4 – Accounting Standards

Introduction:

Financial statements are monetary summaries of an enterprise’s end-result business activities during an accounting period. Business activities are diverse. Explaining the facts intelligibly, succinctly, and with minimal information loss is arduous. Standards are being developed to ensure that the methods and principles used by diverse reporting enterprises are coherent, not misleading, and, to the greatest extent, standardised and comparable.

4.1 Meaning of Accounting Standards

Accounting standards are authoritative pronouncements of the code of practice of the regulatory accounting body that are to be observed and applied in the preparation and presentation of financial statements. Worldwide, professional bodies of accountants have the authority and obligation to prescribe “Accounting Standards.” International Accounting Standards (IASs) are pronounced by the International Accounting Standards Committee (IASC). The IASC was established in 1973, headquartered in London (UK).

It is a set of generally accepted norms, principles, concepts, and conventions produced by the Institute of Chartered Accountants of India in collaboration with other International Accounting bodies. Developing universal norms and principles aims to make financial statement production and presentation simple, relevant, dependable, intelligible, and ultimately comparable. Accounting standards, in other words, are the foundation of accounting policies and practices that facilitate the recording of transactions and events so that they can be converted into financial statements, which can then be used by those interested in obtaining correct and reliable information to make future decisions.

The primary goal of Accounting Standards is to eliminate differences in the treatment of various accounting components and to bring about standardisation in presentation. They intend to harmonise the various accounting policies used by different reporting firms in preparing and presenting financial statements to enable intra-firm and inter-firm comparisons.

In India, the Institute of Chartered Accountants of India (ICAI) established the Accounting Standards Board (ASB) in 1977. The composition of ASB includes

(i) elected,

(ii) ex-officio, and

(iii) co-opted members of the Institute, nominees of RBI, FICCI, Assocham, ICSI, ICWAI and special invitees from UGC, ICWAI, SEBI, IDBI and IIM.

ASB is entrusted with the responsibility of formulating standards on significant accounting matters, keeping in view

(a) international developments and

(b) legal requirements in India. According to the preface to the Statement on Accounting Standards issued by the ICAI, the ASB will issue accounting standards to harmonise the different and diverse accounting policies and practices in use in India, propagate Accounting Standards, and persuade the concerned enterprise to adopt them in the preparation and presentation of financial statements.

4.2 Accounting Standards: Their Nature and Rationale

Accounting Standards are developed to harmonise various accounting regulations and procedures in a country. The goal of Accounting Standards is to reduce the accounting alternatives in preparing financial statements within the bounds of rationality, ensure comparability of financial statements of different enterprises and provide meaningful information to various users of financial statements to enable them to make informed economic decisions.

Nature:

On April 22, 1977, the Institute of Chartered Accountants of India established the Accounting Standards Board to develop accounting standards on a variety of accounting issues, taking into account the accounting standards developed by the International Accounting Standard Committee, prevailing laws in India, business customs, usages, and conventions, and so on. Accounting Standards were not mandatory initially, but with a change in Section 211(3C) of the Companies Act of 1956, Accounting Standards out of 28 were declared compulsory. In his report to the shareholders, the Auditor must state that the accounts have been prepared (drawn) in compliance with Indian Accounting Standards.

This activity aims to improve financial statements’ reliability, comparability, consistency, and transparency. These standards are developed with the country’s laws, corporate customs, environmental factors, and so on in mind. Accounting standards are changed/altered whenever there is a change in a country’s law, business customs, or environment. Accounting Standards’ flexibility is a unique trait that makes them more popular and user-friendly.

If a company wishes to change or modify a business custom or practice, the changes must be appropriately reported, along with the consequences. For example, a change in depreciation method must be stated, as well as the impact on profit or loss.

The following sections analyse the nature of accounting standards from the standpoint of major acts and organisations:

4.2.1 Accounting Principles and the Companies Act

Many people use financial statements, including investors, creditors, the government, consumers, and business owners. They base many economic decisions on financial statements. If financial statements are not adequately regulated, there is a risk that they will mislead and present a skewed view of the firm instead of a genuine and fair picture of the business. Proper accounting process control is required to ensure these statements are transparent, adequately stated, consistent, and dependable. In addition, adequate disclosure in the accounting is necessary. Accounting standards are developed at the national and international levels for this purpose. Accounting standards codify commonly accepted accounting principles. Accounting standards establish norms and criteria for preparing financial statements and annual reports. The International Accounting Standard Committee (IASC) issued the International Standards globally. Leading professional bodies from the United Kingdom, the United States, Australia, France, and Canada are represented on this committee. India is a member of this committee as well. India also has its own accounting standards, which were developed by the Institute of Chartered Accountants of India (ICAI).

