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31 Name of Accounting Standard
Disclosure of Accounting Policies
Valuation of Inventory
Cash Flow Statement
Contingencies and Events Occurring After the Balance Sheet
Net Profit or Loss for the Period, Prior Period Items and
Changes in Accounting Policies
Accounting for Research and Development
Accounting for Fixed Assets
The Effects of Changes in Foreign Exchange Rates
Accounting for Government Grants
Accounting for Investments
Accounting for Amalgamations
Accounting for Retirement Benefits in the Financial
Statements of Employers
Related Party Disclosures
Earning Per Share
Consolidated Financial Statements
Accounting for Taxes on Income
Accounting for Investments in Associates in Consolidated
Interim Financial Reporting
Financial Reporting of Interests in Joint Ventures
Impairment of Assets
Provisions, Contingent Liabilities and Contingent Assets
Financial Instruments: Recognition and Measurement
Financial Instruments: Presentation Feedback : [email protected] Pg. No.
286-306 Contact : IshaN Padia-93766 08069
1 Feedback : [email protected] Notes : 2 Feedback : [email protected] Accounting Standard – 1,
Disclosure of Accounting Policies
(issued in 1979)
(This Accounting Standard includes paragraphs 24-27 set in bold italic type and
paragraphs 1-23 set in plain type, which have equal authority. Paragraphs in bold
italic type indicate the main principles. This Accounting Standard should be read in the
context of the Preface to the Statements of Accounting Standards.)
The following is the text of the Accounting Standard (AS) 1 issued by the Accounting
Standards Board, the Institute of Chartered Accountants of India on ‘
. The Standard deals with the disclosure of significant accounting
policies followed in preparing and presenting financial statements.
In the initial years, this accounting standard will be recommendatory in character.
During this period, this standard is recommended for use by companies listed on a
recognised stock exchange and other large commercial, industrial and business
enterprises in the public and private sectors. Introduction 1. 2. 3.
6. 7. 8. This statement deals with the disclosure of significant accounting policies
followed in preparing and presenting financial statements.
The view presented in the financial statements of an enterprise of its state of
affairs and of the profit or loss can be significantly affected by the accounting
policies followed in the preparation and presentation of the financial statements.
The accounting policies followed vary from enterprise to enterprise. Disclosure
of significant accounting policies followed is necessary if the view presented is to
be properly appreciated.
The disclosure of some of the accounting policies followed in the preparation and
presentation of the financial statements is required by law in some cases.
The Institute of Chartered Accountants of India has, in Statements issued by it,
recommended the disclosure of certain accounting policies, e.g., translation
policies in respect of foreign currency items.
In recent years, a few enterprises in India have adopted the practice of including
in their annual reports to shareholders a separate statement of accounting
policies followed in preparing and presenting the financial statements.
In general, however, accounting policies are not at present regularly and fully
disclosed in all financial statements. Many enterprises include in the Notes on
the Accounts, descriptions of some of the significant accounting policies. But the
nature and degree of disclosure vary considerably between the corporate and
the non-corporate sectors and between units in the same sector.
Even among the few enterprises that presently include in their annual reports a
separate statement of accounting policies, considerable variation exists. The
statement of accounting policies forms part of accounts in some cases while in
others it is given as supplementary information.
The purpose of this Statement is to promote better understanding of financial
statements by establishing through an accounting standard the disclosure of
significant accounting policies and the manner in which accounting policies are
disclosed in the financial statements. Such disclosure would also facilitate a
more meaningful comparison between financial statements of different
enterprises. 3 Feedback : [email protected] Explanation Fundamental Accounting Assumptions
9. 10. Certain fundamental accounting assumptions underlie the preparation and
presentation of financial statements. They are usually not specifically stated
because their acceptance and use are assumed. Disclosure is necessary if they
are not followed.
The following have been generally accepted as fundamental accounting
The enterprise is normally viewed as a going concern, that is, as
continuing in operation for the foreseeable future. It is assumed that the
enterprise has neither the intention nor the necessity of liquidation or of
curtailing materially the scale of the operations.
It is assumed that accounting policies are consistent from one period to
Revenues and costs are accrued, that is, recognised as they are earned or
incurred (and not as money is received or paid) and recorded in the
financial statements of the periods to which they relate.
considerations affecting the process of matching costs with revenues
under the accrual assumption are not dealt with in this Statement.) Nature of Accounting Policies 11.
12. 13. The accounting policies refer to the specific accounting principles and the
methods of applying those principles adopted by the enterprise in the
preparation and presentation of financial statements.
There is no single list of accounting policies which are applicable to all
circumstances. The differing circumstances in which enterprises operate in a
situation of diverse and complex economic activity make alternative accounting
principles and methods of applying those principles acceptable. The choice of
the appropriate accounting principles and the methods of applying those
principles in the specific circumstances of each enterprise calls for considerable
judgement by the management of the enterprise.
