CA-Intermediate

Advanced
Accounting notes

By
CA Chaitanya
 Introduction to AS
1. Accounting Standards (AS):

 Generally accepted accounting principles (GAAP) refer to a common set of accepted

accounting principles, standards, and procedures that business reporting entity must
follow when it prepares and presents its financial statements.
 GAAP = Standards + commonly accepted ways of recording and reporting
 AS are guidelines to standardize financial reporting, ensuring consistency, transparency,
and comparability.
 Key focus areas of AS:
o Recognition of transactions and events
o Measurement of transactions and events
o Presentation of transactions and events in a manner that is meaningful and
understandable
o Disclosure relating to transactions and events to enable to public to get an insight
into the FS
 Benefits:
o Standardization of accounting policies:
 Standardizes alternative accounting treatments to minimize confusion
in financial statement preparation.
 Helps in reflecting consensus on accounting policies to be used in
different identified areas
 Since it is not possible to prescribe a single set of policies for any specific
accounting area, entities should also accounting policies being followed by
them.
o Requirements for additional disclosures: Accounting standards call for
appropriate disclosures of accounting policies and other required information in
the financial statements which would be helpful for readers to understand the
accounting treatment.
o Enhanced comparability: AS improves comparability of FS (intra-firm and
inter-firm). Such comparisons facilitate assessment of financial health for taking
decisions.
o Reduces scope for creative accounting practices

2. Standards-Setting Process in India:

 Initiated by ICAI's Accounting Standards Board (ASB) in 1977.

 Composition of ASB includes representatives of industries, associations of industries
(namely, ASSOCHAM, CII, and FICCI), regulators, academicians, government
departments, etc.
 Process includes:
1. Identifying areas for standards.
2. Constitution of study groups by ASB to consider specific projects and to prepare
preliminary drafts of the proposed accounting standards. Consideration of the
 preliminary draft prepared by the study group of ASB and revision, if any, of the
draft on the basis of deliberations.
3. Draft preparation and its circulation to ICAI’s council members and outside
bodies such as MCA, SEBI, C&AG, CBDT etc. for comments.
4. Meeting with the representatives of the specified outside bodies to ascertain their
views on the draft of the proposed accounting standard.
5. Finalisation of the exposure draft of the proposed accounting standard and its
issuance inviting public comments.
6. Consideration of comments received and finalization of the standard.
7. Consideration of the final draft by the ICAI council and necessary modifications
in consultation with ASB are done.
8. Issuance and notification of AS. For corporates, AS are issued by MCA in
consultation with NFRA.
 Accounting Standard Interpretations (ASIs) were issued earlier to address questions that
arise in course of application of standard. However, later these were merged as
explanation to the relevant AS.

3. Status of AS in India:

 Currently, 27 AS are notified (AS 6 and 8 have been withdrawn).

 AS have evolved with global trends to align with IFRS where possible.
 Ind AS (converged IFRS) has also been issued which is mandatory for certain class of
companies.
 ICAI not being a legislative body can enforce compliance with its standards only by its
members.
 AS become mandatory only when statute governing the enterprise concerned requires
compliance with the Ass (eg.: Companies Act requires compliance with AS)

4. Need for Global Convergence:

 Raising funds from international markets: When an enterprise decides to raise capital
from the foreign markets, it should be in a position to understand the differences between
the rules governing financial reporting in the foreign country as compared to its own
country of origin. Hence, translation and re-instatement is of utmost importance.
Also, AS and principles needs to be robust to increase confidence in FS.
 Comparability of Financial Statements: International analysts and investors would like
to compare financial statements based on similar ASs, and this has led to the growing
need for an internationally accepted set of ASs for cross-border filings. Such
harmonization will also increase confidence of investors.
 Uniformity, Comparability Transparency etc.: Having a multiplicity of types of ASs
around the world is against the public interest. It creates confusion, encourages error and
may facilitate fraud. Hence, single set of global standards facilitate cross border flow of
money, global listing in different stock markets and comparability of financial
statements.
 Global investment: Convergence with global standards improves the ability of investors
to compare investments on a global basis and, thus, lower their risk of errors of judgment.
It helps in eliminating some costly requirements like reinstatement of financial
 statements. It also helps in creating a new standard of accountability and greater
transparency and reduces operational challenges

5. International Accounting Standards Board (IASB):

 Formed in 1973. Comprises the accounting bodies of over 75 countries.

 Primary objective was to formulate and publish IAS to be followed in preparation and
presentation of FS.
 IAS were issued between 1973 and 2001.
 With effect from 2001, IASC was restructured as IASB
 IFRS are principles-based standards issued by IASB.
 Adopted globally by many nations for public company reporting.
 Includes IAS (older standards), IFRS, and their interpretations.

6. Convergence vs. Adoption of IFRS in India:

 Convergence: Adjusting IFRS to suit Indian conditions (Ind AS).

 Adoption: Direct implementation of IFRS (not followed in India).
 Ind AS are nearly aligned with IFRS but include carve-outs (deviations for local context)
and carve-ins (additional guidance).
 Differences between Ind AS and IFRS:
o Terminology differences to make it consistent with words used in Indian law.
(e.g. statement of P&L in place of statement of comprehensive income)
o Removal of options given in IFRS – this is not considered as a carve-out.
o Certain differences in accounting treatment between IFRS and Ind AS owing to
economic conditions prevailing in India (this will result in carve-out)

7. Ind AS Roadmap:

a) Implementation for Companies (Excluding Banks, NBFCs, and Insurance Companies):

Phase I:
Effective from April 1, 2015 (Voluntary Basis):

 Any company (excluding banks, NBFCs, and insurance companies) along with its
holding, subsidiary, joint venture (JV), or associate companies could adopt Ind AS
voluntarily.

Mandatory from April 1, 2016:

 Applicability to:
o Companies listed or planning to list on stock exchanges in India or overseas, with
a net worth of ₹500 crores or more.
o Unlisted companies with a net worth of ₹500 crores or more.
o Parent, subsidiary, JV, or associate companies of the above entities.
Phase II:
Mandatory from April 1, 2017:

 Applicability to:
o All listed companies or those planning to list on stock exchanges (excluding SME
exchanges) in India or overseas, not covered in Phase I.
o Unlisted companies with a net worth between ₹250 crores and ₹500 crores.
o Parent, subsidiary, JV, or associate companies of the above entities.

Special Notes:

 Companies listed on SME exchanges are exempted unless they opt voluntarily.
 Once Ind AS becomes applicable, entities cannot revert to the earlier Accounting
Standards.

b) Implementation for Non-Banking Financial Companies (NBFCs):

Phase I:
Mandatory from April 1, 2018:
 Applicability to:
o NBFCs (listed or unlisted) with a net worth of ₹500 crores or more.
o Holding, subsidiary, JV, or associate companies of these NBFCs.

Phase II:
Mandatory from April 1, 2019:
 Applicability to:
o NBFCs listed or planning to list, with a net worth below ₹500 crores.
o Unlisted NBFCs with a net worth between ₹250 crores and ₹500 crores.
o Holding, subsidiary, JV, or associate companies of the above entities.

Exemptions:
 NBFCs with a net worth below ₹250 crores continue using the existing ASs.
 Voluntary adoption of Ind AS is not permitted unless mandated.

c) Implementation for Scheduled Commercial Banks (Excluding RRBs):

 Scheduled Commercial Banks were initially required to adopt Ind AS from April 1, 2018.
However:
o The Reserve Bank of India (RBI) deferred implementation by one year to April
1, 2019.
o Subsequently, the RBI postponed it indefinitely via a March 2019 notification.
 Exclusions: Regional Rural Banks (RRBs) and Urban Cooperative Banks (UCBs) are not
required to adopt Ind AS.

d) Implementation for Insurers/Insurance Companies:

 Initially planned for April 1, 2018, the Insurance Regulatory and Development
Authority of India (IRDAI) deferred implementation indefinitely.
 FRAMEWORK FOR PREPARATION AND
PRESENTATION OF FINANCIAL STATEMENTS
1. Purpose of the Framework

The framework provides:

 A basis for preparing general-purpose financial statements.

 Guidance for topics not yet covered by accounting standards.
 A foundation for developing and reviewing accounting standards.
 ASB in promoting harmonization of AS and reducing the number of alternative
accounting treatments.
 Auditors in forming an opinion as to whether the FS are as per AS.
 Users in interpretation of FS.

2. Status of the framework:

 The framework is applicable only for “General purpose FS” and not for “specific purpose
FS”.
 In case of conflict between an Accounting Standard and the framework, the requirements
of the Accounting Standard will prevail over those of the framework.

3. Components of Financial Statements

1. Balance Sheet: Reflects the financial position (assets, liabilities, and equity). Provides
information about liquidity and solvency position as well.
2. Profit & Loss Statement: Shows operational performance and profitability.
3. Cash Flow Statement: Tracks cash inflows and outflows (sources and applications of
cash).
4. Notes/Explanatory Materials: present supplementary information explaining different
items of financial statements.

4. Objectives and Users

Financial statements aim to provide useful information for decision-making to:

 Investors:

 Concerned with the risk and return of their investments.

 Use financial statements to assess an enterprise’s profitability and stability.
 Evaluate the company's ability to pay dividends and sustain growth.

 Employees:

 Interested in the stability and profitability of their employer.

  Seek information on the company's ability to provide fair remuneration, retirement
benefits, and job security.

 Lenders:

 Focus on the company’s ability to repay loans and associated interest on time.
 Analyze solvency and cash flow data to ensure timely repayments.

 Suppliers and Trade Creditors:

 Require information on the company’s ability to meet its payment obligations.

 Short-term creditors are particularly interested in liquidity and operational efficiency.

 Customers:

 Depend on the company's stability, especially for businesses with long-term service or
product commitments.
 Assess the enterprise’s ability to continue delivering goods and services reliably.

 Governments and Their Agencies:

 Use financial statements to evaluate the enterprise’s adherence to regulations, tax

liabilities, and contributions to the economy.
 Require data for national statistics, policymaking, and resource allocation.

