© Tata McGraw-Hill Publishing Company Limited, Management Accounting Generally Accepted Accounting Principles and Accounting Standards Prof. Seema Chakrabarti

© Tata McGraw-Hill Publishing Company Limited, Management Accounting GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND ACCOUNTING STANDARDS GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ACCOUNTING STANDARDS

© Tata McGraw-Hill Publishing Company Limited, Management Accounting Generally Accepted Accounting Principles Concepts:   Separate Entity Concept   Money Measurement Concept   Accrual Concept   Cost Concept   Going Concern Concept   Periodicity Concept   Matching Concept Conventions:  Convention of conservatism  Convention of full disclosure  Convention of consistency  Convention of materiality

© Tata McGraw-Hill Publishing Company Limited, Management Accounting Accounting Standards (ASs) Issued by ICAI AS-1: Disclosure of Accounting Policies AS-2: Valuation of Inventories AS-3: Cash Flow Statements AS-4: Contingencies and Events Occurring after the Balance Sheet Date AS-5: Net Profit or loss for the Period, Prior Period Items and Changes in Accounting Policies AS-6: Depreciation Accounting AS-7: Accounting for Construction Contracts AS-8: Accounting for Research and Development

© Tata McGraw-Hill Publishing Company Limited, Management Accounting AS-9: Revenue Recognition AS-10: Accounting for Fixed Assets AS-11: Accounting for the Effects of Changes in Foreign Exchange Rates AS-12: Accounting for Government Grants AS-13: Accounting for Investments AS-14: Accounting for Amalgamations AS-15: Accounting for Retirement Benefits in the Financial Statement of Employers AS-16: Borrowing Costs AS-17: Segment Reporting AS-18: Related Party Disclosures AS-19: Leases Contd.

© Tata McGraw-Hill Publishing Company Limited, Management Accounting AS-20: Earnings per Share AS-21: Consolidated Financial Statements AS-22: Accounting for Taxes on Income AS-23: Accounting for Investments in Associates in Consolidated Financial Statements AS-24: Discontinuing Operations AS-25: Interim Financial Reporting AS-26: Intangible Assets AS-27: Financial Reporting of Interests in Joint Ventures AS-28: Impairment of Assets AS-29:Provisions, Contingent Liabilities and Contingent Assets Contd.

© Tata McGraw-Hill Publishing Company Limited, Management Accounting Accounting Standard-1 AS-1 deals with the disclosure requirement of significant accounting policies (such as methods of depreciation, valuation of inventories, fixed assets and investments, treatment of goodwill and contingent inabilities) in the preparation and presentation of financial statements so as to represent true and fair view of the state of affairs of the enterprise. Disclosure: Any change in the accounting policies which causes a material effect in the current period or is likely to have effect in a after period(s) should be disclosed.

© Tata McGraw-Hill Publishing Company Limited, Management Accounting Accounting Standard-2 AS-2 deals with computing the cost and value of inventories as well as adequate disclosure of the accounting policies followed in this regard by an enterprise. While cost of inventories comprise cost of purchase, duties and taxes, freight inwards and other expenditures directly attributable to the purchase, inventories should be valued at the lower of cost and net realisable value. Cost of inventory should be computed using either FIFO or weighted average method. Disclosure: The financial statements should disclose (i) Accounting policies and (ii) Total carrying amount of inventories.

© Tata McGraw-Hill Publishing Company Limited, Management Accounting Accounting Standard-4 AS-4 is concerned with the treatment in financial statements of (i) contingencies and (ii) events occurring after balance sheet date. If the contingency is likely to result in a loss, it is prudent to provide for that loss by charging to profit and loss account whereas contingent gains are not to be recognized. Further, material events occurring between the balance sheet date on which financial statements are approved by the Board of Directors need to be adjusted. Disclosure: The AS also requires full disclosure of the nature of contingency as well as the nature of the event(s) occurring after the balance sheet date.

© Tata McGraw-Hill Publishing Company Limited, Management Accounting Accounting Standard-5 AS-5 requires classification and disclosure of extraordinary and prior-period items, disclosure of certain items related to ordinary activities in the profit and loss account as well as the impact on financial statements of changes in accounting policies. Period items should be separately disclosed in the income statement in a manner so that their impact on the current profit or loss can be perceived. Disclosure: Profit or loss from ordinary activities and extraordinary items should be separately disclosed.

© Tata McGraw-Hill Publishing Company Limited, Management Accounting Accounting Standard-6 AS-6 deals with the disclosure of accounting policy for depreciation followed by an enterprise. 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. In the case of a change in the method, depreciation should be recalculated with the new method from the date of the asset coming into use. Disclosure: The depreciation methods used, the total depreciation for the period for each class of assets, the gross amount of each class of depreciable assets and the related accumulated depreciation are also required to be disclosed.