The Companies Act’s specific provisions include the following:

1.  Section 211. (Form and contents of Balance Sheet and Profit & Loss Account)

(3A): Every profit and loss account and organisation’s balance sheet must adhere to accounting rules.

(3B): Where a company’s profit and loss account and balance sheet do not comply with accounting standards, such companies must disclose the following in their profit and loss account and balance sheet: I the deviation from accounting standards, (ii) the reasons for such deviation, and (iii) the financial effect, if any, resulting from such deviation.

In this section, “accounting standards” refers to the accounting standards that the Central Government, in consultation with the National Advisory Committee on Accounting Standards established under Sub-section (1) of Section 210 A, prescribed by the Institute of Chartered Accountants of India’s recommendations as established under the Chartered Accountants Act, 1949 (38 of 1949):

However, the accounting standards established by the Institute of Chartered Accountants of India shall be deemed to constitute the Accounting Standards mandated by the Central Government under this sub-section.

2. Paragraph 217 (2AA) I Accounting Standards Adherence

The Board’s report must also include a Director’s Responsibility Statement stating that the applicable accounting standards were followed in compiling the annual accounts and proper explanations for substantial deviations. According to Section 217(2AA), the statement should indicate:

(i) that the applicable accounting standards were followed in the preparation of the annual accounts, along with a proper explanation relating to material departures;

(ii) that the directors had selected such accounting policies and applied them consistently, as well as made judgments and estimates that are reasonable and prudent to give a true and fair view of the company’s state of affairs at the end of the fiscal year.

3. Section 227 (3) (d): Auditors’ Powers and Duties

The auditor’s report must also state whether the profit and loss account and balance sheet, in his judgment, met the accounting standards referred to in Subsection (3c) of Section 211.

Members performing attest tasks are constrained by regulations and must analyse whether standards were met in presenting financial statements subject to audit. Adequate disclosures must be made in the event of a deviation. Compliance with standards is also a legal requirement for people in managerial positions who exercise control functions in finance and accounting.

4.2.2 Accounting Principles and the Income Tax Act of 1961

There appears to be no connection or harmony between the ICAI’s Accounting Standards and the tax legislation and procedures for calculating the taxable income of corporate assessees. The Accounting Standards apply to preparing general-purpose financial statements in which taxable income is estimated based on the tax treatment of various elements. Fiscal concerns and other taxation rules generally drive the tax treatment.

There are various cases where the tax treatment of an item and the relevant accounting rules diverge significantly, resulting in a large disparity in reported profit and taxable income. Significant variations can be seen in the following areas: revenue recognition principle, depreciation computation, accounting for construction contracts, treatment of R&D spending and other intangibles, treatment of borrowing costs, leases, etc.

For example, in the case of a Finance Lease, the asset must be represented on the lessee’s balance sheet, and he may charge depreciation on it. However, under the Income Tax Act of 1961, assets under a financing lease must be recorded on the lessor’s balance sheet (the actual owner), and the lessor is entitled to a depreciation deduction.

Harmonizing the accounting and tax treatment of some things is required. Accounting and taxation principles must be followed in doing so.

4.2.3 Accounting Principles and Non-profit Organizations

According to the Preface to Accounting Standards, the Accounting Standards apply to commercial, industrial, and business companies in the preparation of general-purpose financial statements issued to the public by such enterprises. As a result, charitable organisations and co-operative societies are exempt from these Accounting Standards. However, if philanthropic organisations or cooperative societies participate in any commercial activity, the Accounting Standards must apply to their financial accounts. The ICAI has underlined that even if some of these enterprises’ activities are commercial, the Accounting Standards must apply to all the enterprise’s activities.

