| Read All Accounting Standards at a glance (I) |
• Borrowing costs that are directly attributable to the acquisition, construction or production of any qualifying asset (assets that takes a substantial period of time to get ready for its intended use or sale) should be capitalised.
• Borrowing costs that can be capitalised are interest and other costs that are directly attributable to the acquisition, construction and production of a qualifying asset.
• Income on the temporary investment of the borrowed funds to be deducted from borrowing costs.
• Capitalisation of borrowing costs should be suspended during extended periods in which development is interrupted.
• Capitalisation should cease when completed substantially or if completed in parts, in respect of that part, all the activities for its intended use or sale are complete.
• Statement does not deal with the actual or imputed cost of owner’s equity/preference capital are treated as borrowing costs.
• Financial statements to disclose accounting policy adopted for borrowing cost and also the amount of borrowing costs capitalised during the period.
• Requires reporting of financial information about different types of products and services an enterprise provides and different geographical areas in which it operates.
• A business segment is distinguishable component of an enterprise providing a product or service or group of products or services that is subject to risks and returns that are different from other business segments.
• A geographical segment is distinguishable component of an enterprise providing products or services in a particular economic environment that is subject to risks and returns that are different from components operating in other economic environments.
• Internal financial reporting system is normally the basis for identifying the segments.
• The dominant source and nature of risk and returns of an enterprise should govern whether its primary reporting format will be business segments or geographical segments.
A business segment or geographical segment is a reportable segment if (a) revenue from sales to external customers and from transactions with other segments exceed 10% of total revenues (external and internal) of all segments; or (b) segment result, whether profit or loss is 10% or more of (i) combined result of all segments in profit or (ii) combined result of all segments in loss whichever is greater in absolute amount; or (c) segment assets are 10% or more of all the assets of all the segments.
If total external revenue attributable to reportable segment constitutes less than 75% of total revenues then additional segments should be identified.
• Under primary reporting format for each reportable segment the enterprise should disclose external and internal segment revenue, segment result, amount of segment assets and liabilities, cost of fixed assets, acquired, depreciation, amortisation of assets and other non-cash expenses.
• Reconciliation between information about reportable segments and information in financial statements of the enterprise is also to be provided.
• Secondary segment information is also required to be disclosed. This includes information about revenues, assets and cost of fixed assets acquired.
• When primary format is based on geographical segments, certain further disclosures are required.
• Disclosures are also required relating to intra-segment transfers and composition of the segment.
• In case, by applying the definitions of ‘business segment’ and ‘geographical segment’, contained in AS-17, it is concluded that there is neither more than one business segment nor more than one geographical segment, segment information as per AS-17 is not required to be disclosed.
• It may be mentioned that the illustrative disclosure attached to Standard as appendix (though not forming part of the Standard) illustrate in detail; determination of reportable segments, information about business segments and summary of required disclosures.
AS-18 — RELATED PARTY DISCLOSURES
• Parties are considered to be related if, at any time during the reporting period, one party has ability to control or exercise significant influence over the other party in making financial and/or operating decisions.
• The statement deals with following related party relationships: (a) Enterprises that directly or indirectly, through one more intermediaries, control or are controlled by or are under common control with the reporting enterprise
(b) Associates, Joint Ventures of the reporting entity, investing party or venturer in respect of which reporting enterprise is an associate or a joint venture, (c) Individuals owning voting power giving control or significant influence over the enterprise and relatives of any such individual, (d) Key management personnel and their relatives, and (e) Enterprises over which any of the persons in (c) or (d) are able to exercise significant influence. Other relationship is not covered by this Standard.
• Following are not deemed related parties (a) Two companies simply because of common director, (b) Customer, supplier, franchiser, distributor or general agent merely by virtue of economic dependence; and (c) Financiers, trade unions, public utilities, government departments and bodies merely by virtue of their normal dealings with the enterprise.