 Public:

 Interested in the enterprise's contribution to the local economy, such as employment,

sustainability practices, and community development.
 Financial statements may assist the public by providing information about the trends and
recent developments in the prosperity of the enterprise and the range of its activities.

5. Fundamental Accounting Assumptions: No separate disclosure is necessary to state that

these assumptions have been followed.

1. Going Concern: Business will operate in the foreseeable future and neither there is an
intention, nor there is a need to materially curtail the scale of operations.
If any financial statement is prepared on a different basis, e.g. when assets of an
enterprise are stated at net realisable values in its financial statements, the basis used
should be disclosed.
2. Accrual Basis: Transactions are recognized as they occur, not on cash receipt/payment.
3. Consistency: Same accounting policies across periods for comparability.

6. Qualitative Characteristics of Financial Statements

 o Understandability: Financial statements should present information clearly and
concisely, making it easy for users with reasonable knowledge of business and
accounting to understand.
o Relevance:
 Financial information is relevant if it influences users' economic decisions
by helping them evaluate past, present, or future events or confirm/correct
past evaluations.
 The relevance of a piece of information should be judged by its
materiality. A piece of information is said to be material if its
misstatement (i.e., omission or erroneous statement) can influence
economic decisions
o Reliability: To be useful, the information must be reliable; that is to say, they
must be free from material error and bias.
 Transactions and events reported are faithfully represented.
 Transactions and events are reported on the principle of 'substance over
form (discussed later in AS-1)'.
 The reporting of transactions and events are neutral, i.e. free from bias.
 Prudence is exercised in reporting uncertain outcome of transactions or
events.
 The information in financial statements must be complete.
o Comparability:
 Comparison of financial statements is one of the most frequently used and
most effective tools of financial analysis.
 FS should permit intra-firm and inter-firm comparison.
 However, the need for comparability should not be confused with mere
uniformity and should not be allowed to become an impediment to the
introduction of improved accounting standards.
 When a change is necessary, accounting policies should be altered to
ensure that it provides relevant and reliable information.
 Constraints on relevant and reliable information:
o Timeliness:
 If there is undue delay in the reporting of information it may lose its
relevance.
 Management may need to balance the relative merits of timely reporting
and the provision of reliable information.
 In achieving a balance between relevance and reliability, the overriding
consideration is how best to satisfy the information needs of users.
o Balance between Benefit and Cost:
 The balance between benefit and cost is a pervasive constraint rather than
a qualitative characteristic.
 The benefits derived from information should not exceed the cost of
providing it. The evaluation of benefits and costs is, however,
substantially a judgmental process.
7. Elements of Financial Statements

 Assets:

o Definition: An asset is a resource controlled by the enterprise as a result of past

events from which future economic benefits are expected to flow to the enterprise.
o The resource regarded as an asset, need not have a physical substance.
o A resource not owned but controlled by an entity is also an asset (ownership is not
necessary). E.g. Finance lease.
o A resource cannot be recognised as an asset if the control is not sufficient. E.g.
Employees working in an entity.
o If the economic benefits from a resource is expected to expire within the current
accounting period, it is not an asset.
o Assets value should be reliably measured.

 Liabilities:
o Definition: A liability is a present obligation of the enterprise arising from past
events, the settlement of which is expected to result in an outflow of a resource
embodying economic benefits.
o A liability is recognised only when outflow of economic resources in settlement
of a present obligation can be anticipated and the value of outflow can be reliably
measured.
 Equity:
o Residual interest after liabilities are deducted from assets.
o Equity represents owners’ claim consisting of items like capital and reserves,
which are clearly distinct from liabilities, i.e. claims of parties other than owners.
o The value of equity may change either through contribution from / distribution to
equity participants or due to income earned /expenses incurred.
 Income/Gains:
o Definition: Income is increase in economic benefits during the accounting period
in the form of inflows or enhancement of assets or decreases in liabilities that
result in increase in equity other than those relating to contributions from equity
participants.
o Income includes both revenue (income arising in the ordinary course of business)
and gains (incidental incomes and need not be in the ordinary course of business)
 Expenses/Losses:
o Definition: An expense is decrease in economic benefits during the accounting
period in the form of outflows or depletions of assets or incurrence of liabilities
that result in decrease in equity other than those relating to distributions to equity
participants.
 o Where economic benefits are expected to arise over several accounting periods,
expenses are recognised in the profit and loss statement on the basis of systematic
and rational allocation procedures. The obvious example is that of depreciation.

8. Measurement of Elements

1. Historical Cost: Acquisition price. Amount of cash or cash equivalent paid or the fair
value of the asset at the time of acquisition.
2. Current Cost: Cost to acquire / settle the asset/liability today.
3. Realisable Value: Cash expected from sale of an asset /settlement of a liability.
4. Present Value: Assets are carried at present value of future cash inflows and liabilities
are carried at present value of cash outflows.

9. Capital Maintenance

Capital maintenance ensures that the business retains enough funds to continue operations. In
order to check maintenance of capital, i.e. whether or not retained profit is negative, we can use
any of following three bases:

 Financial capital maintenance at historical cost:

o Under this convention, opening and closing assets are stated at respective
historical costs to ascertain opening and closing equity.
o This means the business will have enough funds to replace its assets at historical
costs.
o This is quite right as long as prices do not rise.
 Financial capital maintenance at current cost:
o Under this convention, opening and closing equity at historical costs are restated
at closing prices using average price indices.
o A positive retained profit by this method means the business has enough funds to
replace its assets at average closing price.
 Physical Capital Maintenance at current costs:
o Under this convention, the historical costs of opening and closing assets are
restated at closing prices using specific price indices applicable to each asset.
o A positive retained profit by this method ensures retention of funds for
replacement of each asset at respective closing prices.
 APPLICABILITY OF ACCOUNTING STANDARDS
1. Status of Accounting Standards

 Issued by the Accounting Standards Board (ASB) of ICAI, approved by the Ministry of
Corporate Affairs (MCA).
 Mandatory compliance for enterprises as per their governing statutes, like the Companies
Act, 2013.
 Applicability determined based on:
1. The enterprise (corporate or non-corporate).
2. The financial statement.
3. The specific financial item.

2. Applicability to Enterprises

 Applicable to: Enterprises engaged in commercial, industrial, or business activities

(profit or non-profit).
 Not applicable to: Entities entirely involved in non-business activities (e.g., charities
with no commercial transactions). These entities should not undertake any commercial
activity.

3. Implication of Mandatory Status

 Non-compliance:
o Even for those enterprises where the governing statute doesn’t mandate
compliance with AS, members should ensure that the FS are compliant with AS.
o In case of any deviations, it should be disclosed in auditor’s report.
 Companies Act, 2013 Requirements:
o Section 129(1): Financial statements must align with AS.
o Section 143(3)(e): Auditors to report compliance with AS.
o In case of any deviation from AS, companies should disclose the same in their FS
along with the reasons.
o It cannot be said that FS is not presenting a true and fair view merely by the
reason that they do not disclose any information that is not required to be
disclosed by the law.
 AS is applicable only to material items.
 An item is considered material, if its omission or misstatement is likely to affect
economic decision of the user. (judged on a case to case basis)

4. Income Computation and Disclosure Standards (ICDS)

 10 ICDS notified under the Income Tax Act, 1961, for specific income heads like
business profits or other sources.
 These standards are to be applied by a particular class of assesses (to be followed by all
assesses other than an individual or a Hindu undivided family who is not required to get
 his accounts of the previous year audited in accordance with the provisions of Section
44AB of the Income Tax Act, 1961) following mercantile system of accounting.

Applicability of AS by Entity Type

Corporate Entities

1. Small and Medium-Sized Companies (SMCs):

o Turnover ≤ ₹250 crores.
o Borrowings ≤ ₹50 crores.
o Not listed or in the process of listing, not a bank/insurance company.
o Not a holding or subsidiary of a non SMC.
o A SMC may opt for availing only certain exemptions. However, it should not
resulting in misleading information.
o If an SMC desires to disclose the information not required to be disclosed
pursuant to the exemptions or relaxations available to the SMCs, it should
disclose that information in compliance with the relevant accounting standard.
o Relaxations:
 AS 17 (Segment Reporting): Not applicable.
 AS 15 (Employee Benefits):
1. No need to create a provision for non-vesting short term
accumulating compensated absences.
2. No need to discount DCP and termination benefits which are due
beyond 12 months.
3. Presentation and disclosure requirements applicable for defined
benefit plans and other long-term employee benefits
 AS 19 and 29 – disclosure related requirements are not applicable
 AS 20 – no need to disclosed diluted EPS.
 AS 28 (Impairment of Assets): Alternative estimates for "value in use"
permitted.
 AS 25 – generally required only if a company is required to prepare
interim financial report. Interim financial report is required only for
certain non SMCs (listed companies as mandated by SEBI).

Previous year Current year Impact

SMC Non SMC Exemptions will not be
available from current year.
No need to restate PY figures.
Non SMC SMC Exemptions are not
applicable unless it remains
as a SMC for 2 consecutive
years.

