the amount of the consideration over the value of the net assets of the
transferor company acquired by the transferee company should be recognized in the
transferee company’s financial statements as goodwill arising on amalgamation.

 If the amount of the consideration is lower than the value of the net assets acquired, the
difference should be treated as Capital Reserve.

Treatment of Goodwill arising on amalgamation

Goodwill arising on amalgamation represents a payment made in anticipation of future
income.The goodwill arising on amalgamation should be amortised to income on a systematic
basis over its useful life. The amortization period should not exceed five years unless a
somewhat longer period can be justified.

Balance of Profit and Loss Account

In the case of an ‘amalgamation in the nature of merger’, the balance of the Profit and Loss
Account appearing in the financial statements of the transferor company is aggregated with the
corresponding balance appearing in the financial statements of the transferee company.
Alternatively, it is transferred to the General Reserve, if any.

In the case of an ‘amalgamation in the nature of purchase’, the balance of the Profit and Loss
Account appearing in the financial statements of the transferor company, whether debit or credit,
loses its identity.

Disclosure
 For all amalgamations, the following disclosures are considered appropriate in the first
financial statements following the amalgamation:
(a) names and general nature of business of the amalgamating companies;
(b) effective date of amalgamation for accounting purposes;
(c) the method of accounting used to reflect the amalgamation; and
(d) particulars of the scheme sanctioned under a statute.

 Amalgamations accounted for under the pooling of interests method,

(a) description and number of shares issued, together with the percentage of each company’s
equity shares exchanged to effect the amalgamation;
(b) the amount of any difference between the consideration and the value of net identifiable
assets acquired, and the treatment thereof.

 Amalgamations accounted for under the purchase method

(a) consideration for the amalgamation and a description of the, consideration paid or
contingently payable; and
(b) the amount of any difference between the consideration and the value of net
identifiable assets acquired, and the treatment thereof including the period of amortisation of any
goodwill arising on amalgamation.

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