CA Intermediate(New) Course capsule @cacscmaportal.pdf - Intermediate Course Accounting ISBN-885-9 Paper 1 Accounting Module 1 Board of Studies The

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Unformatted text preview: Intermediate Course Accounting ISBN : 978-81-8441-885-9 Paper: 1 Accounting Module - 1 Board of Studies The Institute of Chartered Accountants of India A- 29, ICAI Bhawan, Sector-62, Noida-201309 Phone : 0120 - 3045930 E-mail : [email protected] Website : Intermediate Course The Institute of Chartered Accountants of India (Set up by an Act of Parliament) July/2017/P2118(New) New Delhi ACCOUNTING Accounting - A Capsule for Quick Revision Accounting constitutes a significant area of core competence for Chartered Accountancy students. The significance of this subject can be judged from the fact that we have a paper on Accounting at every level of CA course. Accounting papers at Intermediate level under Chartered Accountancy curriculum concentrate on conceptual understanding of the crucial aspects of accounting and acquaint students with the basic concepts, theories and accounting techniques followed by different entities. The objective of Paper 1 “Accounting” at Intermediate level is to acquire the ability to apply specific accounting standards and legislations to different transactions and events and in preparation and presentation of financial statements of various business entities. It has always been the endeavour of Board of Studies to provide quality academic inputs to the students. Keeping in mind this objective, it has been decided to bring forth a crisp and concise capsule for Intermediate Paper 1 ‘Accounting’. Chapter overview has been provided to present a broad outline of the topic coverage in each chapter. The significant points of the topics have been presented through pictorial presentations in this capsule which will help the students in grasping the intricate practical aspects of each topic. This will facilitate the students to recapitulate the whole concepts within minimum time and efforts in the later stages of preparation. Although, the capsule has been prepared keeping in view the new and revised scheme of Education and Training of ICAI, the students of earlier scheme may also be benefitted from it. This capsule, though, facilitates the students in undergoing quick revision, under no circumstances, such revisions can substitute the detailed study of the material provided by the BoS. CHAPTER 1: INTRODUCTION TO ACCOUNTING STANDARDS Chapter Overview Concepts & Benefits of Accounting Standards Concept of Carve Outs Accounting Standards setting process International Financial Reporting Standards as global standards Convergence to IFRS in India Ind AS Significance of Global Standards List of Accounting Standards International Financial Reporting Standards (IFRS) Issuance of Accounting Standards Standardisation of alternative accounting treatments Accounting Standards are written policy documents issued by Government e.g. (MCA) for corporate entities in consultation with NACAS ICAI for non corporate entities Comparability of financial statements Benefits of Accounting Standards Enhanced disclosures Accounting Standards - Benefits Recognition of events and transactions Measurement of transactions and events Presentation of transactions and events Disclosures The Chartered Accountant Student October 2017 ACCOUNTING Accounting Standards Setting Process Significance of Global Standards Identification of area Constitution of study group Preparation of draft and its circulation Cross border flow of money Lower risk of errors of judgment Ascertainment of views of different bodies on draft Global listing in different stock markets Finalisation of exposure draft (E.D.) Comments received on exposure draft (E.D.) Reduced operational challenges Significance of Global Standards Comparability of financial statements Modification of the draft Issuance of AS Greater transparency List of Accounting Standards 1 Disclosure of Accounting Policies 2 Valuation of Inventories 3 Cash Flow Statement 4 Contingencies and Events Occurring after the Balance Sheet Date 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies 7 Construction Contracts 9 Revenue Recognition 10 Property, Plant and Equipment 11 The Effects of Changes in Foreign Exchange Rates 12 Accounting for Government Grants 13 Accounting for Investments 14 Accounting for Amalgamations 15 Employee Benefits 16 Borrowing Costs 17 Segment Reporting 18 Related Party Disclosures 19 Leases 20 Earnings Per Share 21 Consolidated Financial Statements 22 Accounting for Taxes on Income 23 Accounting for Investments in Associates in Consolidated Financial Statements 24 Discontinuing Operations 25 Interim Financial Reporting 26 Intangible Assets 27 Financial Reporting of Interests in Joint Ventures 28 Impairment of Assets 29 Provisions, Contingent Liabilities and Contingent Assets Effectively, there are now only 27 Accounting Standards. October 2017 The Chartered Accountant Student Enhanced