2. Non-SMCs: Other than SMCs

o Required to comply fully with all AS.
Non-Corporate Entities

Classified into four levels based on turnover and borrowings:

1. Level I (Large Entities): Full compliance with all AS.

o Entities with securities listed or in the process of listing.
o Banks, financial institutions, and insurance businesses.
o Entities with turnover exceeding ₹250 crores (excluding other income) in the
preceding year.
o Entities with borrowings above ₹50 crores during the preceding year.
o Holding or subsidiary entities of any of the above.
2. Levels II (medium entities):
o Entities with turnover between ₹50 crores and ₹250 crores (excluding other
income) in the preceding year.
o Entities with borrowings between ₹10 crores and ₹50 crores during the preceding
year.
o Holding or subsidiary entities of any of the above.
3. Level III (small entities):
o Entities with turnover between ₹10 crores and ₹50 crores (excluding other
income) in the preceding year.
o Entities with borrowings between ₹2 crores and ₹10 crores during the preceding
year.
o Holding or subsidiary entities of any of the above.
4. Level IV (micro entities):
o Entities not classified as Level I, II, or III.
o Turnover not exceeding ₹10 crores and borrowings not exceeding ₹2 crores
during the preceding year.
5. Compliance requirements:
o Level I Entities: Must comply fully with all applicable Accounting Standards.
o Others (refer annexure)
6. Additional guidelines:
o Entities availing exemptions or relaxations must disclose their classification (e.g.,
MSME) in the financial statements.
o If an entity moves between levels, it must comply with the requirements of the
higher level immediately, while transitions to lower levels require consistent
classification for two consecutive years to avail of relaxations.
o If an entity covered in Level II or Level III or Level IV opts not to avail of the
exemptions or relaxations available to that Level of entities in respect of any but
not all of the Accounting Standards, it shall disclose the Standard(s) in respect of
which it has availed the exemption or relaxation.
o If any exemption is not availed, then they have to comply with the relevant AS.
Applicability of AS to Level II, III and IV entities
Notes:

 AS 10, 11, 13, 19, 26 and 29 – certain additional disclosures are not applicable
 AS 15:
o Level II and III with average employees of 50 or more: same exemptions as given
to SMC.
o Level II and III with average employees of less than 50: same exemptions as
given to SMC. Additionally, they are also not required to follow Projected Unit
Credit Method.
 AS 22: For level IV, deferred tax recognition is not required
 AS 28:
o Level II and III: Alternative estimates for "value in use" permitted and certain
disclosure requirements are not required.
o Level IV: Entire standard is not applicable
 AS 14, 21, 23 and 27: If the entities enter into transactions that are covered by these
standards, then these AS should be followed.
 AS 25: Applicable only if a non-company elects to prepare an interim financial report.
 AS 1 – Disclosure of Accounting Policies
 Fundamental Accounting Assumptions: The fundamental assumptions include:
o Going Concern Assumption: The entity will continue its operations in the
foreseeable future.
o Consistency: Consistent accounting policies should be applied from one
period to another which improves comparability. An accounting policy can be
changed only in the following circumstances:
 If such change is required by statute or an accounting standard.
 If such change facilitates more appropriate presentation of FS.
o Accrual Basis of Accounting: Transactions are recognized when they
occur, not when cash is received or paid. However, in case of incomes
accounting standards provide that no revenue should be recognised unless
the amount of consideration and its actual realisation is certain.
 If these assumptions are not followed, disclosure is required.
 Accounting policies:
o Accounting policies are the specific principles and methods adopted by an
enterprise for preparing its financial statements.
o Different enterprises may adopt different accounting policies, which can lead
to challenges in comparability of financial statements.
 Selection of Accounting Policies: When selecting accounting policies, the following
considerations should be taken into account:
o Prudence: Avoid overstating profits or assets. Profits are not anticipated but
losses are provided for as a matter of conservatism.
o Substance Over Form: Transactions and events should be accounted based
on their economic reality rather than their legal form.
o Materiality: Disclose items that could influence the decisions of users of the
financial statements (material items).
 Disclosure of Changes in Accounting Policies:
o Any change in accounting policies that materially affects the financial
statements must be disclosed along with quantification of the impact of such
change.
o The impact of such changes should also be indicated. If the effect of the
change is not ascertainable, this should be disclosed as well.
 AS 1 requires entities to disclose significant accounting policies adopted in the
preparation of financial statements.
 AS 2 – Valuation of inventories
 Definition of Inventories:
 Inventory includes assets held for sale, in production for sale, or for
consumption in production (raw material, loose tools, consumables
maintenance supplies etc.).
 Excludes items like spare parts, standby equipment and servicing equipment
which satisfy the definition of PPE under AS 10.
 Scope of AS 2 excludes:
 WIP under construction contracts
 WIP arising in service business
 Shares, debentures and other financial instruments held as stock-in-trade.
(there is no standard governing this currently. These are valued at lower of
cost and fair value)
 Producers’ inventories of livestock, agricultural and forest products, mineral
oils, ores and gases to the extent they are measured at NRV as per
established practices.
 Measurement of Inventories:
 Valued at the lower of cost and net realizable value (NRV) – this valuation
principle is applicable only for finished goods and work in progress.
 NRV = Estimated selling price - Costs to complete and sell.
 Estimate of selling price should take into account events occurring after the
BS date to the extent such events relate to conditions that existed as at the
BS date (adjusting events).
 Cost of inventories:
 Costs of Purchase: Purchase price, duties, direct acquisition costs (minus
discounts).
 Costs of Conversion: Direct labor and production overheads (fixed and
variable). Fixed overheads should be absorbed based on normal capacity,
however if the actual production is more than normal capacity then fixed
overheads should be absorbed based on actual production.
Variable overheads should always be absorbed based on actual production.
 Other Costs: Necessary costs to bring inventory to its present location and
condition. Examples are cost of design as per customer specifications,
borrowing costs in case inventory is a qualifying asset and amortization on
intangibles used in production of the inventory.
 In case of Joint products and material by products, cost incurred upto the
split-off point should be split in a reasonable and consistent basis either using
sale value at split-off point or sale value after further processing.
 In case of immaterial by-products, the cost of main product is calculated by
subtracting the NRV of by products from the total cost incurred.
 Exclusions from Inventory Costs:
 Do not include abnormal waste, storage costs (unless necessary for further
production), administrative overheads (that don’t contribute to bringing the
inventories to their present location and condition), and selling/distribution
costs.
 However, cost of normal loss is included in the value of inventories.
 Cost Formulas:
 Specific identification method: Under this method, calculation of inventory
cost requires identification of units to have come from a particular lot. Once
the lot is identified, cost of inventory is calculated by multiplying the units with
cost rate.
  First In First Out (FIFO): Under this method, units purchased first are
considered to have been sold first. Closing inventory is from the lots that have
been purchased recently.
 Weighted average cost method: Under this method, value is inventory is
calculating by multiplying the units with weighted average cost per unit.

Weighted average cost per unit = Total cost incurred / Total units

 As per AS 2, Last In First Out and simple average price method are not
recommended method for calculating of inventory value.

 Standard cost method: Inventory value is calculated using standard cost

instead of actual cost. Such standards are set using normal levels of material
consumption, labour and capacity utilization. These standards should be
regularly reviewed and revised if necessary.

 Retail inventory method (adjusted selling price method): Under this

method, cost of inventory is calculated by deducting gross margin from the
sale value of inventory. This method is generally used by retail businesses.

 Cost and NRV comparison should be made on an item-by-item basis and not at
group level.

 Valuation principle for raw materials and other materials held for use are written
down to replacement cost if the finished product's market value is less than its cost.
 AS 4 – Notes
Section 1: Events occurring after the BS date
a) Events occurring after the BS date are those significant events (both favourable and
unfavourable) that occur between the BS date and the date on which the FS are approved
by the BoD (in case of company) and by the corresponding approving authority (in case of any
other entity).
b) There are two types of events:
a. Adjusting events: those events that provide further evidence of conditions that exist as
at the BS date.
b. Non-adjusting events: those events which are indicative of conditions that arose
subsequent to the BS date.
c) FS should be adjusted for adjusting events. However, no adjustment should be made for non-
adjusting events.
d) Non-adjusting events are not disclosed in the FS unless they are of such significance that
they require a disclosure in the report of the approving authority (BoD report).
e) Dividends declared after the BS date but before approval of FS are not recognized as a
liability in the BS because there is no obligation as at the BS date unless the statute requires
otherwise. Such dividends are disclosed in the notes.
f) Certain events occurring after the BS date may indicate that the entity ceases to be a going
concern.
A deterioration in the operating results and financial position or unusual changes affecting the
substratum of the enterprise may indicate a need to evaluate whether it is appropriate to use the
going concern assumption in the preparation of FS.
In case the going concern assumption is not valid, then the FS should be prepared on
liquidation basis.
g) With respect to non-adjusting events that are disclosed in the board of the approving authority,
the following needs to be disclosed:
a. Nature of the events.
b. An estimate of their financial effect or a statement that such an estimate cannot be
made.

Section 2: Contingencies
a) AS 4 deals with only those contingencies that are not covered by any other standard. For
example: impairment of receivables (eg.: provision for doubtful debts).
b) Contingency is a condition or a situation, the ultimate outcome of which gain or loss will be
known or determined only on occurrence or non-occurrence of one or more future uncertain
events.
c) If it is likely that a contingency will result in a loss, then it needs to be provided in the FS.
d) Contingent gains are recognized in the FS only when it is virtually certain that the gain
can be realized.
e) The amount at which a contingency is stated in the financial statements is based on the
information which is available at the date on which the financial statements are approved.
 AS 5 – Notes
Ordinary activities:
These are activities undertaken in the normal course of business including other related activities
undertaken in furtherance of or incidental to the business.
Eg: Sales and purchase of goods, sales and purchase of fixed assets, payment of expenses,
payment of tax etc.

Extraordinary items:
These are income or expenses that are clearly distinct from ordinary activities and are not
expected to recur frequently.
Eg: Loss due to earthquake/fire/any other natural disaster, insurance claims etc.

