3.2 ' Hii dnt co “bu REOF ACCOUNTING ApPTER ™® | DISCLOSU POLICIES (AS-1) What are Accounting Policies / 3.1 Accounting policies refer to specific accounting principles and th; method of applying those principles adopted by the enterprise in prepa, 3. ration and presentation of the financial statements. At the time oi tements (ie. Balance Sheet, Profit and Los ql ai ——— which have more than one method oj, accounting treatment such as: , @ Conversion or translation of foreign currency item : - Average Rate - TT buying rate (Te\ eSoaeh 1c tranches) \@ Valuation of inventories : - FIFO - Weighted Average - Standard Cost - Retail Method @ Valuation of Investment @ Valuation of Property Plant and Equipments @ Treatment of Contingent Liabilities There are many areas other method can be followed for ac than aforesaid, where more than wed in : counting which methods have been fol” as saute oon Sheet, profit and loss account is disclos®’ tion about the rete ence accounting policies contains the infor™ ment. Statements of a aon for the Preparation of financial st counting policies are part of financial state"FUNDAME st NTAL ACCOUNTING Asst MPTIONS Para 3.5 . property, Plant and Equipment (PPE) 3.2-1 Examples of Accounting Policies ympany has elected to use the cost afaeppe fanding which is being can ost model for PPE Revaluation Model. sod: except for land and Tied in the Balance Sheet by using the Inventories ct ; @ Inventories are valued at lower of cost and net r cost comprises of cost of purchase, cost of cor cost including appropriate production overheat ing such inventories to their Present location a: is determined on FIFO method. What are Notes to Accounts? ealizable value. The nversion and other d incurred in bring- nd condition the cost 3.3 Notes to accounts are the explanation of the management about the items in the financial statements (Profit & Loss Account and Balance Sheet). The management gives more explanation and information about the items of profit and loss account and balance sheet and any other items, by way of notes to accounts. For example: - Disclosure of details of contingent liability by notes to accounts. - Disclosure of litigation about the claim recoverable, loan receivable etc, Notes to accounts are integral part of financial statement. Example of Notes to Accounts - The company has an investment of & 67 crores in share capital of Shree Dig Vijay Singh & Company Limited (SDCC). The loss of SDCC exceeded its paid up capital and reserve as on 31-3-2001. In view of long-term strategies, investment of the company in SDCC, in the opinion of management, no provision Is required to be made since diminution in the value of such investment is of temporary nature. Need for disclosure of Accounting Policies 3.4 For proper and better understanding | t required that all significant accounting policies followed in preparation of financial statement should be disclosed. Because assets an ae pt ee $ in balance sheet and profit and loss account are significantly affected by accounting policies followed. All significant accounting policies s ecause it would be helpful to the reader o! Fundamental Accounting Assumptions domthe 3.5 Itis generally assumed that financial statements are prepares ; on ine sis of fundamental accounting assumptions. Fundamental Acco Ing assumptions are : f financial statement, it is hould be disclosed at one place f financial statement.CCOUNTING POLICIES: ; Para 3.8 DISCLOSURE OF A . a enterprise had intention for ¢¢ ans th eseeable means coming " Bi ~oncern- It me: 3.5-1 Going Concern It ie future. For ation in foreseea! ing the op r two years. - , continuance ol ither there is intention of discontinuance of busin, ! In other words, neither "1 organization or discontinuance of m, ** nor necessity of liquidation of ore: sas rations of the business. co opel 3,5-2 Consistency - It mean from one period to another. 3.5-3 Accrual- It means that s that same accounting policies are folloy, pz financial statement is prepared onmercy, 3: tile system only. Under this system, the effects of eed and oth, i events are recognised when they occur (and not as cash or its equivale, U is received or paid) and they are recorded in the accounting records ay, reported in the financial statements of the period to which they rela, 3, Financial statements prepared on the accrual basis inform users nyc only of past transactions involving the payment and receipt of cash by also of obligations to pay cash in the futures and of resources ths represent cash to be received in the future. Other accounting assumption like business entity, money measuremen, matching are not fundamental accounting assumptions as per thi accounting standard. A Assumption as regards fundamental accounting