1. Indian Accounting Standard Contribution to GDLC Dr.Swaminathan Institute of Charted Accountants

2. Indian Accounting Standard  Till date Institute of Chartered Accountants of India (ICAI) had proposed 31 Indian Accounting Standards-  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 and Extraordinary Items and Changes in Accounting Policies,

3. AS……..  AS 6:Depreciation Accounting,  AS 7:Construction Contracts (Revised Accounting Standard),  AS 8:Accounting for Research and Development,  AS 9:Revenue Recognition,  AS 10:Accounting for Fixed Assets,  AS 11:(Revised 2003), The Effects of Changes in Foreign Exchange Rate,

4. AS…….  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,

5. AS……  AS 18:Related Party Disclosures,  AS 19:Leases  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 Statement,  AS 24:Discontinuing Operations,

6. AS…….  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,  AS-30:Financial Instruments: Recognition & Measurement,  AS-31:Financial Instruments: Presentations.

7. AS-1: Disclosure of Accounting Policies  Accounting policy refers to specific accounting principles and the methods of applying these principles adopted by an entity in the preparation and presentation of financial statements.  But, according to IAS-8, accounting policies are the specific principles, bases, conventions, rules and practices adopted by an entity in preparing and presenting financial statements.  In the US GAAP, there is no specific pronouncement as to the disclosure of accounting policies.

8. Alternative Treatments:  AS-1, Disclosure of Accounting Policies, provides examples of the areas in which different entities adopt different accounting policies.  (a) Methods of depreciation, and amortization,  (b) Treatment of expenditure during construction period,  (c) Translation of foreign currency items,  (d) Inventory valuation,  (e) Accounting for Goodwill,  (f) Accounting for investments,  (g) Accounting for deferred employee benefits,  (h) Recognition of profits on long term contracts,  (i) Accounting for fixed assets,  (j) Accounting for contingent liabilities.

9. Fundamental Accounting Assumptions:  AS-1 lists out fundamental accounting assumptions that underlie the preparation an presentation of financial statements.  (a) Going concern,  (b) Consistency, and  (c) Accrual.

10. Objectives of Accounting Policies:  AS-1, Disclosure of Accounting Policies, stipulates that the primary consideration in select of accounting policies is that the financial statements prepared and presented based on s accounting policies should present a true and fair view.

11. Considerations for selection and application of accounting policies:  The major considerations governing the selection and application of accounting policies are as follows:  (a) Prudence,  (b) Substance over form,  (c) Materiality.

12. Disclosure of Accounting Polices:  AS-1 stipulates that disclosure of significant accounting policies should form a part of financial statements. They should normally be disclosed in one place. Thus, an entity should disclose accounting policies in one place unless disclosure of accounting policies at different places improves the presentation of financial statements. Disclosing significant accounting policies in one place is a universal practice.

13. Changes in Accounting Policies  AS-1 requires that an enterprise should disclose any change in the accounting policy that has a material effect in the current period or is reasonably expected to have a material effect in later periods. It should also disclose, to the extent ascertainable, the amount by which any item in the financial statements is affected by a change that has a material effected in the current period.

16. AS-2: Valuation of Inventories  AS-2, Valuation of Inventories, was issued in June 1981 and revised in 1999. Its application is mandatory for all enterprises effective from accounting periods commencing on or after April 1, 1999.AS-2 deals with the principles and methods for determining the value at which inventories should be carried in financial statements in the context of historical cost system.  In International context, we also have IAS-2 for valuation and accounting of inventories.  Chapter 4 of Accounting Research Bulletins (ARB) 43 deals with the accounting for inventory. There are other sources for US GAAP, but fundamental principles are laid down in ARB-43.

17. Applicability of AS-2:  AS-2 is applicable in accounting for inventories other than the following:  (a) work-in-progress arising under construction contracts (AS-7),  (b) work-in-progress arising in the ordinary course of business of service providers,  (c) shares, debentures and other financial instruments held as stock-in-trade,  (d) producers' inventories of live stock, agricultural and forest produces, and mineral oils, ores and gases to the extent that they are measured at net realisable value (NRV) in accordance with well established practices in these industries.

