Financial Reporting, Statements and Analysis Module 1 FRSA – Module 1 – 2019-20 SV/GS/PSR/SKK

Module 1 - Introduction Conceptual framework of Financial Accounting What is Accounting ? Why Accounting is Essential ? Accounting as a measurement discipline Users of Accounting Statements Terminology Accounting Concepts* Assumptions and Conventions Accounting Equations Introduction to Indian GAAP, Ind AS and IFRS. FRSA – Module 1 – 2019-20 SV/GS/PSR/SKK

What is Accounting ? Accounting is often called the language of business. Accounting is the common language used to communicate financial information in the world of business. The Committee on Terminology set up by the American Institute of Certified Public Accountants formulated the following Definition of Accounting in 1961: “ Accounting is the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character, and interpreting the results thereof’ FRSA – Module 1 – 2019-20 SV/GS/PSR/SKK

What is Accounting ? FRSA – Module 1 – 2019-20 SV/GS/PSR/SKK

Why Accounting is Essential ? Impact of financial statements affect stock prices Corporate Strategy planning Investment bankers - Use accounting information to value firms. Marketing division use accounting for Profitability analysis A start-up people want to analyze cases in marketing, operations and strategy better. The law requires the CEO and the CFO, to certify the financial statements. A CEO should know what the items in the statements mean. Principal means of communicating financial information to owners, lenders, managers, and many others who have an interest in an enterprise. FRSA – Module 1 – 2019-20 SV/GS/PSR/SKK

Accounting as a Measurement Discipline Valuation Principles Historical Cost Current Cost Realizable Cost Present Value Elements of Measurement Identification of Objects & Events Selection of Standards or Scale Evaluation of Dimension of Measurement Standards or Scale FRSA – Module 1 – 2019-20 SV/GS/PSR/SKK

Users of Accounting Information Investors To understand the profitability of their investments and the associated risks Lenders Banks and debenture holders want to know about the financial stability of a business Analysts and Advisers Equity analysts, bond analysts, stockbrokers, and credit rating agencies, need to analyze and advice Managers and Directors Business Planning and Controlling, decision making for policy implementation. Employees and Trade Unions Employees to know about their employer’s general operations, stability and profitability. Trade unions use financial reports for negotiating enhancements in wages, bonus and other benefits FRSA – Module 1 – 2019-20 SV/GS/PSR/SKK

Users of Accounting Information Suppliers and Trade Financiers Supplies to assess the likelihood of the enterprise continuing to buy from them. Trade financiers provide short-term financial support. Suppliers and trade financiers want information to determine whether the enterprise will pay them on the dot Customers Need information to evaluate the financial strength of their suppliers Auditors To provide assurance on the reliability of accounting information Government and Regulatory Authorities Require information in order to regulate the business practices of enterprises, determine taxation policies, investigate crime, and provide a basis for national income and similar statistics The Public Businesses employ people from the local community and patronize local suppliers FRSA – Module 1 – 2019-20 SV/GS/PSR/SKK

Basic Accounting Terms Event or a business activity which involves exchange of money or money’s worth between parties. Asset is a resource owned by the business with the purpose of using it for generating future profits The customer owe to the business for purchasing goods on credit or services rendered Transaction Asset Debtor Articles or commodities are either bought and sold or produced and sold. It is an obligation of financial nature to be settled at a future date A person to whom the business owes money or money’s worth Goods/Services Liability Creditor Amount invested in the business by its owners It shows the revenue earned by the business and the expenses incurred by the business The excess of Revenue Income over expense Profit Capital Income Statement Cash, goods or any other assets which the owner withdraws from business for his or her personal use The statement of financial position of the business entity on a particular date. It lists all assets, liabilities and capital. The excess of expense over income Loss Drawings Balance Sheet FRSA – Module 1 – 2019-20 SV/GS/PSR/SKK

Accounting Concepts, Assumptions & Conventions Business Entity Concept Money Measurement Concept Going Concern Concept Accounting Period Concept Accounting Cost Concept Dual Aspect Concept Realisation Concepts Accrual Concept Matching Concept - The Business & its Owners are two separate Entities - Business Transactions must be in terms of money. - Business firm will continue to carry on its activities for an indefinite period of time. - The span of time covered by a set of financial statements - All assets are recorded in the books of accounts at their purchase price, which includes cost of acquisition, transportation and installation. - This concept assumes that every transaction has a dual effect, i.e. it affects two accounts in their respective opposite sides - Revenue from any business transaction should be included in the accounting records only when it is realised.. - Accrual is something that becomes due especially an amount of money that is yet to be paid or received at the end of the accounting period. - The revenue and the expenses incurred to earn the revenues must belong to the same accounting period. FRSA – Module 1 – 2019-20 SV/GS/PSR/SKK

Accounting Concepts, Assumptions & Conventions Convention of Consistency Convention of Full Disclosure Convention of Materiality Convention of Conservatism Same accounting principles should be used for preparing financial statements year after year. A meaningful conclusion can be drawn from financial statements of the same enterprise when there is comparison between them over a period of time. Convention of full disclosure requires that all material and relevant facts concerning financial statements should be fully disclosed. The convention of materiality states that, to make financial statements meaningful, only material fact i.e. important and relevant information should be supplied to the users of accounting information. The convention of conservatism means a cautious approach or policy of ‘play safe’. The main objective of this convention is to show minimum profit. Profit should not be overstated. FRSA – Module 1 – 2019-20 SV/GS/PSR/SKK

Accounting Equation The accounting equation or balance sheet equation forms the building blocks for the entire double entry accounting system. It shows that every asset owned by the company is equal to the claims (liabilities and equity) against the asset. FRSA – Module 1 – 2019-20 SV/GS/PSR/SKK