assumptions a 3.6 If nothing has been written about the fundamental accountin assumption in financial statements, it is assumed that fundamente P accounting assumptions have been followed in preparation of finance statements. If any fundamental accounting assumption has not been followed, the: f this fact must be disclosed in financial statements. a Selection of Accounting Policies ; P poner objective of selection of accounting policies is that the financié are pene aout be Prepared on the basis of such accounting police x Tue and fair view of s i * ee el tate of affairs of balance sheet Major points which are con: application of accounting pol 3.8-1 Prude - ence - Generally maker of financial statement has to {2° uncertainties f uncertainties may be of preparation of financial statement. The Sarding collectability of receivables, numbe!’ warranty claims that ma “ha Fi ay occur. Prudence m: f imal! imal which is required under conditions of Gaerne oe 3.8-2 Substance over form accounted for in accordance It means that transaction should * with actual happening and econ" sidered for the purpose of selection 4 licies| 53 ILLUSTRATIONS reality of the transactions not by its legal form. Like in hire purchase if the assets are purchased on hire purchase by the hire purchaser the assets are shown in the books of hire purchaser in spite of the fact that the hire purchaser is not the legal owner of the assets purchased. Under the hire purchase the purchaser, becomes the owner only on the payment of last instalment. Therefore the legal form of the transaction js ignored and the transaction is accounted as per its substance. 3.8-3 Materiality - Financial Statement should disclose all the items and facts which are sufficient enough to influence the decisions of reader or/ user of financial statement. Changes in Accounting Policies 3.9 A change in accounting policies should be made in the following conditions : @ Adoption of different accounting policies is required by statute or for compliance with an Accounting Standard. @ It is considered that change would result in more appropriate presentation of financial statement. If there is any change in accounting policies in preparation of financial statement from one period to subsequent period, and such change affects the state of affairs of balance sheet and profit and loss account of current period or such change affects the financial statement of later period, then such change must be disclosed in financial statement. The amount, by which the financial statement is affected should be disclosed to the extent ascertainable. Example : Consequent upon the issuance of mandatory Accounting Standard-2 (AS 2) by the Institute of Chartered Accountants of India, the company has revised its accounting policy relating to valuation of inventories to include applicable fixed production overheads. The change has resulted in increase in value of inventory and profit before tax by % 252.79 million. ILLUSTRATIONS . Company follows the following policy for rétirement benefits: Contribution to pension fund is made based on actuarial valuation at the year-end in respect of employees who have opted for pension scheme. Contribution to the gratuity fund is made based on actuarial valuation at the year-end. Leave encashment is accounted for on Pay AS YOU GO Method. Comment. Solution : As per para 10(c) of AS-1 (refer point 3.5-3): The Accrual’ is fundamen- tal accounting assumptions, therefore, any accounting policy cannot be contrary to fundamental accounting assumption. Policy followed for leave encashment on the basis of ‘PAY AS YOU GO’ is not in accordance with accrual assumptions. | Therefore, the accounting policy as regards leave encashment is not correct, in fact it is contrary to AS-15 “Employee Benefits”.| al eeateaieataieel DISCLOSURE ©! mputer, The company py, pect to specialized areg 31st March, 2010 the con! J for demonstrating the muy The cost of manufacturing! sas included in fixed prody! 1 special type of €0" “pares d hap ye with res Joping program” ye yeur endee Sumpuier to be used td. manufac for deve During Q2. Induga L software diviston as medical imaging. imanmfactured @ protons eo fy sal ving sofware progrd not for sare ina pte was 750 lakhs. The ame vision. Comment. eads of hardware division. : ' ; ; heads of hd hich is manufactured by the Induga included in fixed production overhes: {of these prototype compute, \ over Solution: Cost of prototyP and is not meant for sal ‘Accounting policy is nec and same to be disclosed. 