• Disclosure under the Standard is not required in the following cases (i) If such disclosure conflicts with duty of confidentially under statute, duty cast by a regulator or a component authority; (ii) In consolidated financial statements in respect of intragroup transactions, and (iii) In case of State-controlled enterprises regarding related party relationships and transactions with other State-controlled enterprises.
• Relative (in relation to an individual) means spouse, son, daughter, brother, sister, father and mother who may be expected to influence, or be influenced by, that individual in dealings with the reporting entity.
• Standard also defines inter alia control, significant influence, associate, joint venture and key management personnel.
• If there are transactions between the related parties, during the existence of relationship, certain information is to be disclosed, viz.; name of the related party, description of the nature of relationship, nature of transaction and its volume (as an amount or proportion), other elements of transaction if necessary for understanding, amount or appropriate proportion outstanding pertaining to related parties, provision for doubtful debts from related parties, amounts written off or written back in respect of debts due from or to related parties.
• Names of the related party and nature of related party relationship to be disclosed even where there are no transactions but the control exists.
• Items of similar nature may be aggregated by type of the related party.
AS-19 — LEASES
• The Standard applies in accounting for all leases other than —
(b) lease agreements to explore for or use natural resources,
(c) licensing agreements for items such as motion pictures, films, video recordings plays, etc. and
(d) lease agreements to use lands.
• Leases are classified as finance lease or operating lease.
• A finance lease is defined to mean a lease that transfers substantially all the risks and rewards incidental to ownership of an asset. Examples of situations which normally lead to a lease being classified as a finance lease are —
(a) lessor transferring the ownership at the end of the lease term,
(b) lessee has an option to purchase the asset at a price which is sufficiently lower than the fair value at the date the option becomes exercisable,
(c) lease term is for substantial part of economic life of the asset,
(d) present value of minimum lease payment at the inception of the lease is substantially equal to the assets fair value and
(e) the asset leased is of specialised nature such that only lessee can use it without major modifications made to it.
• An operating lease is defined to mean a lease other than a finance lease.
Treatment in the books of lessee
In case of finance lease —
• At the inception of the finance the lessee should recognise the lease as an asset and a liability. The asset should be recognised at an amount equal to the fair value of leased asset at the inception. If the fair value exceeds the present value of the minimum lease payment from the stand point of the lessee, the amount to recorded as asset and liability reckoned with the present value of the minimum lease payments that may be calculated on the basis
of interest rate implicit in the lease, if practicable to determine and if not, then at lessee’s incremental borrowing rate.
• Lease payments should be apportioned between finance charges and the reduction of outstanding.
• The depreciation policy for leased asset should be consistent with that for depreciable assets that are owned. AS-6 (Depreciation Accounting) applies in such cases.
• Disclosure should be made of —
(b) assets acquired under finance lease,
(c) net carrying amount at the balance sheet date,
(d) reconciliation between the total minimum lease payments at balance sheet date and their present value,
(e) total minimum lease payments at balance sheet date and their present value for periods specified,
(f) contingent rent recognised as income,
(g) the total of future minimum sub-lease payments expected to be received, and
(h) general description of significant leasing arrangements.
In case of operating lease —
• The lease payments should be recognised as an expense on straight line basis, unless other systematic basis is more representative of the time pattern of the user’s benefit.
• Disclosures should be made of —
(b) the total of future minimum lease payments for the periods specified,
(c) the total of future minimum sub-lease payments expected to be received,
(d) lease payments recognised in the statement of Profit & Loss, with separate amounts of minimum lease payments and contingent rents,
(e) sub-lease payments recognised in the statement of Profit & Loss, and
(f) general description of significant leasing arrangements.
Treatment in the books of lessor
In case of finance lease —
• The lessor should recognise the asset in its balance sheet as a receivable at an amount equal to net investment in the lease.
• The recognition of finance income should be based on a pattern reflecting a constant periodic return on the net investment of the lessor outstanding.
