Module 1 :
FRAMEWORK FOR
PREPARATION AND
PRESENTATION OF FINANCIAL
STATEMENTS
Accounting Standards
Meaning - Accounting Standards are written documents containing ‘Generally Accepted
Accounting Principles’ (GAAP)
These standards are issued by ICAI, they constituted an Accounting Standard Board(ASB)
to prepare accounting standards.
Accounting Standard 1: Disclosure of
Accounting Policies
Issued by ICAI deals with disclosure of significant policies followed in preparing and
presenting final accounts.
Earlier it was recommendatory but now it is mandatory.
The disclosure of accounting policies followed helps to properly study, compare and judge
the figures of final accounts.
It’s purpose is to disclose what accounting policies to be followed and in what manner.
Items to be disclosed Method of disclosure or valuation
Inventories (AS 2) FIFO, Weighted Average etc
Cash Flow Statement (AS 3) Direct Method, Indirect Method
Fundamental Accounting Assumptions
Going Concern - Going concern is an assumption that an entity has no plan of winding up
in the nearer future at the time of preparing financial statements. In other words, the entity
will continue to exist indefinitely or it will be a going concern.
Consistency - The consistency assumption refers to the practice of using the same
accounting policies for similar transactions from one accounting period to another. This
assumption improves the comparability of financial statements over time.
An accounting policy can be changes if the change is required by (i) statute (ii) by an
accounting standard (iii) for more appropriate presentation of financial statements.
Accrual – Transactions are recorded as soon as they occur, whether or not cash or cash
equivalent is actually received or paid.
Factors influencing Choice of Accounting
Policy
Prudence – Since future events are uncertain (may or may not happen), profits are not
anticipated but recorded only when realized. Provision is made for all known liabilities and
losses even though the amount can only be an estimate and not an exact figure.
Substance over form - Substance over form is a concept that emphasizes that accounting
treatment and presentation in financial statements should be based on the economic/financial
reality of a transaction, rather than just its legal form.
For instance, if a piece of land has been sold, but the documentation and legal formalities are
pending at the year-end, the transaction should still be recorded, using the concept of substance
over form. This helps in presenting an accurate and transparent picture of the financial health
of the company.
Materiality – Final accounts should disclose all material items i.e items whose knowledge
might influence the decisions of the user of final accounts.
Disclosure [requirements of AS 1]
All significant accounting policies used in the preparation and presentation of financial
statements should be disclosed.
The disclosure should form part of the financial statements, normally in one place.
Any change in the accounting policies which has a material effect in the current period or is
expected to have a material effect in later periods should be disclosed. In 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 should also be disclosed to the extent
it can be calculated. Where such amount is not ascertainable, wholly or in part, the fact
should be indicated.
If the fundamental accounting assumptions of 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.
AS 9 Revenue Recognition
Revenue is the gross inflow of cash, receivables or other consideration arising in course of
ordinary activities of an enterprise.
Recognition is a process of recording and reporting an item as an element of financial
statement.
From :-
a. sale of goods
b. Rendering of services and
c. Use by others of enterprise resources yielding interest, royalties and dividends
Gross Inflow
• Gross inflow of an enterprise will be considered as its revenue
• Net will inflow will not be considered as revenue.
• EXCEPTION- in an agency relationship, the revenue is the amount of
commission and not the gross inflow .
Cash, Receivables & other consideration
• Cash implies revenue out of cash transactions
• Receivables means revenue out of credit transactions
• Consideration implies revenue arise from contract with a third party and not
within an enterprise
Items of Revenue outside the Scope of AS 9
Revenue arising from Construction Contracts
Revenue arising from hire-purchase, lease agreements
Revenue arising from government grants and other similar subsidies
Revenue of Insurance companies arising from insurance contracts
Revenue recognition from the sale of goods
Performance – the seller has transferred to the buyer all the significant risks and rewards
of ownership. The seller retains no effective control of the goods to a degree usually
associated with ownership
Measurability – revenue is only booked when it is capable of being measured. Revenue
recognition is postponed if it is not possible to measure or compute consideration
Collectability – Revenue is only booked when the revenue is expected to be collected
ultimately. Revenue recognition is postponed if it is uncertain
Revenue recognition for rendering of services
COMPLETED SERVICE CONTRACT METHOD
Revenue is recognised only when the rendering of services under a contract is completed or
substantially completed.
This method is applied when the act to be performed is a single act.
Example – Courier service
PROPORTIONATE COMPLETION METHOD
Recognizes revenue in the statement of profit and loss proportionately with the degree of
completion of services under a contract.
Method is applied where series of acts are performed
Example – Tuition fees
Interest, Royalty and Dividend
Revenue should be recognized when no significant uncertainty exists as to
Its measurability
It’s collectability
BASIS OF RECOGNITION
- INTEREST - ROYALTY - DIVIDEND
Accrual Basis Accrual Basis Right to receive is
established