3. UFC Company is engage e computer, W should not be ry to write off the cos! din the business of eee pecenare i under, since ve assets of the comp '¥ are Dlocke, ing tit igure aS Ce ened UEC has accepted imter-Conau varions claims/petitions in & Mer srefforis tosettle the dues. There were cain, Depa a from lenders from the due date of ICDs to the dae y epayment The company has provided interest, as per the terse of the contract it the due date and a note for non-provision of interest from the due date to date ¢ repayment was effected in the financial statements. On account of uncertaintie, existing regarding the determination of the amount and in the absence of an specific legal obligation at present as per the terms of contracts, the company considers that these claims are in the nature of “claims against the company no, acknowledged as debt’, and the same has been disclosed by way of a note in the accounts instead of making a provision in the profit and loss accounts. Is tha correct? Solution: AS-1 recognises ‘prudence’ as one of the major considerations governing the selection and application of accounting policies. In view of the uncertainty attached to future events, profit are not anticipated but recognised only wher 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. Accrual is one of the fundamental accounting assumptions as per AS-1. Irrespec five the ae of the contract, so long as the principal amount of a loan is 10 ae e i ler cannot be placed in a disadvantageous position by not men cane in respect of overdue amount. From the aforesaid, it * Teese thombany has an obligation on account of the overdue intere* by the lenders)at aro eany should provide for the liability (since it is not waive! Circumstances ofan amount estimated or on reasonable basis based on fats which are setiled, the liabilitg shen espectol the overdue interest amen amounts settled, Nonprovisio vee, See corre alien Violation of accrual bases of Sina overdue interest liability amoun's © Q4. Draft the accounting ie i follownag tence 1g policies to be disclose d in the financial statement for"™ (a) Revenue recognition - sales of goods (b) Depreciation : (c) Impairment of assets (d) Foreign currency translation fe) Inventoriesss 3 ILLUSTRATIONS, Solution (@ Salesare recognised when goods are invoiced and despatched toc " arerecorded net of fade discounts and GST ue hstocustoner Depreciation is charged on strai; Dep ‘ straight line meth in Schedule 11 of the Companies Act pees respect of which depreciation is char ‘ged at (b) ed on useful life specified cept for the following assets in he rates mentioned below () Kutcha Roads 47.50% 20% At each balance sheet date, the company reviews the carrying amounts of its property, plant and equipment to determine whether there is any indication that those assets suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of impairment loss. (i) Enabling works oO Reversal of impairment lossis recognised immediately as income in the profit and loss account, (d) Income and expenses in foreign currencies are converted at exchange rates prevailing on the date of the transaction. Foreign currency monetary assets and liabilities are translated at the exchange rate prevailing on the balance sheet date. Forward exchange contracts outstandingat the balance sheet date are stated at fair values and any gains or losses are recognised in the profit and loss account. (e) Inventories are valued as under: Poultry for livestock breeding | At cost Raw materials and packing _| Atcost ornet realisable value, whichever materials is lower Work-in-process At cost or net realisable value, whichever: is lower Finished goods At cost or net realisable value, whichever: is lower Stores and spares At cost At estimated selling price By products ss include cost of conversion and other sent location and conditions. Cost of finished goods and work in proc: h costs incurred in bringing the inventories to their pr Q5. On Ist April, 2009 F Ltd. had an inven cost 712 million two years ago. Due tos) arrangement to sell the timber to Ban’ to buy back the timber at any time will be charged from the date of the transactions is expected to be 8%. and sold it the same day for an ex, Required: Assuming the above transact L extracts toreflect the transactions in profit Ista isei 720 million. On St April 2009 had riser ter to bank of India for’ [Srmillion. F within the next three years at a cost of 715 million plus accumulated interest at 2% pe original sale. The F Lid, bought pected price of € 25 million. tory of cut seasoning timber which had hhortage of this quality of timber its value at Ist April 2009 F Lid. entered into an ‘Ltd. has an option annum above the base rate. This base rate for the period of the back the timber on 31st March, 2012 ions take place as expected, prepare orloss forthe yearsto31stMarch, 2010,pISCLOSURE OF ACCOUNTING POLICIES siPand the Statement of financial position (ignore cash) aq, 2012 and thes At thse | Jott and 51 