© Tata McGraw-Hill Publishing Company Limited, Management Accounting Accounting Standard-10 AS-10 provides for accounting for fixed assets defined as asset which are held with the intent to be used in business and not for sale in the ordinary course of business. Disclosure: The disclosure requirements in the financial statements are gross and net book values of fixed assets at the beginning and end of an accounting period (showing additions, disposals, acquisitions), expenditure incurred on fixed assets in the course of construction or acquisition, revalued amount of fixed assets, the method used for revaluation and so on.

© Tata McGraw-Hill Publishing Company Limited, Management Accounting Accounting Standard-13 AS-13 deals with accounting for current as well as long-term investments. Their acquisition cost should be considered inclusive of acquisition charges, such as brokerage fees and duties. While interest and dividend incomes should be accounted for in the income statement, interest or dividend received relating to the pre-acquisition period should be used to reduce the acquisition cost of investments. Gain or loss from the disposal of investments should be dealt in the income statement. Disclosure: The disclosure requirements in the financial statements, inter-alia, are classification of investments, accounting policies adopted for determination of carrying amount of investments, interest and dividend income from investments, profit or loss from disposal of investments and break-up of quoted and unquoted investments.

© Tata McGraw-Hill Publishing Company Limited, Management Accounting Accounting Standard-20 AS-20 provides the basis of determination of the basic earnings per share (EPS) and the diluted EPS. The EPS (whether positive or negative) should be shown in the profit and loss account with equal prominence. Disclosure: The basic EPS, the diluted EPS, the unadjusted and the adjusted net profit or loss figures attributable to equityholders and weighted and adjusted weighted number of equity shares outstanding should also be disclosed.

© Tata McGraw-Hill Publishing Company Limited, Management Accounting Accounting Standard-22 AS-22 deals with accounting for taxes on income. There may be differences in the taxable income and accounting income. Differences are classified into permanent and timing differences. While permanent differences cannot be reversed in one or more subsequent accounting periods, timing differences can be reversed. Disclosure: Tax expense for the period, comprising current and deferred tax, should be included in the determination of net profit or loss for the period. The break-up of deferred tax assets and deferred tax liabilities, along with the nature of evidence, should be disclosed in notes to accounts.

© Tata McGraw-Hill Publishing Company Limited, Management Accounting Accounting Standard-26 AS-26 prescribes the accounting treatment for intangible assets. An intangible asset should be recognised only when it is probable that future economic benefits that are attributable to the asset will flow to the enterprise and the cost of the asset can be reliably measured. In the case of separate acquisition, as a part of amalgamation and by way of a Government grant, the cost of the intangible assets can be measured reliably. Internally generated goodwill should not be recognised as an asset. The internally generated brands, publishing titles and customer lists, expenditure incurred on research and development should be recognised as an expense. After initial recognition, the depreciable amount of an intangible asset should be allocated on a systematic basis over the best estimate of its useful life but not exceeding 10 years. Straight-line method should be normally used as a method of amortisation and the amortisation charge should be recognised as an expense. In general, the residual value of an intangible asset should be assumed to be zero. Disclosure: The financial statements should disclose the useful life or amortisation rates used, amortisation methods used, gross carrying amount and accumulated amortisation at the beginning and end of the period for internally generated intangible assets and acquired intangible assets.

© Tata McGraw-Hill Publishing Company Limited, Management Accounting Accounting Standard-28 The objective of AS-28 is to prescribe the procedure that should be applied by an enterprise to ensure that its assets are carried at no more than recoverable amount. An asset that is carried at more than its recoverable amount (if its carrying amount exceeds the amount to be recovered though use or sale of the assets) is described as impaired asset. The impairment loss should be recognised by charging as an expense in income statement. Impairment loss recognised in the previous year(s) can be reversed or reduced if there are favourable indications (based on external and internal sources of information) towards increased recoverable amount. A reversal of an impairment loss is to be recognised as income. Disclosure: The financial statements should disclose the amount of impairment losses as well as the amount of the reversal of impairment losses. The main classes of assets affected by impairment losses, if these losses are material in aggregate to its financial statements, should also be disclosed.

© Tata McGraw-Hill Publishing Company Limited, Management Accounting Accounting Standard-29 The objective of AS-29 is (i) to ensure that appropriate recognition criteria and measurement bases are applied to provisions and contingent liabilities and that sufficient information is disclosed in the notes to the financial statements to enable users to understand their nature, timing and amount and (ii) to lay down appropriate accounting for contingent assets. Provisions should be recognised only when (i) an enterprise has a present obligation to pay it as a result of past event, (ii) resource outflow will take pace to settle it and (iii) its reliable estimate can be made. In contrast, an enterprise should neither recognise a contingent liability nor a contingent asset. Contingent liabilities are shown in notes to accounts. For each class of provision, an enterprise should disclose the opening and closing balances, additional provisions made during the period and amount used. Disclosure: Disclosure should be made for each class of contingent liability and brief description of the nature of contingent liability and, wherever feasible, the estimate of the financial effect and the reimbursement possibility are required to be stated.