Exceptional items:
These are incomes or expenses from ordinary activities but are of such nature, size or
incidence that their disclosure is relevant to explain the performance of the enterprise.
Eg:
a) Write down of inventory to NRV
b) Restructuring (covered in AS 29)
c) Disposal of fixed assets or any long term investments
d) Retrospective application of a changes in law
e) Legal settlements etc.
Prior period items:
These are incomes or expenses arising in the current year as a result of errors or omissions in
the preparation of the financial statements of one or more prior periods.
Note: AS 5 requires entities to disclose extraordinary items, exceptional items and prior period
items separately such that the users are able to understand their impact on the current year profit
or loss.
Change in accounting estimates:
Any change in accounting estimate needs to be given a prospective effect (impact should be
accounted only from the year of change)
Eg: Change in depreciation method, useful life, residual value etc.
Entities are required to disclose the nature and the amount of a change in an accounting
estimate which has a material effect in current or subsequent periods.
Change in accounting policies:
Accounting policies are principles and methods of applying those principles adopted by an
enterprise in the preparation and presentation of financial statements.
An accounting policy can be changed only when (i) such change is required by AS; (ii) such
change is required by law or (iii) such changes would result in a more appropriate presentation of
the FS of the enterprise.
Any change in accounting policy should be given retrospective effect. However, if there are
specific transition procedures outlined in law of new AS, those should be followed.
However, adoption of an accounting policy for transactions which did not occur previously
doesn’t amount to change in accounting policy. (Refer illustration 4 in ISM)
Entities are required to disclose the nature and the amount of a change in an accounting policy
which has a material effect.
If an entity is not able to distinguish between change in accounting policy and change in
accounting estimate, then it should be treated as change in accounting estimate.
 AS 7 – Notes
Definition of a construction contract
Construction contract is a contract that is specifically negotiated for construction of an asset or
combination that are inter-related or inter-dependent in terms of their design, functionality or
ultimate use.
A construction contract also includes:
a) Service contracts relating to construction of an asset (eg: Services of a project
manager, architect etc.)
b) Contract for destruction and restoration of assets and the restoration of environment
following demolition of assets.
Types of construction contacts:
a) Fixed price contract: Contract revenue is agreed and fixed subject to cost escalation.
b) Cost plus contract: Contractor is reimbursed for allowable expenses plus a % of the
costs as profit.
Formula for calculating contract revenue (refer illustration 2 in page 8.8):
Agreed price (fixed / cost plus)
Add: Cost escalation
Add: Claims (reimbursements for cost not included in the contract)
Add: Incentive payments usually for early completion
Less: Penalties for delayed completion
Add/Less: Any variations in contract revenue due to change in scope etc.

Formula for calculating contract cost

Contract cost = Costs that directly relate to a contract + costs that can be allocated to a
contract (insurance, borrowing costs etc.) + other costs that are specifically as per the
contract
Note: Costs that directly relate to a contract can be reduced by incidental income like sale of
surplus material and profit on disposal of PPE used for the contract.
Exclusions from contract cost
a) General and administrative overheads
b) Selling costs
c) R&D costs which are not reimbursable
d) Depreciation of idle PPE that is not used in any contract
Accounting for construction contracts (refer along with illustrations discussed in class for
better understanding)
a) Construction contracts are accounted using the percentage completion method.
b) Percentage of completion = Costs incurred till date / Total expected cost of the
contract
c) Contract revenue for the year = % of completion * total contract revenue – revenue
recognized till previous year
d) In case the construction contract is a loss-making contract, then a provision needs to be
created for full loss. We should also create a provision for future expected non-
reimbursable costs (refer example 4 in page 8.17)
e) If the outcome of the contract can’t be estimated reliably (eg. Not able to contract costs or
contract revenue etc.), then recognize revenue equal to costs incurred during the year
(refer illustration 4 in page 8.16)
f) Any costs relating to future activity should not be included in the contract cost of the
current year. Such costs relating to future activity are recognized as assets in the balance
sheet (similar to prepaid expenses) (refer practical question 9 in page 8.28)
g) Any changes in cost or revenue estimates should be given prospective impact.

Methods to calculate stage of completion.

a) Based on proportion of cost incurred to total cost
b) Based on certification from surveyor (followed in government projects)
c) Based on physical proportion of work that has been completed

Disclosure requirement (refer illustration 6 in page 8.22)

Note: If the above amount is positive – then it is gross amount due from customers (asset),
otherwise it is gross amount due to customers (liability)

Conditions to be satisfied for combining two or more contracts

a) Such contracts are negotiated as a single package
b) Such contracts are closely inter-related or inter-dependent
 c) Such contracts are performed simultaneously
Conditions to be satisfied for separation of a contract for construction of number of assets
a) When separate proposal has been submitted for each asset
b) Each asset has been subject to a separate negotiation
c) Costs and revenues for each asset can be separately identified

Conditions to be satisfied for treating construction of an additional asset as a separate

contract.
a) The asset differs significantly in terms of design, technology or function from the original
asset;
b) The price of the additional asset is negotiated without regard to the original asset.
 AS 9 – Notes
Definition of revenue
Revenue is the gross inflow of cash, receivables or any other consideration for sale of goods,
rendering of services or use of enterprise resources by others yielding interest, royalty and
dividends.
Items not included in revenue definition are as follows:
a) Profit on sale of fixed assets
b) Gains from changes in foreign exchange rates
c) Gains arising due to a reduction in liability
Timing of revenue recognition in case of sale of goods: Revenue from sale of goods should be
recognized once performance is completed and it is not unreasonable to expect ultimate
collection. Performance is considered to be completed upon satisfaction of the following
conditions:
a) Property (ownership) in goods has been transferred to the buyer.
b) All significant risk and rewards of ownership have been transferred to the buyer.
c) There is no uncertainty regarding the amount of consideration.
Timing of revenue recognition in case of sale of services: Revenue from services is recognized
once the services are performed. There are two methods to recognize revenue from services:
a) Proportionate completion method: This method is used when a service consists of
execution of more than one act (marriage example discussed in class).
b) Completed service method: This method is used when a service consists of execution of
a single act (repair example discussed in class)
Timing of revenue recognition in case of income from interest, royalty and dividend:
a) Interest – Time proportionate basis (from the date of lending money)
b) Royalty – Accrual basis based on the agreement between the parties
c) Dividend – To be recognized when the right to receive payment is established (after the
dividend is approved in AGM and not when BoD have proposed such dividend)

Uncertainty in collection (applicable for all the cases above) (refer

illustration 2 and 3 in ISM)

If there is uncertainty at the If the uncertainty arises after

time of recording the revenue revenue has been recognized, then
itself – then postpone the you need not reverse the revenue
revenue recognition till the already recognized. Instead write if
time, there is certainty in off as bad debts or create a
ultimate collection. provision for doubtful debts.
Principal vs agent (refer illustration 1 and example 4 in ISM):
a) If the party earning revenue is a principal (responsible for providing the goods or services
and is generally the owner of the goods being provided), then revenue is recognized on
gross basis.
b) However, if the party is an agent (only responsible for arranging sale of goods or
rendering of services and is generally not owner of the goods being delivered) then the
revenue is recognized on net basis.

For notes on revenue recognition in special cases – refer appendix in AS 9

material.

Scope of AS 9
AS 9 is not applicable to:
a) Construction contracts (AS 7)
b) Leases (AS 19)
c) Government grants (AS 12)
d) Revenue of insurance companies (IRDA regulations will apply)
 AS 10 – Property, Plant and Equipment (PPE)
 Scope: This standard is applied in accounting for PPE except when another
standard permits or requires a different accounting treatment (eg. AS 19 – leases).

 Applicability: AS 10 is not applicable to

o biological assets (other than bearer plants)
o Wasting Assets including Mineral rights, Expenditure on the exploration for
and extraction of minerals, oil, natural gas and similar non-regenerative
resources.

Notes: AS 10 is applicable to PPE used to develop or maintain the assets

above and investment property should be accounted as per cost model under
AS 10.
 Definition of PPE:

Note: Admin purposes includes all business purposes (selling and distribution,
finance and accounting and other functions.
 Certain assets like fire extinguisher etc. may not directly increase the future
economic benefits but may be necessary to obtain benefits from other assets. Such
assets are also recognized as PPE.

 Other definitions:
o Biological asset:

o Bearer plant: Is a plant that satisfies all the below conditions:

 o Agricultural activity:

 Recognition criteria of PPE: An asset is recognized as PPE if the following

conditions are satisfied:
o Probable that future economic benefits will flow to the enterprise
o Cost can be reliably measured
 If spare parts, standby equipment and servicing equipment meet the definition of
PPE, then account it as per AS 10. Otherwise these items will be accounted as per
AS 2.
 Initial recognition of PPE: A PPE should be initially recognized at cost. Cost
comprises of:
o Purchase price (it includes import duties and other non-refundable taxes)
after deduction of trade discount and rebates.
o Other directly attributable costs incurred in bringing the asset to the ‘location
and condition’ necessary for it to be capable of operating in the manner
intended by management. Examples – cost of employee benefits of
employees involved in acquisition or construction of PPE, cost of site
preparation, delivery and handling costs, installation costs, trial run costs (net
of trial run income) and professional fees.
o Cost of decommissioning, restoration and other similar liabilities incurred by
an enterprise as consequence of acquiring or using the asset. However, if
such costs are arising as a consequence of producing the inventories, then it
should be accounted as per AS 2.
o Cost exclusions:
 Initial operating losses
 Relocation costs
 Cost incurred after the asset is capable of operating in the manner
intended by the Management.
 Inauguration costs
 Cost of advertising and promotional activities
 Cost of conducting business in a new location or with a new customer.
 Abnormal losses
 Administrative and other general overhead costs.
o Treatment of income during development of PPE:
 Cost of self-constructed asset:
o Any internal profits in the enterprise to be eliminated.
o Exclude abnormal losses of material, labour and other resources.
o Borrowing costs are included in cost if it meets the definition of a qualifying
asset.
o Bearer plants are accounted for in the same way as self-constructed assets.

 Accounting for exchange of assets:

 Determination of cost in special cases:

o Deferred payment terms: PPE is recorded at cash price equivalent and
interest is accounted over the credit period.
o PPE purchased for consolidated price: Consideration is apportioned to
various assets on the basis of their fair values as at the date of acquisition of
such assets.
o PPE acquired under finance lease: The cost is measured as per AS 19.
o PPE acquired under government grant: Accounted as per AS 12.
 Treatment of subsequent expenditure:
 Note: If the WDV of old part is not readily ascertainable, then the same can be
calculated with reference to the cost of new part after deducting depreciation.