4.3 Accounting Standards Development in India

The Accounting Standards Board (ASB) was established on April 21, 1977, by the Institute of Chartered Accountants of India (ICAI), a member body of the IASC, to harmonise the different accounting rules and practices in India. After permitting the adoption of liberalisation and globalisation as cornerstones of Indian economic policies in the early 1990s and growing concern about the need for efficient corporate governance in the late 1990s, Accounting Standards have grown in importance. The ASB considers the country’s applicable laws, customs, usages, and business climate while developing accounting standards. The ASB also considers International Financial Reporting Standards (IFRSs) and International Accounting Standards (IASs) released by the IASB and attempts to integrate them to the greatest extent practicable in light of Indian conditions and practices.

4.3.1 Accounting Standards Development Process

Accounting standard setting, by definition, entails achieving an optimal balance of financial information needs for diverse interest groups with a stake in financial reporting. At different stages of the standard-setting process, a lot of research, consultations, and talks with representatives of the relevant interest groups are needed to agree on what those groups want. This will lead to broad acceptance of the Accounting Standards among those groups. The ASB’s standard-setting procedure, as briefly detailed below, is aimed at ensuring such consultation and discussion:

1. The ASB identifies the broad areas for accounting standards formulation.
2. The ASB establishes research groups to prepare preliminary drafts of the proposed accounting standards.
3. The ASB considers the preliminary document submitted by the study group and, if necessary, revises the text based on ASB deliberations.
4. Distribution of the amended text to the ICAI Council members and 12 other individuals. For comments, please get in touch with the Standing Conference of Public Enterprises (SCOPE), Indian Banks’ Association, Confederation of Indian Industry (CII), Securities and Exchange Board of India (SEBI), Comptroller and Auditor General of India (C& AG), and Department of Company Affairs.
5. Consultation with representatives of selected external entities to gather their perspectives on the draught of the proposed Accounting Standard.
6. Finalization of the proposed Accounting Standard’s Exposure Draft based on received comments and discussions with representatives of specified outside organisations.
7. Publication of the Exposure Draft for public feedback.
8. The ASB will review the comments received on the Exposure Draft and finalise the draught Accounting Standard for submission to the ICAI Council for evaluation and approval for issuance.
9. The Institute’s Council considers the proposed Accounting Standard and, if necessary, modifies it in collaboration with the ASB.

• The Accounting Standard is issued with the Council’s authority.

4.3.2 Indian Accounting Standards

Accounting Standard Statements (AS 1) Accounting Policy Disclosure
The following is the Accounting Standard (AS) 1 text on ‘Disclosure of Accounting Policies’ released by the Accounting Standards Board, the Institute of Chartered Accountants of India. The Standard addresses the disclosure of significant accounting policies in preparing and presenting financial statements.
This accounting standard will be recommendatory in the early years. This standard is suggested for use by corporations listed on a recognised stock exchange and other big commercial, industrial, and business entities in the public and private sectors during this era.

The Institute of Chartered Accountants of India has issued the following accounting standards:

Accounting Standards (AS)	Title of the Accounting Standards
AS – 1	Disclosure of Accounting Policies
AS – 2 (Revised)	Valuation of Inventories
AS – 3 (Revised)	Cash Flow Statements
AS – 4 (Revised)	Contingencies and Events Occurring after the Balance Sheet Date
AS – 5 (Revised)	Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies
AS – 6 (Revised)	Depreciation Accounting
AS – 7 (Revised)	Accounting for Construction Contracts
AS – 9	Revenue Recognition
AS – 10	Accounting for Fixed Assets
AS – 11 (Revised 2003)	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 Statements of Employers
AS – 16	Borrowing Costs
AS – 17	Segment Reporting
AS – 18	Related Patty 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 Investment in Associates in Consolidated Financial Statements
AS – 24	Discontinuing Operations
AS – 25	Interim Financial Reporting
AS – 26	Intangible Assets
AS- 27	Financial Reporting of Interest in Joint Ventures
AS – 28	Impairment of Assets
AS – 29	Provisions, Contingent Liabilities & Contingent Assets
AS 30	Financial Instruments: Recognition and Measurement and Limited Revisions to AS 2, AS 11 (revised 2003), AS 21, AS 23, AS 26, AS 27, AS 28 and AS 29
AS 31	Financial Instruments: Presentation
AS 32	Financial Instruments: Disclosures and limited revision to Accounting Standard (AS) 19, Leases

 

The following is a basic explanation of Indian accounting standards:

AS-1 — Accounting Policy Disclosure: A corporation can develop its accounting policies within the broad permissible framework of different accounting standards and provisions of various statutes. Accounting policies are the precise accounting principles and methods of applying those principles a company uses to create and present financial statements. AS-1 specifies the following requirements:

(a) As part of the financial statements, all significant accounting policies used in preparing and presenting financial statements should be disclosed in one place.