The various statements of the Institute of Chartered Accountants of India
combined with the efforts of government and other regulatory agencies and
progressive managements have reduced in recent years the number of
acceptable alternatives particularly in the case of corporate enterprises. While
continuing efforts in this regard in future are likely to reduce the number still
further, the availability of alternative accounting principles and methods of
applying those principles is not likely to be eliminated altogether in view of the
differing circumstances faced by the enterprises. Areas in which Differing Accounting Policies are Encountered
14. 4 The following are examples of the areas in which different accounting policies
may be adopted by different enterprises.
Methods of depreciation, depletion and amortization
Treatment of expenditure during construction
Conversion or translation of foreign currency items
Valuation of inventories
Treatment of goodwill
Valuation of investments
Treatment of retirement benefits
Recognition of profit on long-term contracts Feedback : [email protected]
Valuation of fixed assets
Treatment of contingent liabilities.
The above list of examples is not intended to be exhaustive. Considerations in the Selection of Accounting Policies
16. 17. The primary consideration in the selection of accounting policies by an enterprise
is that the financial statements prepared and presented on the basis of such
accounting policies should represent a true and fair view of the state of affairs of
the enterprise as at the balance sheet date and of the profit or loss for the
period ended on that date.
For this purpose, the major considerations governing the selection and
application of accounting policies are:—
In view of the uncertainty attached to future events, profits are not
anticipated but recognised only when realised though not necessarily in
cash. Provision is made for all known liabilities and losses even though
the amount cannot be determined with certainty and represents only a
best estimate in the light of available information.
Substance over Form
The accounting treatment and presentation in financial statements of
transactions and events should be governed by their substance and not
merely by the legal form.
Financial statements should disclose all “material” items, i.e. items the
knowledge of which might influence the decisions of the user of the
financial statements. Disclosure of Accounting Policies
22. 23. To ensure proper understanding of financial statements, it is necessary that all
significant accounting policies adopted in the preparation and presentation of
financial statements should be disclosed.
Such disclosure should form part of the financial statements.
It would be helpful to the reader of financial statements if they are all disclosed
as such in one place instead of being scattered over several statements,
schedules and notes.
Examples of matters in respect of which disclosure of accounting policies
adopted will be required are contained in paragraph 14. This list of examples is
not, however, intended to be exhaustive.
Any change in an accounting policy which has a material effect should be
disclosed. The amount by which any item in the financial statements is affected
by such change should also be disclosed to the extent ascertainable. Where
such amount is not ascertainable, wholly or in part, the fact should be indicated.
If a change is made in the accounting policies which has no material effect on
the financial statements for the current period but which is reasonably expected
to have a material effect in later periods, the fact of such change should be
appropriately disclosed in the period in which the change is adopted.
Disclosure of accounting policies or of changes therein cannot remedy a wrong
or inappropriate treatment of the item in the accounts. Accounting Standard
24. All significant accounting policies adopted in the preparation and
presentation of financial statements should be disclosed. 5 Feedback : [email protected]
26. 27. 6 The disclosure of the significant accounting policies as such should form
part of the financial statements and the significant accounting policies
should normally be disclosed in one place.
Any change in the accounting policies which has a material effect in the
current period or which is reasonably expected to have a material effect
in later periods should be disclosed.
In the case of a change in
accounting policies which has a material effect in the current period, the
amount by which any item in the financial statements is affected by
such change should also be disclosed to the extent ascertainable.
Where such amount is not ascertainable, wholly or in part, the fact
should be indicated.
If the fundamental accounting assumptions, viz. Going Concern,
Consistency and Accrual are followed in financial statements, specific
disclosure is not required. If a fundamental accounting assumption is
not followed, the fact should be disclosed. Feedback : [email protected] Accounting Standard – 2,
Valuation of Inventories
(issued in June, 1981; revised in 1999)
(This Accounting Standard includes paragraphs set in bold italic type and plain type,
which have equal authority.
Paragraphs in bold italic type indicate the main
principles. This Accounting Standard should be read in the context of its objective and
the Preface to the Statements of Accounting Standards.)
The following is the text of the revised Accounting Standard (AS) 2, ‘
, issued by the Council of the Institute of Chartered Accountants of India.
This revised Standard supersedes Accounting Standard (AS) 2, ‘
, issued in June, 1981.
The revised standard comes into effect in respect of accounting periods commencing on
or after 1.4.1999 and is mandatory in nature. Objective A primary issue in accounting for inventories is the determination of the value at which
inventories are carried in the financial statements until the related revenues are
recognised. This Statement deals with the determination of such value, including the
ascertainment of cost of inventories and any write-down thereof to net realisable value. Scope
1. 2. This Statement should be applied in accounting for inventories other
work in progress arising under construction contracts, including
directly related service contracts (see Accounting Standard (AS) 7,
Accounting for Construction Contracts)
work in progress arising in the ordinary course of business of
shares, debentures and other financial instruments held as stockin-trade; and
producers’ inventories of livestock, agricultural and forest
products, and mineral oils, ores and gases to the extent that they
are measured at net realisable value in accordance with well
established practices in those industries.