18. Measurement of Inventories:  AS-2 requires that inventories should be carried at the lower of cost and net realizable value (NRV).  An entity should estimate NRV at each balance sheet date. NRV is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.  CASE#1: COST IS LOWER THAN NRV  X Ltd. is engaged in manufacturing and selling product 'z'. The cost of production per unit of 'z' is Rs 10,000. Xltd. earns a normal pro- fit (gross margin) of 20 per cent on the selling price. The selling price and the selling expenses have been estimated at Rs 15,000 and Rs 1,000 respectively. The NRV is (Rs 15,000 - Rs 1,000) that is Rs 14,000. AS-2 requires that 'z' should be carried at Rs 10,000 per unit. Profit is not deducted to determine the NRV.  CASE#2: COST IS HIGHER THAN NRV  Y Ltd. (YL) produces ‘A'. The unit cost of ‘A' is Rs 15,000. Y Ltd. earns normal profit of 20 per cent on the selling price. The selling price and the selling expenses of ‘A' have been estimated at Rs 15,000 and Rs 1,000 per unit. The NRV is Rs 14,000 per unit. Under AS-2, ‘A' should be carried at NRV, that is, at Rs 14,000 per unit.

19. Cost of Inventories  Cost of Inventories= Costs of purchase +costs of conversion+ other costs incurred in bringing the inventories to their present location and condition.

20. Costs Excluded from Cost of Inventories:  It is appropriate to exclude certain costs from costs of inventories and recognize them as expenses for the period in which they are incurred. AS-2 provides the following examples of such costs:  (a) abnormal loss and waste occurred in the course of production;  (b) storage costs, unless those costs are necessary in the production process prior to further production stage, e.g. warehousing expenses for storing finished goods;  (c) administrative overheads that do not contribute to bringing the inventories to their present location and condition; and  (d) selling and distribution costs

21. Inventory Valuation Formulas:  Different cost formulas are available for pricing materials issued to production and for allocating cost of production to the closing stock of finished goods and incomplete production (work-in-progress), which form part of inventory.  AS-2 prohibits the use of last-in, first-out (LIFO), base-stock, and other cost formulas for valuation of inventories. It permits use of FIFO or weighted average cost formula for items that are interchangeable. For example, cost of components used to manufacture television sets should be charged to the cost of televisions included in inventories by using either the FIFO, or the weighted average cost formula, because the components are ordinarily interchangeable.

22. Conceptual Discussion about some significant valuation methods:  FIFO assumes that raw materials, components or finished goods produced or purchased first are issued first to the production process or to customers.  Under the weighted average cost formula, the cost of each item is determined from the weighted average cost of similar items at the beginning of a period, and the cost of similar items purchased or produced during the period.  Last-in-first-out (LIFO) assumes that raw materials, components or finished goods produced or purchased last are issued first to the production process or to customers. LIFO allows the matching of current cost with current income. Thus, it provides the best measure of periodic income. However, it misstates the value of ending inventory because inventory usually consists of costs from earlier periods. Therefore, it is not consistent with the accounting approach that focuses on the balance sheet.

23. Selection of the Cost Formula:  In selecting the cost formula an entity should examine the industry norm.  The selection of the cost formula should be based on the judgment about which method gives the fairest possible approximation of the cost incurred in bringing the items of inventory to their present location and condition. For example, FIFO is the most appropriate formula for use in industries where there is a high correlation between costs of raw materials and components, and prices of finished products, such as crude oil refining, and agro-industry. Weighted average cost formula is preferable for other industries, because it smoothens the fluctuations in prices of raw materials, components, finished goods and other items inventories.  As a general principle, an enterprise should use the same cost formula for all items of inventory having similar nature and use to the enterprise.  The formula chosen should be used consistently

24. Disclosures:  AS-2 requires that the financial statements should disclose the following:  (a) The Accounting policies adopted in measuring inventories, including the cost formula used;  (b) The total carrying amount of inventories and its classification appropriate to the purpose; and  (c) Information about the carrying amounts held in different classification of inventories and the extent of the changes in these assets.  Common classification of inventories is raw materials and components, work-in-progress, finished goods, stores and spares, and loose tools.

25. US GAAP on Accounting for Inventories:  ARB-43 (US GAAP) stipulates that inventory should be written down to the `market', if it is evident that the utility of goods, in their disposal in the ordinary course of business, will be less than cost, whether due to physical deterioration, obsolescence, change in price levels, or other causes. The difference should be recognized as a loss of the current period. Thus, US GAAP provides a ceiling and a floor for valuation of inventories.  US GAAP does not allow inclusion of borrowing costs in the cost of an item of inventory,  US GAAP (ARB-43) allows use of any one of several assumptions as to the flow of cost factors (such as FIFO, LIFO, and average) to determine the cost for inventory. It stipulates that the major objective in selecting the method should be to choose the method that most clearly reflects the periodic income. The Treasury Regulations in the USA requires that if LIFO is selected for tax purposes, it must also be used for accounting purposes. This is known as 'LIFO conformity rule'.