• In case of any reduction in the unguaranteed residual values, income allocation over the remaining lease term should be revised.
• Initial direct cost are either recognised immediately in the profit and loss statement or allocated against the finance income over the lease term.
• Disclosure should be made of —
(a) total gross investment in lease and the present value of the minimum lease payments at specified periods and a reconciliation thereof at the balance sheet date,
(b) unearned finance income,
(c) accruing unguaranteed residual value benefit,
(d) accumulated provision for uncollectible minimum lease payments receivable,
(e) contingent rent recognised,
(f) general description of significant leasing arrangements and
(g) accounting policy adopted in respect of initial direct costs.
In case of operating lease —
• Lessors to present an asset given on lease under fixed assets. Lease income should be recognised on a straight line basis over the lease term or other systematic basis, if representative of the time pattern over which benefit derived gets diminished.
• Costs, including depreciation, incurred are recognised as an expense.
• Initial direct cost are either deferred and allocated to income over the lease term in proportion to rent income recognised or are recognised immediately in the profit and loss statement.
• Disclosure should be made of —
(b) gross carrying amount of the leased assets, accumulated depreciation and impairment loss at the balance sheet date and depreciation and impairment loss recognised or reversed for the period,
(c) the future minimum lease payments in aggregate and for the periods specified,
(d) total contingent rent recognised as income,
(e) a general description of the significant leasing arrangements, and
(f) accounting policy for initial direct costs.
Lease by manufacturer or dealer
• The manufacturer or dealer lessor should recognise the transaction in accordance with policy followed for outright sales. Initial direct costs should be recognised as an expense at the inception of the lease. Artificial low rates of interests are quoted, profit on sale should be restricted to that which would apply if a commercial rate of interest were charged.
Sale and leaseback transactions
• If the transaction of sale and leaseback results in a finance lease, any excess or deficiency of sale proceeds over the carrying amount, it should be deferred and amortised over the lease term in proportion to the depreciation of the leased assets.
• If the transaction result in an operating lease and it is clearly established to be at fair value, profit or loss should be recognised immediately. If the sale price is below the fair value, any profit or loss should be recognised
immediately, except that, if the loss is compensated by future lease payments at market price, it should be deferred and amortised in proportion to the lease payments over the period for which asset is expected to be used. If the sales price is above fair value, the excess over the fair value should be deferred and amortised over period of expected use of asset.
• In an operating lease, if the fair value at the time of sale and leaseback transaction is less than the carrying amount of the asset, a loss equal to the amount of the difference between the carrying amount and fair value should be recognised immediately.
AS-20 — EARNINGS PER SHARE
• Basic and diluted EPS is required to be presented on the face of Profit and Loss Statement with equal prominence for all the periods presented. EPS is required to be presented even when it is negative.
• Basic EPS should be calculated by dividing net profit or loss for the period attributable to equity shareholders by weighted average of equity shares outstanding during the period.
• In arriving earnings attributable to equity shareholders preference dividend for the period and the attributable tax are to be excluded.
• The weighted average number of shares, for all the periods presented, is adjusted for bonus issue or any element thereof in rights issue, share split and consolidation of shares.
• For calculating diluted EPS, net profit or loss attributable to equity shareholders and the weighted average number of shares are adjusted for the effects of dilutive potential equity shares (i.e., assuming conversion into equity of all dilutive potential equity).
• Potential equity shares are treated as dilutive when, and only when, their conversion into equity would result in a reduction in profit per share from continuing ordinary operations.
• The effects of anti-dilutive potential equity shares are ignored in calculating diluted EPS.
• For the purpose of calculating diluted EPS, the net profit or loss for the period attributable to equity shareholders and the weighted average number of shares outstanding during the period should be adjusted for the effects of all dilutive potential equity shares.
• The amounts of earnings used as numerators for computing basic and diluted EPS and a reconciliation of those amounts with Profit and Loss Statement, the weighted average number of equity shares used as the denominator in calculating the basic and diluted EPS and the reconciliation between the two EPS and the nominal value of shares along with EPS per share figure need to be disclosed.