 Subsequent recognition:
o An enterprise can account either using cost or revaluation model as an
accounting policy choice.
o Such accounting policy should be applied to an entire class of PPE (group of
assets having similar nature and use).
o Cost model: The asset is carried at Cost – accumulated depreciation –
accumulated impairment.
o Revaluation model: The asset is carried at fair value – subsequent
accumulated depreciation – subsequent accumulated impairment.
o If an item of PPE is revalued, the entire class of PPE to which that asset
belongs should be revalued.
o Frequency of revaluations:

o Fair value of PPE can be estimated from market based evidences. However,
if the same is not available then the fair value is estimated using discounted
cash flow method or depreciated replacement cost method.
o Accounting for revaluation is done in one of the following ways:
 Proportionately adjust gross carrying amount and depreciation such
that difference between revised gross carrying amount and
accumulated depreciation is equal to fair value.
 Accumulated depreciation is eliminated against gross carrying amount
and the resultant net carrying amount is increased / decreased to fair
value.
 Treatment of revaluation of surplus or deficit:
  Treatment of surplus in revaluation reserve:
 Whole surplus is transferred to revenue reserves (not P&L a/c)
once the asset is retired or disposed.
 Some of the surplus is transferred to revenue reserves (not
P&L a/c) during the remaining useful life. Amount transferred is
equal to difference between depreciation based on revalued
amount and depreciation based on original cost.
 Depreciation:
o Depreciation on PPE should be charged to P&L unless it is included in the
carrying amount of another asset.
o Depreciable amount = Cost or revalued amount – Residual value. Such
depreciable amount is allocated on a systematic basis over the useful life.
o Residual value and useful life needs to be reviewed regularly and any change
needs to be treated as a change in accounting estimate (prospective effect)
as per AS 5.
o Depreciation on an asset should be charged once the asset is available for
use (when it is capable of operating in the manner intended by the
Management).
o Cessation of depreciation: Depreciation ceases:
 When residual value exceeds the assets’ carrying amount.
 The date that the asset is retired from active use and held for disposal
or the date that the asset is derecognized whichever is earlier.

Note: Depreciation doesn’t cease when the asset is retired from active
use but not held for disposal. However, depreciation may be zero
under usage method.
o Depreciation method used should reflect the pattern in which economic
benefits from the asset are expected to be consumed. Any change in
depreciation method should be accounted as a change in accounting
estimate as per AS 5 (prospective method).
o It is not appropriate to use depreciation method based on revenue as it
doesn’t reflect the pattern of consumption of economic benefits.

 Accounting for land and building:

o Land and building are separable assets and have to be accounted separately.
o Land is not depreciated except in case of quarries and sites used for landfill.
o However, leasehold land is depreciated.
o If the land cost includes costs of site dismantlement, removal and restoration,
then such portion is depreciation over the period of benefit from such costs.

 Accounting for changes in existing Decommissioning, Restoration and other

Liabilities:
o If the asset is accounted under cost model: Then the changes in liability
should be added or deducted from the cost. If the amount deducted from the
asset exceeds its carrying amount, then such excess amount needs to be
recognized in P&L.
o If the asset is accounted under revaluation model:
 Decrease in liability should be added to revaluation reserve. However,
if there has been a revaluation deficit previously, then it will be
recognized as income in P&L.
 Increase in liability is reduced from revaluation reserve. However, if
there has been a revaluation deficit previously, then it will be charged
in P&L.
 Note: In the event that a decrease in the liability exceeds the carrying
amount that would have been recognised had the asset been carried
under the cost model, the excess should be recognised immediately in
the Statement of Profit and Loss.
  However, if the changes in liability occur after the asset has reached
the end of useful life, then all the changes needs to be recognized in
P&L.

 Other points:
o Impairment of PPE is accounted as per AS 28.
o Items of PPE that have been retired from active use and held for disposal are
accounted at lower of carrying amount and NRV.
o PPE is de-recognised upon (i) disposal by sale or finance lease or donation or
(ii) when no future economic benefits are expected from its use or disposal.
o Gain or loss on de-recognition is recognized in P&L. Gain or loss = Net
disposal proceeds – carrying amount on the date of sale.
o Gain on sale of asset is treated as other income (not revenue). However, if an
entity routinely sells items of PPE that are held for rental, then such assets
should be transferred to inventories once they cease to be rented and are
held for sale. The proceeds from such sale is recorded as per AS 9.
 AS 11 – Notes
Section 1: Accounting of foreign currency transactions
Definition of foreign currency: Any currency other than reporting currency of the entity.
Definition of a foreign currency transaction: Any transaction that is denominated in or
requires settlement in foreign currency.
Eg: (i) purchase or sale of goods in foreign currency; (ii) borrowing or lending funds in foreign
currency; (iii) becoming a party to forward contract; (iv) acquires or disposes assets or incurs or
settles liabilities in foreign currency.
Monetary items: Money held, assets and liabilities receivable or payable in fixed or
determinable amounts of money. In other words, these are the items where change in the
exchange rate will impact the cash flows receivable or payable for the reporting entity.
Non-monetary items: Assets and liabilities other than monetary items.
Accounting:
a) Foreign currency transactions are initially accounted by applying the exchange rate as
on the transaction date. For practical purposes average rate for a week or month can be
used if there is no significant fluctuation in exchange rates.
b) As at the balance sheet date, monetary items are restated using the closing rate as at
the balance sheet date. However, non-monetary items that are carried at historical cost
are not restated.
c) Non-monetary items which are carried at fair value or any other value that is
denominated in foreign currency should be restated using the exchange rate as on the date
of determination of such value.
d) Contingent liability is converted using the closing rate.
Recognition of exchange difference:
a) Exchange gain or loss arising due to restating or settlement of monetary items should be
taken to P&L.
b) Para 46 and 46A exceptions:
• Exchange difference in respect of long-term foreign currency monetary item
(asset or liability having a term of 12 months or more) that relates to acquisition
of depreciable capital asset should be adjusted against cost of the asset.
• In other cases, exchange difference should be accumulated in FCMITDA
(Foreign Currency Monetary Items Translation Difference Account) and taken to
P&L over the balance life of such asset or liability.
• FCMITDA should be presented as a part of reserves and surplus in the balance
sheet irrespective of whether it is debit or credit balance.
• The above option is irrevocable and should be applied to all such foreign
currency monetary items.
 • Para 46 is only applicable only till 31 March 2020, but there is no time limit for
46A.

Section 2: Accounting of foreign operations

a) There are two types of foreign operations as per AS 11 – (i) Integral foreign operation
(IFO) and (ii) non-integral foreign operation (NIFO)
b) Foreign operation is a subsidiary, associate, joint venture or branch that carries out
activities in a country other than the country of the reporting enterprise.
c) IFO: It is a foreign operation whose activities are integral to those of the reporting entity.
IFO carries on its business as if it is an extension of reporting entity’s operations. In
this case, change in exchange rates affects the cash flows of the reporting entity.
d) NIFO: Any foreign operation that is not IFO. In this case, change in exchange rates will
have a little or no direct effect on cash flows but will affect the net investment made in
the operation.
e) Rules for translation of foreign currency trial balance into INR:
FS item IFO NIFO
Opening stock Opening rate Opening rate
Closing stock Closing rate Closing rate
Revenue items (expenses Average rate Average rate
and incomes except
depreciation and goods
received from HO)
Depreciation At the date of purchase of asset Average rate
Goods received from HO Take it from the HO books – Take it from the HO books – no
and HO a/c no need to convert need to convert
Fixed assets and other Original rate on the date of Closing rate
non-monetary items transaction
Other monetary assets Closing rate Closing rate
and liabilities
Contingent liability Closing rate Closing rate
Treatment of difference P&L FCTR (Foreign Currency
in the TB Translation Reserve)

Note:
• NRV in case of inventory and fair value or any other similar valuation in foreign currency
should be translated into INR using the exchange rate on the date of calculating such
values.
• FCTR will be taken to P&L upon disposal of such NIFO. Write down of NIFO balance
doesn’t amount to disposal, hence FCTR should not be transferred to P&L.
• In case of partial disposal of NIFO, proportionate amount of FCTR will be taken to P&L.
 f) When IFO changes to NIFO, exchange differences arising on translation of non-monetary
items at the rate on the date of reclassification should be accumulated in FCTR. However,
if NIFO is reclassified as IFO, the translated amounts of non-monetary items using the
rate on the date of such reclassification will be treated as historical cost for subsequent
periods. However, exchange difference accumulated in FCTR should not be taken to P&L
until the operation is disposed.

Section 3: Accounting of forward exchange contracts

a) Forward exchange contract: It means an agreement to exchange currencies at a forward
rate.
b) Forward rate: It is the specified rate at which currencies are exchanged in the future.
c) Spot rate: It is the exchange rate on the date of entering into the forward contract.
d) If the forward rate is more than spot rate, then it is premium on forward contracts.
However, if the spot rate is more than forward rate then it is discount.
e) Accounting for forward contracts entered into for hedging purposes: Premium or
discount should be taken to P&L over the life of the contract and any profit or loss on
cancellation or renewal should be taken to P&L. For detailed accounting refer examples
discussed in class.
f) With respect to a contract that is entered into for trading or speculation purposes,
premium or discount on such contract is ignored. As at each balance sheet date the value
of the contract is marked to its current market value and gain, or loss is recognized in
P&L.

Section 4: Scope of the standard

This standard does not:
a) Specify the currency in which the FS should be presented (reporting currency). Reporting
currency is generally currency of the country in which the entity is located.
b) Deal with presentation of cash flows arising from foreign currency transactions and
translation of cash flows of a foreign operation.
c) Deal with exchange differences to the extent they are regarded as borrowing cost as per
AS 16.
d) Deal with restatement of FS from reporting currency into any other currency.
 AS 12 – Accounting for Government Grants (GG)
 Definition of Government Grants: Assistance by government in cash or kind to an
enterprise for past or future compliance with certain conditions.
 Excludes grants for which value cannot be placed and transactions with government
that cannot be distinguished from normal operating activities.
 A GG can be recognized only if the following conditions are satisfied:
 the enterprise will comply with the conditions attaching to it
 the grant will be received

However, receipt of grant alone is not a conclusive evidence that the

conditions attached to the GG will be satisfied.
 Accounting for Asset based grants: GG whose primary condition is purchase,
construction or acquisition of such assets.
 Grants related to depreciable assets:
 Method I: Grant received is deducted from the assets and the net
value is depreciated over the useful life.