(b) Any change in accounting policies that has a significant impact in the current period or is projected to have a material impact in future periods should be reported, as should the amount by which any item in the financial statements is affected by such change, to the extent ascertainable. The facts should be noted when such an amount cannot be determined.

(c) The information should be communicated if any essential accounting assumptions (going concern, consistency, and accrual) are violated.

AS-2 – Inventory Valuation: Inventories consist of the following items:

(a) raw materials and components;

(b) work-in-process;

(c) finished goods;

(d) stores and spares

Inventories should be valued less than their historical cost and net realisable value. Each item in the inventory should be dealt with independently to compare historical cost with net realisable value, or comparable items may be dealt with as a group. However, the preceding inventory valuation principle does not apply in the following situations:

(a) Consumable stores and supplies Should usually be valued at cost.

(b) By-products: If the cost of a by-product cannot be identified separately, it should be evaluated at its net realisable value.

(c) Reusable waste: It should be valued at the cost of raw materials less the cost of processing.

(d) Non-recyclable waste should be valued at its net realisable value.

Cash Flow Statement (AS-3): The Companies Act of 1956 does not require corporate organisations to create and show a cash flow statement as part of their financial statements. However, several stock exchanges’ listing agreements compel business entities to provide cash flow statements to the relevant stock exchanges. As a result, publicly traded corporations are required to prepare a cash flow statement. Cash flows from three distinct activities should be clearly shown on the cash flow statement:

(a) cash flows from operations;

(b) cash flows from investing activities

c) cash flows derived from financing activities

AS-4 – Unforeseen contingencies and occurrences that occur after the balance Date on the sheet: Contingencies are conditions or situations in which the outcome, gain or loss, is only known or determined by the occurrence or non-occurrence of one or more uncertain future events. Estimates are required for numerous items in financial statements, such as depreciation, provision for doubtful debts, provision for taxation, and so on. However, the fact that the things have been estimated does not constitute contingencies.

There are two kinds of contingencies: contingent loss and contingent gain. The amount of a contingent loss should be provided for in the profit and loss statement if:

(a) future events are likely to confirm that, after taking into account any related probable recovery, an asset has been impaired or a liability has been incurred as of the balance sheet date, and

(b) a reasonable estimate of the resulting loss can be made. [Paragraph 10 of AS-4.]

AS-5 – Period net profit or loss, prior period items, and changes in accounting policies: The net profit or loss for a given accounting period comprises two components:

(a) profit or loss from ordinary activities and

(b) unusual items.

Ordinary activities are those carried out by a business entity as part of its operations and include any associated activities in which the entity is involved. Extraordinary items are income or expenses resulting from events or transactions that are separate from normal business operations and are not expected to recur frequently or regularly. Profit or loss from routine activities and profit or loss from extraordinary items must be stated on the face of the profit and loss statement. It should be emphasised that almost all income and expenses considered in calculating net profit or loss arise during the enterprise’s normal operations. As a result, the appearance of remarkable goods is uncommon. In most circumstances, only losses from natural disasters are deemed unusual items.

Items from a Previous Period

(a) The kind and amount of items from the prior period shall be stated individually in the profit and loss statement so that their impact on the current profit or loss can be perceived.

(b) The term ‘previous period items,’ as defined in this Statement, relates only to revenue or expenses incurred in the current period due to mistakes or omissions in preparing one or more prior period financial statements.

Accounting Policy Changes

On the other hand, an accounting policy change should be made only if the adoption of the new policy is required by statute to conform to an accounting standard or if the change is thought to result in a more acceptable presentation of the enterprise’s financial statements.

AS-6 – Revised Statements of Accounting Standards – Depreciation Accounting: The wording of the amended Accounting Standard (AS) 6, ‘Depreciation Accounting,’ issued by the Council of the Institute of Chartered Accountants of India, is as follows:

(a) This statement addresses depreciation accounting and applies to all depreciable assets, except the following items, which require special consideration:

(i) forest, plantations, and similar regenerative natural resources;

(ii) wasting assets, including expenditure on mineral exploration and extraction, oils, natural gas, and similar non-regenerative resources;

(iii) expenditure on research and development;

(iv) goodwill; and

(v) livestock.