28. Case Study: Inventory Valuation Practices of Indian Companies: #1 Ashok Leyland, 2004: 1. Inventories are valued at cost or net realizable value whichever is lower; cost is ascertained on the following basis: Stores, Spares, Consumable tools, Raw materials and components: on monthly moving weighted average basis. In respect of works-made components, cost includes applicable production overheads. Work- in-Progress, Finished/Trading goods: under absorption costing method. 2. Cost includes taxes and duties and is net of credits under Cenvat Scheme. 3. Cost of patterns and dies is amortized equally over five years. 4. Surplus/Obsolete/Slow moving inventories are adequately provided for.

29. #2 Balaji Telefilm, 2004 1. Items of inventory are valued at lower of cost and net realisable value. Cost is determined on the following basis 2. Tapes: First-In, First-Out3. Television serials/feature films: Average cost. #3 Balrarmpur Chini Mills 1. Inventories (other than By-products, Scrap and Standing crop) are valued at lower of cost or net realisable value. The cost of Inventories is computed on a weighted average/ FIFO basis. The cost of finished goods and work-in- process includes cost of conversion and other cost incurred in bringing the Inventories to their present location and condition. 2. 2. By-products (Molasses & Bagasse), Scrap and Standing Crop are valued at net realisable value.

30. #4 Bharat Earth Movers Ltd., 2004 1. Raw materials, Components Stores and Spare parts are valued at Weighted Average Cost. 2. Work-in-progress is valued at actual cost of materials; labour and production overheads based on normative capacity or adjusted/estimated realisable value, whichever is lower. 3. Finished stock is valued at actual cost or estimated realisable value whichever is lower. 4. Estimated costs are considered wherever actual costs are not available. 5. The cost is adjusted for decline in value by writing down the value based on specific identification. Further, provision for obsolescence is made depending on movement. 6. Based on technical assessment, provision is made for revalidation/refurbishment of finished goods to reflect the current status thereof. 7. Scrap is valued at estimated realisable value.

31. #5 BPCL, 2004 Raw Material and Intermediate are valued at cost. Cost is determined as follows: 1. Crude oil on first-in, first-out basis. 2. Base oil and additives on weighted average cost. 3. Intermediate Stocks at raw material cost plus cost of conversion. 4. In case there has been a decline in the price of raw material and the realisable value of the finished products is expected to be lower than the cost of the finished products, raw material and intermediate are valued at net realisable value.

32. #6 Coal India, 2004 1. Book stock of coal/coke is considered in the Accounts where the variance between book stock and measured stock is up to ± 5% and in cases where the variance is beyond ± 5% the measured stock is considered. Such stock are valued at net realisable value or cost, whichever is lower. 2. Provision at the rate of 10% on the value of Closing Stock of Coal is made to take care of deterioration of stock due to fire and longer period of stocking etc. 3. Slurry, middlings of washaries are valued at net realisable value. 4. Stock of stores & Spare parts at the Central & Area Stores are valued at cost calculated on the basis of weighted average method. The year end inventory of stores & spare parts lying at collieries/sub-stores/consuming centres, initially charged off, at issue price of Area Stores, Cost/estimated cost. Workshop jobs including work-in-progress are valued at cost. 5. Stores & spare parts include loose tools. 6. Provisions are made at the rate of 100% for unserviceable, damaged and obsolete stores and 50% for stores & Spares not moved for 5 years excepting insurance items. 7. Stock of stationery (other than lying at printing press), sand, medicine (except at Central Hospitals), bricks, aircraft spares and scraps are not considered in inventory.

33. #7 Gujarat Ambuja, 2004 1. Coal, Fuel, Packing Materials and Stores & Spare Parts are valued at cost on FIFO basis or net realisable value, whichever is lower. 2. Raw Materials are valued at cost or net realisable value whichever is lower. Cost is arrived at on FIFO basis. Limestone, Marl and Shale raised in own mines are valued at cost. 3. Materials-in-process are valued at cost or net realisable value, whichever is lower. Finished Goods are valued at cost or net realisable value, whichever is lower, including excise duty. 4. Trial Run Inventories are valued at cost or net realisable value, whichever is lower. 5. Goods in transit are stated at costs up to the date of Balance Sheet. 6. Cost is arrived at on full absorption basis as per Accounting Standard AS-2-"Valuation of Inventories".