Expanded Accounting Equation Assets Assets are resources a company owns or controls. These resources are expected to yield future benefits. Liabilities Liabilities are creditors’ claims on assets. These claims reflect company obligations to provide assets, products or services to others. Equity Equity is the owner’s claim on assets. Equity is equal to assets minus liabilities. This is the reason equity is also called net assets or residual equity. Expanded Accounting Equation Assets = Liabilities + Owner’s Capital – Owner’s Withdrawals + Revenues - Expenses FRSA – Module 1 – 2019-20 SV/GS/PSR/SKK

Introduction to Indian GAAP GAAP is the collection of accounting conventions, assumptions, concepts and rules. The sources of Indian GAAP (IGAAP) include the Companies Act 2013, accounting standards, and the ICAI’s pronouncements. Indian GAAP primarily comprises 18 accounting standards (AS) issued by the Institute of Chartered Accountants of India (ICAI). In addition, the Indian Companies Act 1956 and various other industry-specific statutes prescribe certain minimum disclosures in the financial statements. Companies listed on the stock exchanges also need to comply with a few other accounting rules such as preparing cash flow statements and accounting for stock-based compensation. Indian GAAP mirrors international GAAP in the key accounting principles such as going concern, consistency, accruals, prudence, substance over form and materiality. The most significant accounting differences at present are absence of consolidation and deferred tax accounting. There are other differences relating to disclosures such as segment reporting, disclosure of related party transactions, and so on. FRSA – Module 1 – 2019-20 SV/GS/PSR/SKK

Introduction to Indian Accounting Standards – Ind AS The Accounting standard adopted by companies in India and issued under the supervision of Accounting Standards Board (ASB) which was constituted as a body in the year 1977.  ASB - a committee under Institute of Chartered Accountants of India (ICAI) which consists of representatives from government department, academicians, other professional bodies. Accounting Standards (AS) issued by the government (MCA- Ministry of Corporate Affairs) in 2006. Companies may opt to comply with Ind AS for financial statements for accounting periods beginning on or after April 1, 2015. All listed companies and some unlisted companies must comply with Ind AS for accounting periods beginning on or after April 1, 2016. The RBI and the IRDAI have directed banks and insurers to comply with Ind AS for financial statements for accounting periods beginning from April 1, 2018. FRSA – Module 1 – 2019-20 SV/GS/PSR/SKK

Introduction to Indian Accounting Standards – Ind AS As on date MCA has notified 41 Ind AS. This shall be applied to the companies of financial year 2015-16 voluntarily and from 2016-17 on a mandatory basis. Ind AS 101 First-time adoption of Ind AS Ind AS 102 Share Based Payment Ind AS 103 Business Combination Ind AS 104 Insurance Contract Ind AS 105 Non-Current Assets Held for Sale and Discontinued Operations Ind AS 106 Exploration for and Evaluation of Mineral Resources Ind AS 107 Financial Instruments: Disclosures Ind AS 108 Operating Segments Ind AS 109 Financial Instruments Ind AS 110 Consolidated Financial Statements Ind AS 111 Joint Arrangements Ind AS 112 Disclosure of Interests in Other Entities Ind AS 113 Fair Value Measurement Ind AS 114 Regulatory Deferral Accounts Ind AS 115 Revenue from Contracts with Customers (Applicable from April 2018) Ind AS 1 Presentation of Financial Statements Ind AS 2 Inventories Accounting Ind AS 7 & in only AS 3 Statement of Cash Flows Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors Ind AS 10 Events occurring after Reporting Period Ind AS 11 Construction Contracts (Omitted by the Companies (Indian Accounting Standards) Amendment Rules, 2018) Ind AS 12 Income Taxes Ind AS 16 Property, Plant and Equipment Ind AS 17 Lease Ind AS 18 Revenue (Omitted by the Companies (Indian Accounting Standards) Amendment Rules, 2018) Ind AS 19 Employee Benefits Ind AS 20 Accounting for Government Grants and Disclosure of Government Assistance Ind AS 21 The Effects of Changes in Foreign Exchange Rates Ind AS 23 Borrowing Costs Ind AS 24 Related Party Disclosures Ind AS 27 Separate Financial Statements Ind AS 28 Investments in Associates and Joint Ventures Ind AS 29 Financial Reporting in Hyper Inflationary Economies Ind AS 32 Financial Instruments: Presentation Ind AS 33 Earnings per Share Ind AS 34 Interim Financial Reporting Ind AS 36 Impairment of Assets Ind AS 37 Provisions, Contingent Liabilities and Contingent Assets Ind AS 38 Intangible Assets Ind AS 40 Investment Property Ind AS 41 Agriculture

Introduction to Indian GAAP IFRS is the international accounting framework within which to properly organize and report financial information. It is derived from the pronouncements of the London-based International Accounting Standards Board (IASB). It is currently the required accounting framework in more than 120 countries. IFRS requires businesses to report their financial results and financial position using the same rules; this means that, barring any fraudulent manipulation, there is considerable uniformity in the financial reporting of all businesses using IFRS, which makes it easier to compare and contrast their financial results. IFRS is used primarily by businesses reporting their financial results anywhere in the world except the United States. Generally Accepted Accounting Principles, or GAAP, is the accounting framework used in the United States. GAAP is much more rules-based than IFRS. IFRS focuses more on general principles than GAAP, which makes the IFRS body of work much smaller, cleaner, and easier to understand than GAAP. FRSA – Module 1 – 2019-20 SV/GS/PSR/SKK

FRSA – Module 1 – 2019-20 SV/GS/PSR/SKK