This assertion is likewise not applicable to land unless it has a limited useful life for the enterprise.

(a) Different enterprises use different depreciation accounting policies. An enterprise’s depreciation accounting procedures must be disclosed to appreciate the picture offered in its financial statements.

AS-7 – Construction contract accounting: There are two kinds of construction contracts (revised proved reserves contracts):

(a) Fixed-price contracts: the contractor receives a set fee or rate.

(b) Cost-plus contracts: the contractor is compensated for permissible costs and pays a fee.

AS-7 defines a construction contract as “a contract particularly negotiated for building an asset or a mix of assets that are closely interrelated or independent in terms of their design, technology, function, or ultimate purpose or use.” Construction contracts also cover services provided by project managers and architects directly related to the asset’s construction.

AS-8 — Research and development accounting: Before the start of commercial production, research is an original and planned investigation to gather new scientific or technological knowledge, whereas development is the use of research results to manufacture new or significantly enhanced materials, technologies, products, processes, and so on.

AS-9 – revenue recognition: According to paragraph 4.1 of AS-9, “revenue is the gross inflow of cash, receivable, or other consideration arising in the ordinary course of an enterprise’s activities from the sale of goods, the rendering of services, and the use by others of enterprise resources yielding interest, royalties, and dividends.” Thus, money from routine activities can be generated in three ways:

(a) by selling items,

(b) by providing services and

(c) by enabling others to use firm resources, which generate interest, royalties, and dividends.

The timing of revenue recognition in the profit and loss statement is addressed in revenue recognition.

AS-10 – Accounting for fixed assets: The following is the text of the Institute of Chartered Accountants of India’s Accounting Standard 10 (AS 10) on ‘Accounting for Fixed Assets.’ This accounting standard will be recommendatory in the early years. During this time, companies listed on a recognised stock exchange and other big commercial, industrial, and business enterprises in the public and private sectors are encouraged to employ this standard.

(a) Financial accounts disclose specific information about fixed assets. In many businesses, these assets are classified as land, buildings, plant and machinery, vehicles, furnishings and fittings, goodwill, patents, trademarks, and designs. Except as detailed in paragraphs 2–5 below, this statement deals with accounting for such fixed assets.

(b) This statement does not address the specialised issues of accounting for fixed assets that arise under a comprehensive system that considers the effects of changing prices. Instead, it applies to financial statements prepared on a historical cost basis.

(c) This statement does not address accounting for the following items that require special consideration:

(i) forest, plantations, and similar regenerative natural resources;

(ii) wasting assets such as mineral rights, expenditure on mineral exploration and extraction, oil, natural gas, and similar non-regenerative resources;

(iii) expenditure on real estate development; and

(iv) livestock.

Individual fixed asset expenditures utilised to create or maintain the activities listed in I to (iv) above, but distinct from those activities, must be accounted for in line with this statement.

(d) This statement does not address allocating the depreciable amount of fixed assets to future periods because such is covered in Accounting Standard 6 on ‘Depreciation Accounting.’

(e) This statement excludes the treatment of government grants and subsidies and assets subject to lease rights. It refers to capitalising borrowing costs and assets acquired in a merger or amalgamation. These issues necessitate a more in-depth discussion than can be provided in this Statement.

AS-11 – The implications of changes in foreign exchange rates: This standard was amended in 2003 and became mandatory on April 1, 2004. This accounting standard was initially titled “Accounting for the Consequences of Changes in foreign currency rates.” AS-11 outlines how to account for the financial impact of changes in foreign exchange rates in the reporting entity’s financial statements. An exchange rate is calculated using two currencies: the foreign currency and the reporting currency. In India, the reporting currency is INR (Indian Rupee), and foreign currency is other than INR. AS-11 is used to account for foreign currency transactions and to translate financial statements of foreign operations. As a result, AS-11 addresses the accounting for transaction and translation exposure in foreign currency.

AS-12 – Accounting for government grants: Government grants are monetary or in-kind payments made by the government to a business in exchange for past or future compliance with specific requirements.