34. #8 Indian Airlines, 2004 1. Inventories are stated at cost on weighted average basis. 2. Provision for obsolescence of Aircraft Stores and Spares is made over the depreciable life of the Aircraft of 18 years. Besides, a sum equivalent to 20% of net additions during, the year towards Other Engineering Stores, Computer Stores, Ground Support Notables, Simulator & Link Trainers Spares and General Tools is also provided towards obsolescence.

35. #9 Tata Coffee, 2004 1. Raw Materials and Stores & Spares: At weighted average cost, 2. Stock-in-trade, Work-in-progress of coffee, Instant Coffee, Tea, Veneers/Plywood and Trading Stock: At lower of cost and net realizable value. 3. Pepper, Cardamom and Other Produces: At since realized/estimated realizable value.

36. Inventory Valuation and Accounting practices of Sample U.S. Companies: #1 Cisco Systems, 2003: Inventories are stated at the lower of cost or market. Cost is computed using standard cost, which approximates actual cost, on a first-in first- out basis. The Company provides inventory allowances based on excess and obsolete inventories determined primarily by future demand forecasts

37. #2 Delta Airline 2003 : Inventories of expendable parts related to flight equipment are carried at moving average cost and charged to operations as consumed. An allowance for obsolescence for the cost of these parts is provided over the remaining useful life of the related fleet. #3 GE 2003: All inventories are stated at the lower of cost or realizable values. Cost for substantially all of GE's U.S. inventories is determined on a last-in, first-out (LIFO) basis. Cost of other GE inventories is determined on a first-in, first-out (FIFO) basis. GECS inventories consist of finished products held for sale. Cost is determined on a FIFO basis.

38. #4 International Paper, 2004 Inventory is valued at the lower of cost or market and includes all costs directly associated with manufacturing products: materials, labour and manufacturing overhead. In the United States, costs of raw materials and finished pulp and paper products are generally determined using the last-in, first-out method. Other inventories are valued using the first-in, first-out or average cost methods. #5 P&G 2003 Inventories are valued at cost, which is not in excess of current market prices. Product-related inventories are primarily maintained on the first-in, first-out method. Minor amounts of product inventories, including certain pet health, cosmetics and commodities are maintained on the last-in, first-out method. The replacement cost of last-in, first-out inventories exceeded carrying value by approximately $26 and $27 at June 30, 2003 and 2002, respectively. The cost of spare part inventories is maintained using the average cost method

39. #6 Tyson Food, 2004 Processed products, livestock (excluding breeders) and supplies and other are valued at the lower of cost (first- in, first-out) or market. Livestock includes live cattle, live chicken and live swine. Cost includes purchased raw materials, live purchase costs, grow out costs (primarily feed, contract grower pay and catch and haul costs), labor and manufacturing and production overhead, which are related to the purchase and production of inventories. Live chicken consists of broilers and breeders. Breeders are stated as cost less amortization. The costs associated with breeders, including breeder chicks, feed and medicine, are accumulated up to the production stage and amortized to broiler inventory over the productive life of the flock using a standard unit of production.

40. #7 United Technologies 2004 Inventories and contracts in progress are started the lower of cost of estimated realizable value and are primarily based on first-in, first-out (FIFO) or average cost methods; however, certain subsidiaries use the last- in-first-out (LIFO) method. If inventories which were valued using the LIFO method had been valued under the FIFO method, they would have been higher by $114 in million and $96 million at December 31, 2004 and 2003, respectively. Costs accumulated against specific contracts or orders are at actual cost. Materials in excess of requirements for contracts and current of anticipated orders have been reserved as appropriate. Manufacturing costs are allocated to current production and firm contracts.

41. #8 Wal-mart, 2004 The Company values inventories at the lower of cost or market as determined primarily by the retail method of accounting, using the last-in, first-out ("LIFO") method for substantially all domestic merchandise inventories, except SAM'S CLUB merchandise, which is based on average cost using the LIFO method. Inventories of foreign operations are primarily valued by the retail method of accounting, using the first-in, first-out ("FIFO") method. Our inventories at FIFO did not exceed inventories at LIFO by a significant amount.

42. #9 Walt Disney, 2003 Carrying amounts of merchandise, materials and supplies inventories are generally determined on a moving average cost basis, and are stated at the lower of cost or market.

43. Thank You.