AS-21 — CONSOLIDATED FINANCIAL STATEMENTS
• To be applied in the preparation and presentation of consolidated financial statements for a group of enterprises under the control of a parent.
• Control means the ownership of more than one-half of the voting power of an enterprise or control of the composition of the board of directors or such other governing body.
• Control of composition implies power to appoint or remove all or a majority of directors.
• Consolidated financial statements to be presented in addition to separate financial statements.
• All subsidiaries, domestic and foreign to be consolidated except where control is intended to be temporary or the subsidiary operates under severe long-term restriction impairing transfer of funds to the parent.
• Consolidation to be done on a line by line basis by adding like items of assets, liabilities, income and expenses which involve.
• Elimination of cost to the parent of the investment in the subsidiary and the parent’s portion of equity of the subsidiary at the date of investment.
• Excess of cost over parent’s portion of equity, to be shown as goodwill.
• Where cost to the parent is less than its portion, of equity, difference to be shown as capital reserve.
• Minority interest in the net income to be adjusted against income of the group.
• Minority interest in net assets to be shown separately as a liability.
• Intra group balances and intra-group transactions and resulting unrealised profits should be eliminated in full. Unrealised losses should also be eliminated unless cost cannot be recovered.
• Where two or more investments are made in a subsidiary, equity of the subsidiary to be generally determined on a step by step basis.
• Financial statements used in consolidation should be drawn up to the same reporting date. If reporting dates are different, adjustments for the effects of significant transactions/events between the two dates to be made.
• Consolidation should be prepared using same accounting policies. If the accounting policies followed are different, the fact should be disclosed together with proportion of such items.
• In the year in which parent subsidiary relationship ceases to exist, consolidation to be made up-to-date of cessation.
• Disclosure is to be of all subsidiaries giving name, country of incorporation, residence, proportion of ownership and voting power if different, nature of relationship between parent and subsidiary, effect of the acquisition and disposal of subsidiaries on the financial position, names of subsidiaries whose reporting dates are different than that of the parent.
• When the consolidated statements are presented for the first time figures for the previous year need not be given.
• While preparing consolidated financial statements, the tax expense to be shown in the consolidated financial statements should be the aggregate of the amounts of tax expense appearing in the separate financial statements of the parent and its subsidiaries.
• ‘Near Future’ should be considered as not more than twelve months from acquisition of relevant investments unless a longer period can be justified on the basis of facts and circumstances of the case.
• When there are more than one investor in a company in which one of the investors controls the composition of board of directors and some other investor holds more than half of the voting power, both these investors are required to consolidate the accounts of the investee in accordance with this Standard.
Note: Not all the notes appearing in standalone financial statements is required to be disclosed in the consolidated financial statements.Typically notes that are not required to be included are, managerial remuneration, CIF value of import, capacity, quantitative details, etc.
• This statement should be applied in accounting for taxes on income. This includes the determination of the amount of the expense or saving related to taxes on income in respect of an accounting period and the disclosure of such an amount in the financial statements.
• The expense for the period, comprising current tax and deferred tax should be included in the determination of the net profit or loss for the period.
• Deferred tax should be recognised for all the timing differences, subject to the consideration of prudence in respect of deferred tax assets as set out in paragraph below.
• Except in the situations stated in paragraph 5, deferred tax assets should be recognised and carried forward only to the extent that there is a reasonable certainty that sufficient future taxable income will be available against which such deferred tax assets can be realised.
• Where an enterprise has unabsorbed depreciation or carry forward of losses under tax laws, deferred tax assets should be recognised only to the extent that there is virtual certainty supported by convincing evidence that sufficient future taxable income will be available against which such deferred tax assets can be realised.
• Current tax should be measured at the amount expected to be paid to (recovered from) the taxation authorities, using the applicable tax rates and tax laws.