“Government grants shall not be recognised until there is reasonable certainty that

(i) the firm will comply with the criteria linked to them, and

(ii) the grants will be received,” states AS-12 paragraph 13. Government grants can be classified into four types:

(a) Grants for specified fixed assets.

(c) Grants for revenue items.

(c) Contributions from promoters in the form of grants.

(d) Grants made to compensate for expenses or losses incurred in a prior accounting period.

AS-13 — Investment Accounting: There are two kinds of investments: short-term and long-term. These two adhere to opposing valuation standards. Current investments are valued less than fair value, whereas long-term assets are primarily evaluated at cost. Current investments can be reclassified as long-term investments and vice versa. Transfers are made at a lower price and carrying amount at the date of transfer when long-term investments are reclassified as current investments. Transfers are made at a lower cost and fair value at the date of transfer when current investments are reclassified as long-term assets.

AS-14 – Accounting for amalgamations: According to AS-14, “For all amalgamations, the following disclosures should be made 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.”

AS-15 — Accounting for retirement benefits in employer financial statements:

Retirement perks often include the following:

(a) provident fund

(b) superannuation (pension)

(c) gratuity;

(d) leave encashment benefit on retirement

(e) post-retirement health and welfare plans

(f) other benefits.

The form of the benefit scheme influences how retirement benefits are accounted for. Schemes for retirement benefits are divided into two broad categories:

(a) Defined contribution plans and

(b) Defined benefit plans. In the former situation, only the employer’s (as well as the employee’s, if any) investment is specific, and the prevailing interest rates and other market conditions would determine the ultimate benefits that would accrue to the employees. The benefits under defined contribution systems are unrelated to criteria such as the employee’s income at the time of retirement, the number of years of service supplied, and so on. The employer’s obligation in these schemes is confined to making periodic and timely contributions to the funds/trusts that manage the schemes. In the case of defined benefit schemes, the benefits are connected to specific criteria and are usually determined by reference to the employee’s earnings and/or years of service. In these plans, the employer is responsible for ensuring that retiring employees get these defined benefits by their entitlements. A benefit under a defined contribution programme is a provident fund. Pensions and gratuities are examples of defined benefit plans.

AS-16 – Borrowing charges: Borrowing costs are the interest and other expenses incurred by a business due to borrowing capital. Borrowing costs include interest and commitment charges on borrowings, amortisation of discounts or premiums related to borrowings, finance charges under a finance lease, and exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. Borrowing costs associated with acquiring, building, or manufacturing a fixed asset should be capitalised until the asset is ready for commercial use. All additional borrowing costs must be deducted in the year they are incurred. Borrowing costs incurred to purchase inventory (held for a limited time) are not to be added to the inventory cost. On the other hand, borrowing expenditures incurred to acquire long-term strategic assets can be capitalised with the acquisition cost.

AS-17 – Reporting on Segments: According to this guideline, a corporate entity should submit critical financial information on each reportable segment. A reportable section is either a business or a geographical segment. A business segment is defined in AS-17 as “a distinguishing component of a company that is engaged in supplying an individual product or service or a collection of related products or services and is subject to risks and returns that are different from those of other business segments.” In the same paragraph, a geographical segment is defined as “a distinguishable component of an enterprise that is engaged in providing products or services within a specific economic environment and is subject to risks and returns that differ from those of components operating in other economic environments.” If one or more of the following conditions are met, a business segment or geographical segment shall be classified as a reportable segment (Para 27 of AS-17):

(a) its revenue from sales to external customers and transactions with other segments is equal to or greater than 10% of the firm’s total revenue or

(b) its segment result (profit or loss) is equal to or greater than 10% of the combined result of all segments in profit or loss, whichever is more significant in absolute amount or

(c) Its segment assets are 10% or greater than the total assets of all segments.

As a result, there are three criteria for selecting a reportable segment: sales basis, profit/loss basis, and asset basis.

AS-18 – Related party disclosures: A corporation must report all transactions with related parties under this accounting standard. According to paragraph 10 of AS-18, “parties are considered related if, at any time during the reporting period, one party has the potential to control the other party or have significant influence over the other party in making financial and/or operating decisions.” Linked parties may enter into transactions with terms and conditions that are not available to unrelated parties. Such favourable terms to connected parties may impact the firm’s profitability.