accountability Elimination of costly requirements International Financial Reporting Standards (IFRS) IFRS issued by IASB IAS issued by IASC and adopted by IASB Interpretations on IAS/IFRS issued by IFRS Interpretations Committee IFRS Interpretations on IAS issued by SIC International Financial Reporting Standards (IFRSs) as Global Standards IFRSs Principle based set of standards Enhanced transparency and comparability of financial statements Emergence as Global Standards ACCOUNTING Convergence to IFRS in India ICAI Convergence to IFRS; not adoption Deviation from corresponding IFRS, if required Application of IFRS in India considering legal and other conditions prevailing in India Indian Accounting Standards (Ind AS) Decision to have two sets of Accounting standards Ind AS Accounting Standards (AS) Indian Accounting Standards - Benefits Ind AS are IFRS converged standards issued by the Central Government with certain carve outs. Globalization and Liberalization Steps for notification Transparency of financial statements Comparability of financial statements Enhanced Disclosure requirements Objectives and Concepts of Carve Outs Formulation of Ind AS Sent to Central Govt. for Notification Sent to NACAS for deliberation Departures Resulting into carve-outs Formulation by ASB of ICAI Not resulting into carve-outs Deviation from the accounting principles stated in IFRS Removal of options in accounting principles and practices in Ind AS vis-avis IFRS Implementation of Ind AS Corporate entities Voluntary w.e.f. 1/4/15 Mandatory w.e.f. 1/4/16 MCA NBFC 1/4/2018 Roadmap by respective Regulators RBI IRDA Banking Co Insurance Co. 1/4/2018 Earlier adoption not allowed Earlier Ind AS to be implemented from 1.4.2018. However after issuance of IFRS 17, implementation of Ind AS will be from F.Y. 2020-21 The Chartered Accountant Student October 2017 ACCOUNTING CHAPTER 4: FINANCIAL STATEMENTS OF COMPANIES Unit 1: Preparation of Financial Statements of Companies Unit Overview Meaning of Company and maintenance of books of accounts Preparation of financial statements Accounting for Taxes on Income Dividend Distribution Tax Requisites of financial statements Transfer to Reserves Managerial remuneration of managers Declaration and payment of dividend Divisible profits Meaning of Company and Maintenance of Books of Accounts of a Company As per Section 128 of the Companies Act, 2013 Company as per Section 2(20) of the Companies Act, 2013 Every company should prepare and keep at its registered office books of accounts, relevant books and financial statements Company incorporated under the Companies Act, 2013 Under any previous company law (e.g., the Companies Act, 1956) Different types of companies as defined in the Companies Act, 2013 Preparation of Financial Statements on accrual basis and according to double entry system of accounting for every financial year giving a true and fair view of the state of the affairs. Requisites of Financial Statements Schedule III to the Companies Act, 2013 Statement of Profit and loss Balance sheet Cash Flow Statement Financial Statements as per Section 2(40) Notes and other statements Statutory requirements Statement of changes in Equity (if applicable) October 2017 The Chartered Accountant Student Financial Statements Guidance Notes Accounting Standards notified by MCA ACCOUNTING Managerial Remuneration Schedule V Managerial Remuneration (MR) Part I Adequacy of profits Calculated as Profit % as per Sec. 198 As per Schedule V and sections under the Companies Act, 2013. Total MR* < 11% of the net profits as per Sec. 198 Lays down conditions to be fulfilled for the appointment of a managing or whole-time director or a manager without the approval of the Central Govt. Total MR > 11% of the net profits as per Sec. 198 with the approval of the Central Govt. As per Section 197 Subject to Schedule V. *Total managerial remuneration payable includes payable to Directors + Managing director + Whole-time director+ Manager Part II Part III Deals with remuneration payable to managerial person by companies having profits and also by companies having no profits or inadequate profits. Specifies the provisions applicable to parts 1 and 2 of this schedule Part IV Deals with Central Government’s power to relax any requirements in this Schedule. Remuneration Payable by Companies having no Profit or Inadequate Profit without Central Government Approval (i) (ii) (iii) (iv) Where the effective capital is Negative or less than 5 crores 5 crores and above but less than 100 crores 100 crores and above but less than 250 crores 250 crores and above Limit of yearly remuneration payable should not exceed (Rupees) 60 Lakh 84 Lakh 120 Lakh 120 lakh plus 0.01% of the effective capital in excess of ` 250 crore. d en id iv D The availability of Divisible Profits (available for distribution) depends on a number of factors, e.g., their composition, the amount of provisions and appropriations that must be made out of them in priority, etc. ay m a n il io ta s ut en set rib ot as