Important Question and Answers on Accounting Standards (Part-I)

Valuation of fixed assets in special cases.

        Para 15 of Accounting Standard 10 on “Accounting for Fixed Assets” states the following provisions regarding valuation of fixed assets in special cases :

1.          In the case of fixed assets acquired on hire purchase terms, although legal ownership does not vest in the enterprise, such assets are recorded at their cash value, which if not readily available, is calculated by assuming an appropriate rate of interest. They are shown in the balance sheet with an appropriate narration to indicate that the enterprise does not have full ownership thereof.

2.          Where an enterprise owns fixed assets jointly with others (otherwise than as a partner in a firm), the extent of its share in such assets, and the proportion in the original cost, accumulated depreciation and written down value are stated in the balance sheet. Alternatively, the pro-rata cost of such jointly owned assets is grouped together with similar fully owned assets. Details of such jointly owned assets are indicated separately in the fixed assets register.

3.          Where several assets are purchased for a consolidated price, the consideration is apportioned to the various assets on a fair basis as determined by competent valuers.

Events Occurring after the Balance Sheet Date and their disclosure requirements.
        Events occurring after the balance sheet date are those significant events, both favourable and unfavourable, that occur between the balance sheet date and the date on which the financial statements are approved by the Board of Directors in the case of a company and in the case of any other entity by the corresponding approving authority.

Assets and liabilities should be adjusted for events occurring after the balance sheet date that provide additional evidence to assist the estimation of amounts relating to conditions existing at the balance sheet date or that indicate that the fundamental accounting assumption of going concern (i.e. the continuance of existence or substratum of the enterprise) is not appropriate. However, assets and liabilities should not be adjusted for but disclosure should be made in the report of the approving authority of events occurring after the balance sheet date that represent material changes and commitments affecting the financial position of the enterprise.

(ii)         Disclosure regarding events occurring after the balance sheet date :

(a)        The nature of the event;

(b)        An estimate of the financial effect, or a statement that such an estimate cannot be made.

Prior-Period items.
        When income or expenses arise in the current period as a result of errors or omissions in the preparation of the financial statements of one or more prior periods, the said incomes or expenses have to be classified as prior period items. The errors may occur as a result of mathematical mistakes, mistakes in applying accounting policies, misinterpretation of facts or oversight.

Pre–incorporation expenses. 
        Pre–incorporation expenses denote expenses incurred by the promoters for the purposes of the company before its incorporation.

Broadly, these include expenses in connection with:

(a)        preliminary analysis of the conceived idea,

(b)        detailed investigation in terms of technical feasibility and commercial viability to establish the soundness of the proposition,
(c)        preparation of ‘project report’ or ‘feasibility report’ and its verification through independent appraisal authority (before giving final approval to the proposition) and

(d)        organisation of funds, property and managerial ability and assembling of other business elements.

These expenses should be properly capitalised and shown in the balance sheet under the heading “Miscellaneous Expenditure”. There is no legal requirement to write–off these expenses to profit and loss account within any specified period of time nor is there any rigid accounting convention in regard to this matter. However, good corporate practice recognises the need to write off these expenses to profit and loss account whtin a period of 3 to 5 years.

Provisions contained in the Accounting Standard in respect of Revaluation of fixed assets.
        (i)         Revaluation of fixed Assts

(a)       When fixed assets are revalued in financial statements, the basis of selection should be an entire class of assets or the selection should be done on a systematic basis. The basis of selection should be disclosed.

(b)       The revaluation of any class of assets should not result in the net book value of that class being greater than the recoverable amount of that class of assets.
(c)        The accumulated depreciation should not be credited to profit and loss account.

(d)        The net increase in book value should be credited to a revaluation reserve account.

(e)        On disposal of a previously revalued item of fixed asset, the difference between net disposal proceeds and the net book value should be charged or credited to the profit and loss account except that to the extent to which such a loss is related to an increase and which has not been subsequently reversed or utilised may be charged directly to that account.

The difference between actual expense or income and the estimated expense or income as accounted for in earlier years’ accounts, does not necessarily constitue the item to be a prior period item comment.
           The statement given in the question is correct and is in accordance with the Accounting Standard (AS) 5 (Revised) “NetProfit or Loss for the Period. Prior Period Items and Changes in AccountingPolicies’’.

The use of reasonable estimates is an essential part of the preparation of financial statements and does not undermine their reliability. An estimate may have to be revised if changes occur regarding the circumstances on which the estimate was based, or as a result of new information or subsequent developments. The revision of the estimate, by its nature, does not bring the adjustments within the definition of an extraordinary item or a prior period item.

When can revenue be recognised in the case of transaction of sale of goods? 
            As per AS 9 Revenue Recognition, revenue from sales transactions should be recognised when the following requirements as to performance are satisfied, provided that at the time of performance it is not unreasonable to expect ultimate collection :

(i)          The seller of goods has transferred to the buyer the property in the goods for a price or all significant risks and rewards of ownership have been transferred to the buyer and the seller retains no effective control of the goods transferred to a degree usually associated with ownership; and
(ii)        No significant uncertainty exists regarding the amount of the consideration that will be derived from the sale of goods.

Important Question and Answers on Accounting Standards (Part-II)

Important Question and Answers on Accounting Standards (Part-III)

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