Related party disclosures include the following (Para 23 of AS-18):

(a) the name of the transacting related party;

(b) a description of the relationship between the parties and the nature of the transactions;

(c) the volume of the transactions, either as an amount or as an appropriate proportion;

(d) the amount or proper proportions of outstanding items relating to related parties at the balance sheet date and

(e) amounts written off or written back in the period in question.

AS-19 – Leases: Lease transactions are classified into two types: financing leases and operating leases. In the case of a finance lease, the lessee must account for the lease as both an asset and a liability on the balance sheet. As a result, the lessee also claims depreciation. The lessor must record assets received under the finance lease as receivables on its balance sheet. In the event of an operational lease, the lessor records the leased asset as an asset on the balance sheet and claims depreciation. However, Income Tax laws in India continue to provide the lessor with a tax benefit on depreciation for assets under financing lease. As a result, there is a conflict between the accounting approach of finance leasing proposed in AS-19 and the provisions of the Income Tax Act. AS-20 – Earnings per share (EPS): The traditional calculation method has been abandoned.

According to AS-20, the profit available to equity shareholders should be divided by the weighted average number of shares rather than the closing number of shares. The net profit or loss attributable to equity shareholders should be the net profit or loss for the period after deducting preference dividends and any applicable tax for the period when calculating basic earnings per share. Unless an Accounting Standard mandates or permits otherwise, all items of income and expense recognised in a period, including tax expenses and unusual items, are included in the computation of the period’s net profit or loss. The amount of preference dividends and any attributable tax for the period is deducted from the net profit for the period (or added to the net loss for the period) to determine the net profit or loss attributable to equity shareholders. The number of equity shares used to calculate basic earnings per share should be the weighted average number of equity shares outstanding during the period.

The weighted average number of equity shares outstanding during the period reflects the fact that the quantity of shareholders’ capital may have fluctuated during the period due to a more significant or fewer number of shares outstanding at any given time. It is calculated by multiplying the number of equity shares outstanding at the start of the period by the number of equity shares bought back or issued during the period by the time-weighting factor. The time-weighting factor is the number of days for which the individual shares are outstanding as a percentage of the overall number of days in the period; in many cases, a good approximation of the weighted average is sufficient.

AS-21 – Financial Statements: Consolidated: Under certain conditions, a holding company is now required (though not legally required) to prepare consolidated financial statements that depict the group’s financial performance in addition to its individual and separate financial statements. Consolidated financial statements typically include a consolidated balance sheet, a consolidated statement of profit and loss, and any notes, other statements, and explanatory material integral to the financial statements. A consolidated cash flow statement is given if a parent presents its cash flow statement. To the greatest extent practicable, the consolidated financial statements are provided in the same format as the parent’s separate financial statements. Users of a parent’s financial statements are typically concerned with, and require information about, the financial status and results of operations of the firm and the group as a whole. This requirement is met by providing users with

(a) separate financial statements of the parent and

(b) Consolidated financial statements display financial information about the group as if it were a single firm, regardless of the legal boundaries of the distinct legal entities.

It is essential to integrate the parent company’s and subsidiaries ‘ financial statements when combining assets, liabilities, income, and costs to create consolidated financial statements.

AS-22 – Income tax accounting: Before the introduction of AS-22, income tax accounting in India was rudimentary, with the tax provision determined solely based on current tax due, completely ignoring deferred tax liability. This therapy was opposed to global practices. AS-22 attempted to bridge this chasm. AS-22 requires that income taxes be accounted for using the matching principle. Matching such taxes against revenue for a period is difficult because tax is levied on taxable income, which can differ significantly from accounting income. Such distinctions exist because tax laws determine taxable income, whereas the Companies Act of 1956’s provisions and, in some cases, stock exchange listing requirements determine accounting income.

AS-23 – Accounting for investment in subsidiaries in consolidated financial statements: This standard applies only when a holding company files consolidated financial accounts. Consolidated financial statements are not required for an unlisted holding company. In that instance, even if the unlisted firm has an affiliate, AS-23 is inapplicable. It should also be emphasised that even when a publicly traded holding company prepares and presents consolidated financial statements, AS-23 does not apply to separate financial statements of the same holding company. Where AS-23 does not apply, the firm should display its investment in associates in a separate Balance sheet by AS-13. An associate is an enterprise in which the investor has significant influence (usually demonstrated by a holding of equity interest ranging from 20% to 50%) but which is not the investor’s subsidiary or joint venture. According to AS-23, investments in associates must be accounted for using the equity method in consolidated financial statements.