st n f di ay e o A r m ea s o rel Distribution of divisible profit as per number of shares held by share holder Divisible Profits Declaration of a dividend presupposes that there is a trading profit or a surplus available for distribution, arrived at after providing for depreciation on assets, not only for the year in which the profits were earned but also for any arrears of depreciation of the past years. Board of Directors of a company may declare interim dividend during any financial year out of the surplus in the profit and loss account and out of profits of the financial year in which such interim dividend is sought to be declared. Declaration and Payment of Dividend No Dividend can be declared except out of Trading profits after providing for depreciation (a) Current financial year (b) Previous financial years Money provided (in pursuance of guarantee) by Both (a) and (b) Central Government State Government Capital cannot be returned to the shareholders by way of dividend. No dividend should be declared or paid by a company from its reserves other than free reserves. The Chartered Accountant Student October 2017 ACCOUNTING Conditions as per Companies (Declaration and Payment of Dividend) Rules, 2014 Rate of Dividend Should not exceed Average rates of dividend in the 3 years immediately preceding that year This rule does not apply to a company, which has not declared any dividend in each of the three preceding financial year. Amount Total amount drawn from accumulated profits should not exceed 1/10 of Paid-up share capital + free reserves as appearing in the latest audited Financial Statements Utilization Drawn amount should first be used to set off the losses incurred in the FY in which dividend is declared. Balance of reserves After such withdrawal should not fall below 15% of paid up share capital as appearing in the latest audited Financial Statements No company should declare dividend unless carried over previous losses and depreciation not provided in previous year are set off against profit of the company of the current year. Transfer to Reserves Appropriation of a part of Profit As per section 123 (1)of the Companies Act, 2013. As required under law. Dividend Distribution Tax (DDT) Loss or depreciation, whichever is less, in previous years is set off against the profit of the company for the year for which dividend is declared or paid. Disclosure and Presentation of DDT in Financial Statements ● Dividend on shares is shown as an appropriation of profit in the ‘Notes to Accounts’ of the ‘Reserves and Surplus’ item of the Balance sheet. ● DDT liability relates to distribution of profits as dividends which are disclosed as appropriation /allocation of profit in the ‘Notes to Accounts’ of ‘Reserves and Surplus’, it is appropriate that the liability in respect of DDT should also be disclosed therein. AS 22 Accounting for Taxes on Income * Meaning Income Accounting income as per books of accounts Leviable on gross dividend / income Taxable income as per Income Tax Act Differences between accounting income & taxable income that originate in one period DDT paid treated as the final payment of tax on dividends. Addition to the income-tax Are they capable of reversal in one or more subsequent periods? DDT DDT should be payable even if no income-tax is payable The rate is 15% (excluding 12% surcharge* + 3% secondary and higher education cess). Chargeable in respect of the total income of a domestic company. * In specified cases October 2017 The Chartered Accountant Student No Yes Permanent differences Timing differences No accounting adjustments Results in a DTA or a DTL in B/S and form part of the tax expenses in P& L A/c *Accounting for Taxes on Income is not covered in syllabus of Paper 1 under earlier scheme. ACCOUNTING Unit 2: Cash Flow Statement Cash and Cash Equivalents for the Purpose of Cash Flow Statement Unit Overview Definition & Significance of cash flow statement Meaning of Cash & cash equivalents and Cash flow Difference between operating, investing and financing activities. ‘Cash’ include: Cash, Bank balances Preparation of cash flow statement as per AS 3. Definition of Cash Flow Statement + Cash flow statement is a summary of cash receipts and cash payments for accounting period. and Cash equivalents Significance of Cash Flow Statement Accuracy of past assessments of future cash flows. Indicator of amount, timing and certainty of future cash flows. Historical changes & Future requirement of cash & cash equivalents. Cash flow statement depicts Insolvency and liquidity position of an enterprise. Short term highly liquid investments that are readily convertible into known amounts of cash and subject to an insignificant risk of changes in value Ability to generate cash & cash equivalents. Securities with short maturity period of, say, three months or less from date of acquisition Meaning of term Cash Flow Operational efficiency of different enterprises. Cash Flow Inflow from Activities Outflow of Activities Cash increase Cash decrease