Journal entry at the time of receipt of grant is:

Bank a/c
To Asset a/c

If the grant received is equal to or virtually equal to asset’s value then

the asset is presented in BS at nominal value.

 Method II: Grant received is credited to a separate account named

as “Deferred Government Grant (DGG)”. Balance in DGG is
transferred to P&L in the ratio of depreciation charged on the asset.

Journal entry at the time of receipt of grant is:

Bank a/c
To DGG a/c

 Grants related to non-depreciable assets: Such GGs are credited to capital

reserve. However, if such grant requires fulfillment of certain conditions, then
the grant is credited to DGG a/c and taken to P&L in the ratio of cost incurred
to satisfy the conditions.

 Assets received free of cost: Such assets should be recorded at nominal

value in the BS.

Journal entry at the time of receipt of asset is:

Asset a/c
To P&L a/c
  Grants received in the form of assets (non-monetary grants): Such assets
should be accounted at acquisition cost and not at fair value of the asset.

Journal entry at the time of receipt of asset is:

Asset a/c
To Bank a/c

 Accounting for grants related to revenue:

 Grants related to one year’s expense: Such grants should be credited to
P&L.
 Grants that relate to multiple year’s expenses: Such grants will be credited
to DGG a/c and will be transferred to P&L in the ratio of expenses incurred.
 Revenue grants can be presented either as other income or can be shown as
a deduction from the relevant expense.
 GGs received as a compensation for prior year expenses or for the
purpose of immediate financial support needs to be disclosed as an
extra-ordinary item as per AS 5.

 Accounting for grants related to promoter’s contribution:

 Grants are given with reference to the total investment in an undertaking and
no repayment is ordinarily expected for such grants. These grants are not
given for any specific asset or expense.
 Such grants are credited to capital reserve.

 Refund of asset based grants:

 Grants related to depreciable assets:
 Method I: At the time of refund of GG, cost of the asset is
increased and the revised book value is depreciated over the
balance useful life.

Journal entry at the refund is:

Asset a/c
To Bank a/c

 Method II: At the time of refund of GG, DGG a/c is debited to the
extent of the available balance and the remaining amount is debited
to P&L a/c.

Journal entry at the refund is:

DGG a/c
P&L a/c
To Bank a/c

 Grants related to non-depreciable assets:

 Without conditions: Refund of such GG should be debited to
capital reserve. Journal entry at the time of refund is:

Capital reserve a/c

To Bank a/c
  With conditions: At the time of refund, DGG a/c is debited to the
extent of the available balance and the remaining amount is debited
to P&L a/c.

Journal entry at the refund is:

DGG a/c
P&L a/c
To Bank a/c

 Assets received free of cost: Journal entry at the time of refund is:

P&L a/c
To Asset a/c

 Grants received in the form of assets (non-monetary grants): Refund of

such grants should be accounted similar to the entries passed for sale of
assets. Journal entry is:

Bank a/c
P&L a/c (in case of loss)
To asset a/c
To P&L a/c (in case of profit)

 Accounting for refund of grants related to revenue:

 Grants related to one year’s expense: Refund of such GG should be
debited to P&L a/c. Journal entry is:

P&L a/c
To Bank a/c

 Grants that relate to multiple year’s expenses: At the time of refund, DGG
a/c is debited to the extent of the available balance and the remaining amount
is debited to P&L a/c. Journal entry is:

DGG a/c
P&L a/c
To Bank a/c

 Accounting for refund of grants related to promoter’s contribution: Refund of

such grant is debited to capital reserve a/c. Journal entry is:

Capital reserve a/c

To Bank a/c

 Refund of GG should be presented as an extra-ordinary item as per AS 5

 Non-applicability of the standard: AS 12 doesn’t deal with:

 Accounting for GG in hyperinflationary economies
 Government assistance other than in the form of government grants.
 Government participation in the ownership of the enterprise.
 AS 13 – Notes
Section 1: Investment in fixed income securities (refer PQ 11 and 12
in page 5.99)
a) Cum-interest price: Refers to price inclusive of interest from the date of last payment of
interest till the date of purchase / sale.
b) Ex-interest price: Refers to price exclusive of interest.
c) Investments account format:

Particulars No. of Income Amount Particulars No. of Income Amount

securities securities
To balance b/d XXX XXX XXX By bank a/c XXX
(Note 1) (interest received)
To bank a/c (new XXX XXX XXX By bank a/c (sale XXX XXX XXX
purchases) (Note 2) of securities) (Note 3)
To P&L (profit on XXX By P&L (loss on XXX
sale) sale)
To P&L (interest XXX By balance c/d XXX XXX
income for the (Note 4)
year)

Notes:
1) Opening balance in income column represents interest accrued from the last interest
payment date till the previous year balance sheet date (for example if interest payments
dates are 30th June and 31st Dec and balance sheet date is 31st Mar. Then opening balance
in income column represents interest accrued from 31st Dec to 31st Mar)
2) Interest in case of new purchases represents interest from the date of last payment of
interest till the date of purchase. Interest for such period should accrue to the seller as it
was the seller who was holding the securities for that period.
3) Interest in respect of sale of securities represents interest from the date of last payment of
interest till the date of sale.
4) Closing balance in income column represent closing interest accrued from the last interest
payment date till the current year balance sheet date.
Section 2: Investment in variable income securities (refer illustration
9 in page 5.94)
Particulars No. of Income Amount Particulars No. of Income Amount
shares shares
To balance b/d XXX XXX By bank a/c (dividend XXX XXX
received) – Note 1 (post-acq (pre-acq
dividend) dividend)
To bank a/c (new XXX XXX By bank a/c (sale of XXX
purchases / right securities)
shares)
To bonus shares XXX - By bank a/c (proceeds
from sale of rights)
To P&L (profit on XXX By P&L (loss on sale) XXX
sale)
To P&L (dividend XXX By balance c/d XXX
income for the year)

Note 1: Dividend for the period prior to acquisition of shares should be adjusted against the cost
of the shares and dividends for the period post-acquisition should be taken as income to P&L.

Section 3: Theory points:

a) Investments are assets held for earning income by way of rentals, dividend, interest or
for capital appreciation or for other benefits to the investing enterprise. Assets held as
stock-in-trade are not covered in the definition of investments.
b) There are two types of investments:
I. Current investments: These are the investments that are readily realizable and
are intended to be held for not more than one year from the date of purchase.
Valuation principle: Cost of fair value whichever is less (comparison to be done
at investment level. It can also be compared at category level – i.e. equity shares,
preference shares etc.) (refer illustration 2 in page 5.83)
II. Non-current investments: These are investments other than current investments.
Valuation principle: Valued at cost unless there is other than temporary
decline in value of such investments. (refer illustration 1 and 2 in page 5.83)
III. Situations such as (i) cash operating losses; (ii) introduction of new legislation
affecting the business and (iii) significant reduction in market price indicate other
than temporary decline.
c) Cost of an investment:
I. Cost includes acquisition charges such as brokerage, acquisition fees and duties,
amount paid for purchase of rights etc.
II. If investment is acquired in exchange of securities, then cost of such investment =
fair value of securities issued.
 III. If investment is acquired in exchange of another asset, then cost of such
investment = fair value of asset given up or investment taken over whichever is
clearly evident (first preference should be given to fair value of asset given up)
IV. Where investments have been acquired on cum-rights basis and the ex-right
market value has reduced below cost of purchase. Then to the extent of such
decline, proceeds from sale of rights should be adjusted against the cost of
investments. (refer PQ9 in page 5.98)
d) Investment properties:
I. Investment in land or buildings or both that is neither intended to be occupied
substantially for use in the operations nor held for sale (it is neither PPE nor
inventories).
II. Investment property should be accounted using cost model as per AS 10
(revaluation model not permitted)
III. The cost of holding shares in any co-operative society or company which is
directly related to holding the investment property should be added to the cost of
the investment property.
e) Any profit or loss on sale of investments should be taken to P&L. Cost of investments
sold should be calculated only using weighted average method. (profit or loss on sale =
Net sale proceeds (net of selling expenses) – cost of investments sold)
f) Reclassification of investments:
I. Current to non-current: Transfer should happen at lower of cost or fair value on
the date of transfer.
II. Non-current to current: Transfer should happen at lower of cost or carrying
amount on the date of transfer. (refer illustration 3 in page 5.85)
g) Investments held as stock-in-trade: Not covered either by AS 13 or AS 2. However,
such investments are accounted in the same manner as prescribed for current investments
in AS 13 with the exception that at the time of sale, cost of investment sold can be
computed either using weighted average method or FIFO.
h) Scope of the standard: AS 13 is not applicable to
I. Basis of recognition of income on investments (covered by AS 9)
II. Finance or operating leases (covered by AS 19)
III. Investments made by retirement benefit plans (covered by AS 15) and life
insurance companies (covered by IRDA regulations)
IV. Investments made by mutual funds, venture capital funds, related asset
management companies, banks and public financial institutions formed under
Central or State Government Act.
 AS 15 – Notes
Section 1: Introduction
1) Employee benefits can arise from:
a) Formal agreement between employer and employee
b) Legislative requirements
c) Informal practices that give rise to an obligation

2) Employees include part-time, full-time, casual and temporary employees. It also includes
directors and other managerial personnel. Indicators to identify employer-employee
relationship are as follows:
a. Existence of a contract of employment
b. Individuals are considered for legal and social security purposes.
c. Large amount of oversight or direction is being provided for an individual’s work.
d. Services are being performed at location specified by the employer.