The inventories referred to in paragraph 1 (d) are measured at net realizable
value at certain stages of production.
This occurs, for example, when
agricultural crops have been harvested or mineral oils, ores and gases have been
extracted and sale is assured under a forward contract or a government
guarantee, or when a homogenous market exists and there is a negligible risk of
failure to sell. These inventories are excluded from the scope of this Statement. Definitions 3. The following terms are used in this Statement with the meanings
Inventories are assets:
held for sale in the ordinary course of business;
in the process of production for such sale; or 7 Feedback : [email protected]
c. in the form of materials or supplies to be consumed in the
production process or in the rendering of services. Net realisable value is the estimated selling price in the ordinary course
of business less the estimated costs of completion and the estimated
costs necessary to make the sale.
4. Inventories encompass goods purchased and held for resale, for example,
merchandise purchased by a retailer and held for resale, computer software held
for resale, or land and other property held for resale.
encompass finished goods produced, or work in progress being produced, by the
enterprise and include materials, maintenance supplies, consumables and loose
tools awaiting use in the production process.
Inventories do not include
machinery spares which can be used only in connection with an item of fixed
asset and whose use is expected to be irregular; such machinery spares are
accounted for in accordance with Accounting Standard (AS) 10, Accounting for
Fixed Assets. Measurement of Inventories
5. Inventories should be valued at the lower of cost and net realizable
value. Cost of Inventories
6. The cost of inventories should comprise all costs of purchase, costs of
conversion and other costs incurred in bringing the inventories to their
present location and condition. Costs of Purchase
7. The costs of purchase consist of the purchase price including duties and taxes
(other than those subsequently recoverable by the enterprise from the taxing
authorities), freight inwards and other expenditure directly attributable to the
acquisition. Trade discounts, rebates, duty drawbacks and other similar items
are deducted in determining the costs of purchase. Costs of Conversion
8. 9. 8 The costs of conversion of inventories include costs directly related to the units
of production, such as direct labour. They also include a systematic allocation of
fixed and variable production overheads that are incurred in converting materials
into finished goods. Fixed production overheads are those indirect costs of
production that remain relatively constant regardless of the volume of
production, such as depreciation and maintenance of factory buildings and the
cost of factory management and administration. Variable production overheads
are those indirect costs of production that vary directly, or nearly directly, with
the volume of production, such as indirect materials and indirect labour.
The allocation of fixed production overheads for the purpose of their inclusion in
the costs of conversion is based on the normal capacity of the production
facilities. Normal capacity is the production expected to be achieved on an
average over a number of periods or seasons under normal circumstances,
taking into account the loss of capacity resulting from planned maintenance. The
actual level of production may be used if it approximates normal capacity. The
amount of fixed production overheads allocated to each unit of production is not
increased as a consequence of low production or idle plant.
overheads are recognised as an expense in the period in which they are
In periods of abnormally high production, the amount of fixed Feedback : [email protected] 10. production overheads allocated to each unit of production is decreased so that
inventories are not measured above cost. Variable production overheads are
assigned to each unit of production on the basis of the actual use of the
A production process may result in more than one product being produced
simultaneously. This is the case, for example, when joint products are produced
or when there is a main product and a by-product.
When the costs of
conversion of each product are not separately identifiable, they are allocated
between the products on a rational and consistent basis. The allocation may be
based, for example, on the relative sales value of each product either at the
stage in the production process when the products become separately
identifiable, or at the completion of production. Most by-products as well as
scrap or waste materials, by their nature, are immaterial. When this is the case,
they are often measured at net realizable value and this value is deducted from
the cost of the main product. As a result, the carrying amount of the main
product is not materially different from its cost. Other Costs
11. 12. Other costs are included in the cost of inventories only to the extent that they
are incurred in bringing the inventories to their present location and condition.
For example, it may be appropriate to include overheads other than production
overheads or the costs of designing products for specific customers in the cost of
Interest and other borrowing costs are usually considered as not relating to
bringing the inventories to their present location and condition and are,
therefore, usually not included in the cost of inventories. Exclusions from the Cost of Inventories
13. In determining the cost of inventories in accordance with paragraph 6, it is
appropriate to exclude certain costs and recognise them as expenses in the
period in which they are incurred. Examples of such costs are:
abnormal amounts of wasted materials, labour, or other production
storage costs, unless those costs are necessary in the production process
prior to a further production stage;
administrative overheads that do not contribute to bringing the
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