The Chartered Accountant Student October 2017 ACCOUNTING Classification of Cash Flow Activities Classification of Cash Flow Activities Financing activities (changes in the size and composition of the owner’s equity and borrowings) Investing activities (acquisition and disposal of long-term assets and other investments) Operating activities (principle revenue generating) Methods (Operating Cash flow) Direct method Indirect method Gross cash receipts and gross cash payments Net profit or loss is adjusted instead of individual items of P & L A/c Proforma of Cash Flow Statement prescribed by AS 3 Direct Method Indirect Method Particulars Particulars Operating Activities: Operating Activities: Cash received from sale of goods xxx Closing balance of Profit & Loss Account xxx Cash received from Trade receivables xxx Less: Opening balance of Profit & Loss Account xxx Cash received from sale of services xxx Less: Payment for Cash Purchases xxx Payment to Trade payables xxx Payment for Operating Expenses xxx xxx Reversal of the effects of Profit & Loss Appropriation Account xxx Net Profit after tax xxx Add: Provision for Income Tax xxx Net Profit Before Tax and Extraordinary Items xxx xxx Reversal of the effects of non-cash and non-operating items xxx xxx Effects for changes in Working Capital except cash & cash equivalent xxx e.g. power, rent, electricity Payment for wages & salaries xxx Payment for Income Tax xxx xxx Adjustment for Extraordinary Items xxx Net Cash Flow from Operating Activities xxx xxx Less : Payment of Income Tax Net Cash Flow from Operating Activities October 2017 The Chartered Accountant Student xxx xxx xxx ACCOUNTING CHAPTER 5: PROFIT OR LOSS PRE AND POST INCORPORATION Methods for Computation Chapter Overview Meaning of profit or loss prior to incorporation Methods for computation Apportionment of items of incomes and expenses in pre and post incorporation periods Close off old books and open new books with the assets and liabilities as they existed at the date of incorporation Meaning of Profit or Loss prior to Incorporation referred as Pre-Incorporation Profits or Losses Profit or loss of a business prior to the date Company came into existence Methods for computation Split up the profit of the year in which the business has been transferred, between ‘pre’ and ‘post’ incorporation periods Such profits or losses are of capital nature disclose them separately Time basis (i) Turnover basis (ii) Combination of both (i+ii) Apportionment of Items of Incomes and Expenses in Pre and Post Incorporation Periods Item Basis of Apportionment between pre and Post incorporation period Audit Fees Gross Profit or Gross Loss Sales Ratio or Cost of goods sold Ratio or Time Ratio (i)For Company’s Audit under the Companies Act Variable expenses linked with Turnover [e.g. Selling and distribution expenses, etc.] Types of Audit Charge to Post-incorporation period Sales Ratio (ii)For Tax Audit under the Income-tax Act, 1961 Time Ratio Interest on purchase consideration to vendor Expenses exclusively relating to pre-Incorporation period [e.g. Interest on Vendor’s Capital] Charge to Pre-incorporation period (i) For the period from the date of acquisition of, business to date of incorporation Charge to Pre-incorporation period Expenses exclusively relating to post-incorporation period [e.g. interest on debentures etc.] Charge to Post-incorporation period (ii) From the date of incorporation Charge to Post-incorporation period Fixed Common charges [e.g., Salaries, Office etc.] On the basis of turnover in the respective periods Time basis The Chartered Accountant Student October 2017 ACCOUNTING CHAPTER 6: ACCOUNTING FOR BONUS ISSUE AND RIGHT ISSUE* Chapter Overview Right Issue & its Effects Value of Right Accounting treatment Provisions of the Companies Act, 2013 Definition of Bonus Shares & its Effects Authorised by its articles Partly paid-up shares, if any outstanding are made fully paid-up Definition of Bonus issue Issue of shares at no cost to current shareholders in a company Based upon the number of shares That the shareholder already owns Conditions for issue of bonus shares Company not defaulted for payment of statutory dues of the employees Provisions of the Companies Act Authorised in the general meeting of the company Company not defaulted in payment of interest / principal of fixed deposits/ debt securities issued by it Section 63 allows companies to issue fully paid-up bonus shares from Free reserves Effects of Bonus Issue Securities premium Increase in share capital Reduction in EPS and other per share values Capital redemption reserve Favourable act considered by markets Bonus shares Can’t be issued Out of reserves created by revaluation of assets Adjustment in market price in lieu of dividend *Right Issue is not covered in the syllabus of Paper 1 under the earlier scheme. October 2017 The Chartered Accountant Student Reduction in accumulated profits ACCOUNTING Effects of Right Issue Accounting...
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