3) In substance existence of contract of services as against contract for service is an indicator of

employer-employee relationship.
4) At times services rendered by an entity may in substance be services provided by employees
especially when such entity has no other clients or requires permission of employer to
provide services to any other clients.
5) Employee benefits may be paid to employees, their spouses, children, other dependents or to
third parties (like insurance company etc.). The crux is these benefits should have been paid
for the service rendered by the employees.
6) The core principle of the standard is employee cost should be recorded in the period in which
the employee has provided the corresponding service.
7) This standard doesn’t deal with accounting by employee benefit plans (trusts etc. created for
settling employee benefits)

Section 2: Short-term employee benefits (STEB)

1) Definition: These are employee benefits (other than post-employment and termination
benefits) that fall wholly due within 12 months after the end of the period in which the
employee has provided the service.
2) Accounting for STEB (other than compensated absences and profit-sharing plans): It
should be recognized as an:
a. Expense (unless any other AS allows capitalization)
b. Liability (reduced by payments made during the period. If payments made exceed
the expense, then the excess can be recorded as a prepayment to the extent that it
reduces future payments).
3) No need to discount or actuarially value STEBs.
4) Accounting for short term compensated absences (STCA):
a. Non-accumulating STCA: In this case unutilized leave cannot be carried
forward to the future periods. Hence it is accounted in the year in which absences
have occurred (generally there is no need for a separate entry for this).
b. Accumulating STCA: In this case unutilized leave can be carried forward to the
future periods. Such unutilized leave can either be encashed or availed in the
future. A liability and a corresponding expense should be recorded for the same in
the period in which we have rendered service without taking leave that is leading
to such unutilized leave balance.
c. The above provision for accumulating STCA needs to be recorded irrespective of
whether it is vesting (can be encashed) or non-vesting (can only be availed and
not encashed).
d. While measuring provision for non-vesting accumulating STCA, we can estimate
the possibility of certain employees not utilizing the unutilized leave or leaving
the entity before taking leave.

5) Accounting for short term profit sharing and bonus plans: It should be recognized as
an expense and a liability if the following conditions are satisfied:
a. There is a present obligation as a result of past events.
b. A reliable estimate of the obligation can be made (there is a formula, or the
amount can be estimated before the approval of the FS).

Section 3: Post employee benefits (PEB)

1) Definition: These are employee benefits (other than termination benefits) that are
payable after completion of service.
2) Arrangements made by employer to settle PEBs are called as post employee benefit
plans. There are two types of post employee benefit plans:
a. Defined Contribution Plan (DCP): These are plans where the actuarial risk (risk
that the benefits will be more or less than expected) and investment risk (the
assets invested will be insufficient to settle the benefits).
b. Defined Benefit Plan (DBP): These are plans other than DCPs.
3) Accounting for DCPs: The contributions to be made are recorded as:
a. Expense (unless any other AS allows capitalization)
b. Liability (reduced by payments already made)
c. If any contribution is payable after 12 months, the same needs to be discounted.
d. No need of actuarial valuation.
4) Accounting for DBPs:
a. Balance sheet components:
i. Present value of DBO
ii. Less: Fair value of plan assets
iii. Less: Past service cost not yet recognized
b. P&L components:
i. Current service cost: Increase in DBO due to current year service by
employees.
ii. Interest cost: Increase in DBO due to accrual of interest. Discount rate to
be used is interest rate on government bonds for a similar term as at the
balance sheet date.
iii. Past service cost recognized: Change in DBO due to introduction or
alteration to post employee benefits. Can be an income or expense
depending on the change. Such cost is recorded over the vesting period.
iv. Expected return on plan assets: Interest, dividend and other revenue
from plan assets + realized and unrealized gain or loss on investments –
cost of administering the plan and taxes payable. Difference between
expected return and actual return is actuarial gain or loss on plan
assets.
v. Actuarial gain or loss on DBO and plan assets: It is the effect of change
in actuarial assumptions and difference between actuarial assumptions and
what has actually occurred. It should be recognized in P&L immediately
and should not be deferred.
vi. Gain or loss on settlement or curtailment
vii. P&L impact of limitation on net defined benefit asset: Net defined
benefit asset can be recognized only to the extent of benefit available in
the future in the form of refunds from the plan or reduction in
contributions to be made.
c. Curtailment: It refers to reduction in scope of post employee benefit plans (eg.:
reduction in number of employees due to discontinuance of plant etc.).
Curtailment may result in reduction of DBO and past service cost not yet
recognized which will be recognized as a gain in P&L.
d. Settlement: It occurs when an enterprise enters into a transaction that eliminates
all its future obligations to settle the employee benefits for current or prior period
services. Settlement may arise at the curtailment as well. Journal entry for
settlement is as follows:

Journal entry:

Defined benefit obligation a/c Dr. xxx

To bank a/c xxx

To Plan assets a/c xxx

To past service cost not yet recognized xxx

 e. Actuarial assumptions: These are the assumptions used in valuation of defined
benefit obligation and plan assets. Such assumptions should be mutually
compatible and unbiased. There are two types of assumptions which are as
follows:
i. Demographic assumptions: Assumptions about future characteristics of
the employees like mortality rate, employee attrition rate etc.
ii. Financial assumptions: Deals with items such as discount rate (nominal),
future salary levels, expected return on plan assets etc.

Defined benefit obligation a/c

To gain on curtailment xxx By balance b/d (opening balance) xxx
To plan assets (payment of benefits) xxx By current service cost xxx
To Actuarial gain xxx By interest cost xxx
To balance c/d (closing balance) xxx By past service cost (total amount) xxx
(closing balance is to be actuarially valued) By Actuarial loss xxx

Plan assets a/c

To balance b/d (opening balance) xxx By DBO (payment of benefits) xxx
To bank a/c (contributions made) xxx By Actuarial loss xxx
To expected return on plan assets xxx By balance c/d (closing balance) xxx
To Actuarial gain xxx (closing balance is to be actuarially valued)

Section 4: Other long term employee benefits (OLEB)

• Definition: These are employee benefits (other than post employee benefits and
termination benefits) which do not fall wholly due within 12 months after the end of the
period in which the employee has provided the service.
• Accounting of OLEB is similar to accounting for defined benefit obligation with the
exception that 100% of past service cost if any is recognized immediately in P&L without
any deferral over the vesting period.
Section 5: Termination benefits
• Definition: These are employee benefits arising as a result of either:
o An enterprise decision to terminate employment of an employee or;
o An employee’s decision to accept voluntary retirement.
• Termination benefits should be recognized only when:
o there is a present obligation as a result of past events;
o it is probable that there will be an outflow of resources embodying economic
benefits;
o a reliable estimate of the obligation can be made.
• Termination benefits should be recognized as an expense and liability immediately.
However, if such termination benefits fall due beyond 12 months after the BS date, they
should be discounted.
• If there is any uncertainty regarding the number of employees who will accept an offer of
voluntary retirement, there is a contingent liability which needs to be disclosed as per AS
29.
 AS 16 – Notes
Section 1: Borrowing cost and qualifying asset definition
a) Borrowing cost: Interest and other costs incurred in connection with borrowings.

Note: Dividend on preference share that is classified as a liability is considered as borrowing

cost.
b) Qualifying asset: An asset (tangible or intangible) that takes substantial period of time
to get ready for intended use or sale. It includes both fixed assets and inventories.
Normally a period of 12 months is considered as a substantial period unless a shorter
period can be justified.
Note:
a) Exchange gain on restatement of principal amount of foreign currency borrowings should
be credited to P&L.
b) However, in case there is exchange loss lower of (i) actual exchange loss or (ii)
difference between interest on local currency borrowings and interest on foreign
currency borrowings will be treated as borrowing as per AS 16.
Excess exchange loss will be treated as per AS 11.

Section 2: Recognition of borrowing costs

a) Borrowing costs that are directly attributable to the acquisition, construction, or
production of a qualifying asset should be capitalized as part of the cost of that asset.
b) Other borrowing costs should be recognized as an expense in the period in which they
are incurred.

Section 3: General vs specific borrowings

a) Specific borrowings: These are amounts borrowed specifically for the purpose of
obtaining a particular qualifying asset.

Amount eligible for capitalization = Actual borrowing costs incurred – income on

temporary investments made.

Note: In case of specific borrowings, amount and period of utilization should not be
considered.

b) General borrowings: Borrowing cost to be capitalized is computed based on

capitalization rate.

Capitalization rate = Total borrowing cost incurred / Weighted average borrowings

Amount to be capitalized = Amount spent * Capitalization rate * (no. of months from

the date of utilization / 12)

Note:
a) In case of general borrowings, amount and period of utilization should be considered.
b) Amount of borrowing costs capitalized should not exceed the amount incurred during
that period.
c) In case there are both general and specific borrowings, specific borrowings should be
utilized.
Section 4: Commencement of capitalization
The capitalization of borrowing costs should begin when:
a) Expenditures for the asset are being incurred (expenditure should have been paid and
such expenditure will be reduced by government grants or advances from customers)
b) Borrowing costs are being incurred
c) Activities necessary to prepare the asset for its intended use or sale are in progress.
Such activities include technical and administrative activities as well, but it doesn’t
include holding of assets without any further development.

Section 5: Suspension of capitalization

a) Capitalization of borrowing costs should be suspended during extended periods in
which active development is interrupted. (eg. Labour strikes).
b) However, capitalization is not suspended when a temporary delay is a necessary part of
the process of getting the asset ready for intended use or sale.