AS-24 — Discontinuation of operations: This standard became necessary on April 1, 2004, for all listed businesses and organisations with an annual revenue of more than Rs 50 crore. AS-24 will become essential for all other companies on April 1, 2005. This standard mandates that terminating operations be reported separately from continuing activities so that consumers of financial statements can accurately forecast the entity’s future cash flows/earnings from continuing operations. A discontinuing operation is defined as a component of an enterprise: (a) the enterprise, according to a single plan,

(i) is disposing of substantially in its entirety, such as by selling the component in a single transaction or by demerger or spin-off of ownership of the element to the enterprise’s shareholders or

(ii) disposing of piecemeal, such as by selling off the component’s assets and settling its liabilities individually; or

(iii) As a result, a discontinuing operation must be a separate line of business that is part of a disposal or abandonment plan.

AS-25 – Interim financial reporting: This standard is only relevant when a business organisation must provide interim financial reports. SEBI, for example, mandates that listed companies prepare and disclose quarterly financial reports. In such cases, AS-25 should determine the format and content of interim financial reporting. According to AS-25, “an interim financial report should include, at a minimum, the following components:

(a) a condensed balance sheet;

(b) a condensed statement of profit and loss;

(c) a condensed cash flow statement, and

(d) selected explanatory notes.”

An organization’s interim financial statements should follow the same accounting policies as its annual financial statements. As a result, the inventory valuation and depreciation procedures used in interim financial statements should be the same as those used in yearly financial statements.

AS-26: Intangible assets: An intangible asset is defined as a “distinguishable non-monetary asset, devoid of physical substance, held for use in the production or supply of goods or services, for rental to others, or administrative purposes” (Para 6 of AS-26). Patents, copyrights, computer software, customer lists, franchises, brands, and other intangible assets are common examples. Goodwill is a unique form of intangible asset that cannot be separated. As stated in AS-26 Paragraph 6, the definition of an intangible asset requires that the asset be separately identifiable. Goodwill is not an intangible asset because it cannot be purchased or sold individually. An intangible asset can be recorded as an asset on the balance sheet if two conditions are met:

(a) future economic benefits from the asset’s use will likely flow to the firm and

(b) the cost of the asset can be accurately determined.

If both conditions are unmet, the sum incurred should be written off. Only when money or worth is paid for the acquisition of goodwill can it be classified as an asset. Internally created goodwill is not a tradable asset. Similarly, internally developed brands, client lists, and publishing titles are not intangible assets.

AS-27 — Financial reporting of joint venture interests: A joint venture is a firm run by two or more people. It can take the form of a partnership or an incorporated venture. A contractual agreement is a criterion used to assess if a firm is a joint venture (a Joint venture agreement). There are three sorts of joint ventures:

(a) jointly controlled activities,

(b) jointly controlled assets, and

(c) jointly controlled entities.

AS-28 – Asset Impairment: Asset impairment signifies a drop in value. When an asset’s carrying amount (i.e., depreciation value) exceeds the recoverable amount, the asset is considered impaired. The discrepancy is referred to as impairment loss. The impairment loss should be immediately recorded as a cost in the profit and loss statement. Where the recoverable amount is less than the carrying amount, this standard aims to present the assets in the balance sheet in their recoverable amount. As a result, the standard takes a conservative approach in that it does not recommend carrying an asset at its recoverable amount when it is greater than the carrying amount. As a result, AS-28 aims to address some of the criticisms levelled regarding historical cost accounting.

AS-29: Provisions, contingent obligations, and contingent assets: This is a statutory accounting standard that went into effect on April 1, 2004. The standard distinguishes between provisions and contingencies and suggests rules for their recognition and disclosure. First, it should be stated that provisions (e.g., tax provision) are distinct from outstanding liabilities (e.g., salary payable). In the former scenario, the amount is based on estimation, whereas in the latter case, the responsibility is specific; hence, no estimation is required. AS-29 defines the term “provision” as follows: “A provision is an obligation that can only be measured with a substantial degree of estimation.”