oe F Lid treated the transactions in their legal form and ‘ wit actions is recorded. ! did Ihthe substance of the tral Solution: (i) Legal Form semen F Lid. Profit or Loss year to 31st March Amt, C0, — 2010 2011 2012 Tos — 15,000 Nil 25,000 0 (12,000) Nill (19,965) | Glog 3,000 Nil 5,035 BOs in the year 2012s the original selling price of €15 pluscompoun t at 10% for the previous three years. i F Ltd. - Statement of financial position as at 31st March Amt. 000) 2010 2011 2012 ierory Nil Nil Nil Loan Nil Nil Nil (ii) Substance F Ltd. - Profit or loss year to 31st March Amt. (7000) 2010 2011 2012 Total Revenues Nil Nil 25,000 25,000 Cost of Sales Nil Nil| (12,000) | __(12,000) Gross profit Nil Nil 13,000 13,000 Interest (Accrued @ 10%) | __(1,500) (1,650) (1,815) (4,965) Profit/(loss) (1,500) (1,650) 11,185 8,035 | F Ltd. - Statement of financial Position as at 31st March Amt. 000) Inventory a au 1 — 12,000| 12,000, NE Plus accrued interest 16,000} 15,000 150% 1,500 3,150 4.965 19,96' Repaid 31st March, 2012 ___(19.9e5)8 87 ILLUSTRATIONS As can be seen from the figure in (i) 0 if the legal form of the transa | it results ir reading of the profit Seer nese ast March, 201 in 2012. Also no inventory or loai pear in the stateme ancid this improves many ratios, particularly gearing. ment of nancial In Sa rele Rae of the transaction and (ignoring F Ltd.’s other s ‘sin “losses” in 2010 and 2011 and large profi 2; thet t ction: esull 1 ‘ge profit in 2012; there isnopr an smoothing Italso shows an interest charge, which in (i) is “lost” in the cost of sales figure. In addition both the inventory and the loan (including accrued interest) appear in the statement of financial position, Note both methods eventu- sition. N e - ally report the same profit. ° Q6. (i) ABC Ltd. was previously making provision for non-moving s 7 g stocks based on not issued for the last 12 months up to 31-3-2020. Now, the company wants 10 make provision based on technical evaluation during the year ending 31-3-2021. Total value of stock ® 133.75 lakh. Provision required based on technical evaluation ® 4.00 lakh. Provision required based on 12 months not issued # 5.00 lakh. (ii) In the Books of M/s Kay Lid., Closing stock as on 31st March, 2021 amounts to 7 1,24,000 (on the basis of FIFO method). The company decides to change from FIFO method to weighted average method for ascertaining the cost of inventory from the year 2020-2021. On the basis of weighted average method, closing stock 4s on 31st March, 2021 amounts to @ 1,15,000. Realisable value of the inventory as on 31st March, 2021 amounts to € 1,54,000. Discuss Disclosure Requirements of change in accounting policy in above cases as per AS 1. [CA Inter Group I, Dec. 2021] Solution: () The decision of making provision for non-moving stocks on the basis of technical evaluation does not amount to change in accounting policy as it is just a change in the basis of making provision. The method of estimating the amount of provision may be changed in case it results in a better esti- mate of the provision. So, it will be considered as a change in accounting estimate. The disclosure for the same will be as under - “The company has provided for non-moving stocks on the basis of techni- cal evaluation unlike preceding years. Had the same method be followed as in the previous year, the profit for the year would have been lower by z 1 lakh and accordingly the net assets would have been lower by @ 1 lakh. (i) Changing the method of valuation of cost of inventory from FIFO to weighted average method is a change in accounting policy. As per AS 1 “Disclosure of Accounting Policies’, any change in an accounting policy having material effect should be disclosed in the financial statement, The amount by which any item in the financial statement is affected by ea change should also be disclosed. Where such amount is not ascertainal te wholly or in part, the f should be indicated. Thus, in the given aaa the company must disclose the change in method of valuation of cost of inven- tory and its effect in the financial statements. ‘The company may disclose the change in accounting P | ner - olicy in the following man-NG POLICIES: vl , DISCLOSURE OF ACCOUN ; and net realizable value, §,, 2 re than the cost, the ing, s inventory was MO! “cost : he inv current year, the company has ado, ae ae inventory z tory has been car vied t method for me: suring the ae a une nOFY 35 ae sars as it better reflects the ¢ weighted average an pears " F sthod adopted ws ee ented pared to FIFO meth fea The change ee e uction tion pattern The 00. ae t fat profit and value of inventory DY ae ; current yea «statements are True’or False’ Also give reasy, Q7. State whether the following » VY : answer: ; ate in fundamental