• Deferred tax assets and liabilities should be measured using the tax rates and tax laws that have been enacted or substantively enacted by the balance sheet date.
• Deferred tax assets and liabilities should not be discounted to their present value.
• The carrying amount of deferred tax assets should be reviewed at each balance sheet date. An enterprise should write-down the carrying amount of a deferred tax asset to the extent that it is no longer reasonably certain or virtually certain, as the case may be that sufficient future taxable income will be available against which deferred tax asset can be realised. Any such writedown may be reversed to the extent that it becomes reasonably certain or virtually certain, as the case may be that sufficient future taxable income will be available.
• An enterprise should offset assets and liabilities representing current tax if the enterprise:
2. (a) Has a legally enforceable right to set off the recognised amounts; and
3. (b) Intends to settle the asset and the liability on a net basis.
• An enterprise should offset deferred tax assets and deferred tax liabilities if:
1. (a) The enterprise has a legally enforceable right to set off assets against liabilities representing current tax; and
2. (b) The deferred tax assets and the deferred tax liabilities relate to taxes on income levied by the same governing taxation laws.
• Deferred tax assets and liabilities should be distinguished from assets and liabilities representing current tax for the period. Deferred tax assets and liabilities should be disclosed under a separate heading in the balance sheet of the enterprise, separately from current assets and current liabilities.
• The break-up of deferred tax assets and deferred tax liabilities into major components of the respective balances should be disclosed in the notes to accounts.
• The nature of the evidence supporting the recognition of deferred tax assets should be disclosed, if an enterprise has unabsorbed depreciation or carry forward of losses under tax laws.
• On the first occasion that the taxes on income are accounted for in accordance with this statement, the enterprise should recognise, in the financial statement, the deferred tax balance that has accumulated prior to the adoption of this statement as deferred tax asset/liability with a corresponding credit/charge to the revenue reserve, subject to the consideration of prudence in case of deferred tax assets. The amount so credited/charged to the revenue reserve should be the same as that which would have resulted if this statement had been in effect from the beginning.
AS-23 — ACCOUNTING FOR INVESTMENT IN ASSOCIATES IN CONSOLIDATED FINANCIAL STATEMENT
• This statement should be applied in accounting for investments in associates in the preparation and presentation of consolidated financial statements by an investor. An investment in an associate should be accounted for in a consolidated financial statement under the equity method except when:
2. (a) The investment is acquired and held exclusively with a view to its subsequent disposal in the near future, or
3. (b) The associate operates under severe long-term restrictions that significantly impair its ability to transfer funds to its investors. Investment in such associates should be accounted for in accordance with the Accounting Standard (AS)-13, Accounting for Investments. The reason for not applying the equity methods in accounting for investments in an associate should be disclosed in the consolidated financial statements.
• An investor should discontinue the use of equity method from the date that:
1. (a) It ceases to have significant influence in an associate but retains, either in whole or in part, its investments, or
2. (b) The use of the equity method is no longer appropriate because the associate operates under severe long-term restrictions that significantly impair its ability to transfer funds to the investors. From the date of discontinuing the use of equity method, investments in such associates should be accounted for in accordance with Accounting Standard (AS)-13, Accounting for Investments. For this purpose, the carrying amount of investments at that date should be regarded as the cost thereafter.
• Goodwill/capital reserve arising on the acquisition of an associate by an investor should be included in the carrying amount of investment in the associate but should be disclosed separately.
• In using equity method for accounting for investment in an associate, unrealised profits and losses resulting from transactions between the investor (or its consolidated subsidiaries) and the associate should be eliminated to the extent of the investor’s interest in the associate. Unrealised losses should not be eliminated if and to the extent the cost of the transferred asset cannot be recovered.
• The carrying amount of investment in an associate should be reduced to recognise a decline, other than temporary, in the value of the investment, such reduction being determined and made for each investment individually.