ace punting assumptions underline the preparation ang (i) Certain fundame presentation of financial statements. They are a ually specifically stated by cause their acceptance and use are nol assume / ental accounting assumptions are not followed in presentation of financial statements, aspecific disclosure is not required, policies adopted in the preparation and presenta. t of the financial statements, | of cost measured at lowe alue ol t tory at its cost Inthe ntory is lizable (ii) If fundament and preparation i, Allsignificant accounting oe tion of financial statements should form part (iv) Any chance in an accounting policy, which has a material effect should be| disclosed. Where the amount by which any item in the financial statements is affected by such change is not ascertainable, wholly or in part, the facts, need not to be indicated. [CA Inter Group I, May 2022] Solution: The answer to the given question is given as per the provisions of AS-1: | () False. Reason ~ Fundamental accounting assumptions are not usually specifically | stated since if nothing has been written about the fundamental accounting ae in financial statements, it is assumed that the same have been | ollowed in preparation of financial statements, Di i ired i . Disclosure is required in case they are not followed. ae (i) False. Reason -If any fundamental accountii in the presentation and i anaes must be dis pecific dict (ii) True. ing assumption has not been followed los, of financial stat his fact losed by a specific disclosure. ements then thi: (iv) False. ements should be specifically disclosed. | eee ~ If there is a c} inancial statements are of ascertainable. I the cree tlected should be disclosed to the exte™ not ascertainabl of fi A 5 a specific dj inancial statement © a specilic disclosure, Part the fact should be disclosed by mail (Ce " ‘a59 ILLUSTRATIONS . You are required to comme: 7 ‘| Pari St ence edema Pere rons ed (1) Bee Limited has not complied with AS-2 “Valuation of inventories" and the same is disclosed in the Notes on Accounts. Management is of the view that the financial statements give a true and fair view as non-compliance with AS-2 is disclosed. aman (2) Cee Limited sold its Office Building for % 10,00,000 on Ist March, 2023. The buyer has paid the full amount and taken possession of the building. The book value of the Office Building is % 4,00,000. On 31st March 2023, docu- mentation and legal formalities are pending. The company has not recorded the disposal and the amount received is shown as an advance. (3, Dee Limited has prepared its accounts on cash basis and the same is not disclosed. (4, Jee Limited disclosed significant accounting policies adopted in the prepara- tion of financial statements, in the Directors’ Report. [CA Inter Group I, May 2023] Solution: (1) As per section 129 of the Companies Act, 2013, financial statements must be prepared in compliance with the Accounting Standards. If the Account- ing standards have not been complied with, the company shall disclose in its financial statements the deviation from accountings standards, the rea- sons for such deviation and the financial effects arising out of such devia- tion. In the given case, Bee Limited has merely disclosed the fact of non- compliance with AS 2, but that is not sufficient. It should also disclose the reason for such non-compliance and the financial effect of such non-com- pliance on the financial statements. Hence, the contention of management is not correct. (2) As per AS 1, we must account for transactions based on “substance over form” concept. In the given case, the company has already sold its office building on Ist March, 2023. Merely documentation and legal formalities are pending. So, even though the documentation and legal formalities are pending, based on substance over form concept, the company should have eee rded the same as disposal of asset in the accounts for the year ending ‘on 31st March, 2023 and the asset must have been derecognized with corre- sponding gain of & 6,00,000 being also recognised. One of the fundamental accounting assumption: is accrual concept. If any fundamental accounting assumption has not been followed, the fact should be disclosed in the financial statements. In the given case, ince Dee Lim- ited has not followed accrual concept, the fact should be disclosed. Non- disclosure of the said fact is not correct as per AS 1. 4 All ignifi ccountiny licies adopted in the preparation an‘ pre- A the sient ca Sol statements should be disclosed in the financial ae ments and should normally be disclosed at one place. In the given case ; disclosure of significant accounting policies adopted in the preparal financial statements in the Directors’ Report is not correct. 3 4)