• In addition to the disclosures required by paragraphs 2 and 4, an appropriate listing and description of associates including the proportion of ownership interest and, if different, the proportion of voting power held should be disclosed in the consolidated financial statements.
• Investments in associates accounted for using the equity method should be classified as long-term investments and disclosed separately in the consolidated balance sheet. The investor’s share of the profits or losses of such investments should be disclosed separately in the consolidated statement of profit and loss. The investor’s share of any extraordinary or prior period items should also be separately disclosed.
• The name(s) of the associate(s) of which reporting date(s) is/are different from that of the financial statements of an investor and the differences in reporting dates should be disclosed in the consolidated financial statements.
• In case an associate uses accounting policies other than those adopted for the consolidated financial statements for transactions and events in similar circumstances and it is not practicable to make appropriate adjustments to the associate’s financial statements, the fact should be disclosed along with a brief description of the differences in the accounting policies.
• On the first occasion when investment in an associate is accounted for in consolidated financial statements in accordance with this statement, the carrying amount of investment in the associate should be brought to the amount that would have resulted had the equity method of accounting been followed as per this statement since the acquisition of the associate. The corresponding adjustment in this regard should be made in the retained earning in the consolidated financial statements.
• Adjustments to the carrying amount of investment in an associate arising from changes in the associate’s equity that have not been included in the statement of profit and loss of the associate should be directly made in the carrying amount of investment without routing it through the consolidated statement of profit and loss. The corresponding debit/credit should be made in the relevant head of the equity interest in the consolidated balance sheet. For example, in case the adjustment arises because of revaluation of fixed assets by the associate, apart from adjusting the carrying amount of investment to the extent of proportionate share of the investor in the revalued amount, the corresponding amount of revaluation reserve should be shown in the consolidated balance sheet.
• The objective of this statement is to establish principles for reporting information about discontinuing operations, thereby enhancing the ability of users of financial statements to make projections of an enterprise’s cash flows, earnings-generating capacity, and financial position by segregating information about discontinuing operations from information about continuing operations.
• A discontinuing operation is a component of an enterprise that the enterprise, pursuant to a single plan, is: (1) 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 component to the enterprise’s shareholders; or (2) disposing of piecemeal, such as by selling off the component’s assets and settling its liabilities individually; or (3) terminating through abandonment; and that represents a separate major line of business or geographical area of operations; and that can be distinguished operationally and for financial reporting purposes.
• With respect to a discontinuing operation, the initial disclosure event is the occurrence of one of the following, whichever occurs earlier (a) the enterprise has entered into a binding sale agreement for substantially all of the assets attributable to the discontinuing operation; or (b) the enterprise’s board of directors or similar governing body has both (i) approved a detailed, formal plan for the discontinuance and (ii) made an announcement of the plan.
• An enterprise should apply the principles of recognition and measurement that are set out in other Accounting Standards for the purpose of deciding as to when and how to recognise and measure the changes in assets and liabilities and the revenue, expenses, gains, losses and cash flows relating to a discontinuing operation.
• When an enterprise disposes of assets or settles liabilities attributable to a discontinuing operation or enters into binding agreements for the sale of such assets or the settlement of such liabilities, it should include, in its financial statements, the following information when the events occur (a) for any gain or loss that is recognised on the disposal of assets or settlement of liabilities attributable to the discontinuing operation, (i) the amount of the pre-tax gain or loss and (ii) income tax expense relating to the gain or loss; and (b) the net selling price or range of
prices (which is after deducting expected disposal costs) of those net assets for which the enterprise has entered into one or more binding sale agreements, the expected timing of receipt of those cash flows and the carrying amount of those net assets on the balance sheet date.
• Any disclosures required by this statement should be presented separately for each discontinuing operation. The disclosures requirements may be quickly assessed by referring to questoinnaire below.
• An appendix to the Standard (though not a part of the Standard) sets out detailed illustration explaining significant disclosure requirements of the Standard.