Section 6: Cessation of capitalization

a) Capitalization should cease when substantially all the activities necessary to prepare the
qualifying asset for its intended use or sale are complete.
b) When the construction of a qualifying asset is completed in parts and the completed part
is capable of being used while construction continues for the other parts, then
capitalization of interest for such completed part should cease. However, if such
completed part cannot be used before completion of construction of other parts, then
capitalization should continue until the entire construction is completed.
 AS 17 – Notes
Step 1: Identification of segment (business of geographical)
Definition of business segment (refer illustration 5 in page 4.57)
A distinguishable component of an enterprise that is engaged in providing an individual
product or service or a group of related products or services and that is subject to risks and
returns that are different from those of other business segments.
Factors to be considered in the identification of business segments:
a) Nature of product or service
b) Nature of production process
c) Type of customers
d) Methods of distribution of product or service
e) Nature of regulatory environment

Definition of geographical segment (refer PQ 7 and 8 in page 4.60)

A distinguishable component of an enterprise that is engaged in providing an products or
services within a particular economic environment and that is subject to risks and returns
that are different from those of other components operating in other economic
environments.
Factors to be considered in the identification of business segments:
a) Similarity of economic and political conditions
b) Relationships between operations in different geographical areas
c) Proximity of operations
d) Special risks associated with operating in a particular area
e) Exchange control regulations
f) Currency risks
A geographical segment can be a single country, a group of two or more countries or region
within a country.
Geographical segments can be of two types: (i) Geographical segment based on location of assets
and (ii) Geographical segment based on location of customers.
Definition of segment revenue
Segment revenue

Includes: Excludes:
a) Revenue directly attributable to a segment a) Extraordinary items
b) Revenue that can be reasonably allocated b) Interest or dividend income unless segment’s
to segment. operations are of financial nature.
c) Inter-segment revenue c) Gain on sale of investment unless segment’s
operations are of financial nature.
Definition of segment expense
Segment expense

Includes: Excludes:
a) Expenses directly attributable to a segment a) Extraordinary items
b) Expenses that can be reasonably allocated b) Interest or dividend expense unless segment’s
to segment. operations are of financial nature.
c) Inter-segment expenses c) Loss on sale of investment unless segment’s
operations are of financial nature.
d) Income tax expense
e) General and admin expenses, head office
expenses and other expenses at company level

Segment result = Segment revenue – Segment expense

Definition of segment asset (refer PQ 6 in page 4.59)
Segment asset

Includes: Excludes:
a) Assets directly attributable to a segment a) Assets that generate interest or dividend income
b) Assets that can be reasonably allocated to if such interest or dividend income was not
segment. included in segment revenue.
b) Tax assets (current and deferred)
c) Assets used for general or head-office purposes.

Definition of segment liabilities

Segment liabilities

Includes: Excludes:
a) Liabilities directly attributable to a segment a) Liabilities on which interest expense is incurred
b) Liabilities that can be reasonably allocated if such interest expense was not included in
to segment. segment expense.
b) Tax liabilities (current and deferred)
Note 1: In case interest cost is included as a part of cost of inventories in accordance with AS
16, then interest expense should be included as a part of segment expense.
Note 2: Segments are generally identified based on management’s internal financial reporting
to CEO or board of directors. However, if such segments do not meet the definitions provided
in AS 17, then we have to look into the information reported to the next lower level of
management for identification of segments.

Step 2: Primary and secondary reporting formats

Segment (business or geographical) which represents dominant source of risks and rewards for
the entity will be primary segment and the other one will be secondary segment.

Step 3: Identification of reportable segments (refer illustration 1

(page 4.53), PQ9 to 11 (page 4.60)
From the primary segments, we have to identify the reportable segments based on the criteria
mentioned in AS 17.
Summary of criteria for identifying reportable segments:
Note 1: A segment that has satisfied 10% test in the previous reporting period will be
reportable segment for this year as well whether or not the 10% test has been satisfied.
Note 2: If a segment which has been identified as reportable segment in the current period,
then we have restate the preceeding period data as well to disclose that segment information
for the previous period.

Step 4: Disclosures for primary segments (refer illustration 4 in page 4.55

and PQ 12 in page 4.62)

Note: Segment revenue, result, assets and liabilities disclosed above should be reconciled to
numbers as per the financial statements.
Step 5: Disclosures for secondary segments
Case 1: If the primary segments are business segments.

Revenue from external customers of those Segment assets and capital expenditure of those
geographical segments based on location of geographical segments based on location of assets
customers whose external revenue is >=10% whose assets >=10% of total assets.
of company’s revenue

Case 2: If the primary segments are geographical segments

Following needs to be disclosed for those business segments whose external revenue is >=10%
of company’s revenue or whose assets >=10% of total assets
a) External revenue
b) Segment assets
c) Capital expenditure incurred during the year

Other points
a) Inter-segment transfers can be priced on any basis. However, basis of such pricing needs
to be disclosed in the financial statements. (refer illustration 2 in page 4.54)
b) Any changes in accounting policies materially affecting segment information should be
disclosed along with a description of nature of change and the financial effect of the
same.
c) Segment accounting policies should be in line with the accounting policies followed for
company’s financial statements.
d) Additional disclosure of information which is not in line with accounting policies used
for company’s financial statements can be disclosed if such information is reported
internally to the board and CEO and basis of measuring such information is disclosed in
the financial statements.
e) Entity should disclose type of products or services included within each business segment
and composition of each geographical segment.
f) If an entity prepares both standalone and consolidated financial statements, then segment
information disclosure is required only in consolidated financial statements.
g) AS 17 is applicable only to non-SMCs (non-corporates) and Level 1 entities (corporates).
 AS 18 – Notes
Definition of related party (definitive / exhaustive list)
a) Holding companies, subsidiaries and fellow subsidiaries
b) Associates, joint venture, investing party (associate) or venturer (joint venture)
c) Individuals having control or significant influence over the entity and relatives of such
individuals
d) Key Management Personnel (KMP) and their relatives
e) Entities over which persons mentioned in (c) and (d) is able to exercise significant
influence. This includes enterprises owned by directors or major shareholders and entities
that have common KMP.
Note: A party is considered to be related if any of the above are satisfied at anytime during the
reporting period.

Disclosure requirements under AS 18

a) Name of the related party
b) Description of the relationship
c) Description of nature of transactions
d) Volume of transactions either in terms of amount or proportion
e) Related party balances outstanding as at the balance sheet date along with provision for
doubtful debts on such balances if any
f) Amounts written off or written back in respect of balances due from / to related parties.
Note 1: Points (a) and (b) above should be disclosed whether or not transactions have taken
place in respect of parties related through control.
Note 2: Remuneration to KMP should be considered as a related party transaction.

Key definitions
Related party transactions: Transfer of resources or obligations between related parties
regardless of whether or not the price is charged.
Control: Control means:
a) Ownership over more than 50% of voting power
b) Control over composition of board of directors or any corresponding governing body (non-
company)
c) Substantial interest in voting power (>=20%) and power to direct financial and / or operating
policies of the entity
Significant influence: Participation in the financial and / or operating policies of the enterprise
but not control of these policies. A party holding 20% or more voting power in the entity is
presumed to have significant influence unless proved otherwise. Similarly, a party having less
than 20% of voting power is presumed to not have significant influence unless proved otherwise.
Significant influence can be exercised through:
a) Representation on BoD
b) Participation in policy making process
c) Material inter-company transactions
d) Interchange of managerial personnel
e) Dependence on technical information
Key Management Personnel: Those persons who have the authority and responsibility for
planning, directing and controlling the activities of the reporting entity.
Example: Managing director, whole-time director, manager and any other person in accordance
with whose instructions the BoD is accustomed to act.
Note: Non-executive director is not a related party unless he/she satisfied the definition of
KMP.
Relative:
a) Spouse
b) Son
c) Daughter
d) Father
e) Mother
f) Sister
g) Brother
who may be expected to be influenced by or influence that individual in relation to his/her
dealings with the entity.
Joint control: It is contractually agreed sharing of power to govern financial and operating
policies of an economic activity.

Other points
a) Following are not deemed to be related parties:
a. Entities with common directors
b. A single customer, vendor, franchiser, distributor or general agent merely by
virtue of economic dependence
c. Providers of finance
d. Trade Unions
e. Public Utilities
f. Government departments and agencies
b) Related party disclosure requirements do not apply in circumstances where providing
such disclosures would conflict with the entity’s duty of confidentiality as required by the
statute. (Example – banks are obliged to maintain confidentiality in respect of
transactions with their customers)
c) No disclosure is required in consolidated financial statements in respect of intra-group
transactions.
d) No disclosure is required in FS of state-controlled enterprises with respect to related party
relationships and transactions with other state-controlled enterprises.
 AS 19 – Notes
Section 1: Finance lease
Definitions
Minimum lease payments

From the point of lessee: From the point of lessor:

a) Lease payments excluding contingent a) Lease payments excluding contingent rent,
rent, cost of service and taxes to be paid cost of service and taxes to be paid by lessor.
by lessor. b) Residual value guaranteed by the lessee or
b) Residual value guaranteed by the lessee by any independent third party
c) In case there is a purchase option to the c) In case there is a purchase option to the lessee
lessee which he is reasonably certain to which he is reasonably certain to exercise (as
exercise (as the price is lower than fair the price is lower than fair value), then instead
value), then instead of residual value of residual value include amount payable by
include amount payable by the lessee to the lessee to exercise the purchase option.
exercise the purchase option.

Gross investment in lease (GIL): Undiscounted value of MLP and unguaranteed residual value
Net investment in lease (NIL): Present value of MLP and unguaranteed residual value
discounted at interest rate implicit in the lease. NIL is always equal to fair value of the asset.
Unearned Finance Income (UFI): GIL – NIL
Interest rate implicit in the lease: The rate at which present value of GIL equals NIL or fair
value of the asset. In other words, it is IRR of the lessor.
Lessee’s incremental borrowing rate: The rate of interest at which lessee would borrow a
similar amount for similar term with similar security or rate of interest that lessee will pay on a
similar lease. This is used by lessee when he is not aware of the interest rate implicit in the
lease.
Contingent rent: Refers to the rent that is based on a factor other than passage of time (eg.: % of
sales, based on usage, price index etc.)
Accounting for finance lease (refer example 1 to 4 in ISM and ques
13 in pg 5.173):
In the books of lessor In the books of lessee
Initial recognition entry Initial recognition entry
Lease receivable a/c (Fair value or NIL) Asset a/c (Lower of fair value or
To Asset a/c (carrying amount) To Lease payable present value of MLP from
To P&L a/c (profit on entering lessee viewpoint)
into Finance lease)
Interest a/c (outstanding balance *
Lease receivable a/c (outstanding balance To Lease payable interest rate)
To interest a/c * interest rate)
Lease payable a/c Lease rental
Bank a/c Lease rental To Bank a/c
To lease receivable a/c
Depreciation a/c
To Asset a/c

Notes:
a) To calculate present value, lessee has to use interest rate implicit in the lease. However, if
he is not aware of the same, he can use incremental borrowing rate.
b) Useful life for depreciation calculation will be as follows:

c) Depreciation policy should be same as the policy used for fixed assets as per AS 10.
d) Lessor needs to keep reviewing the unguaranteed residual value. Any decline in such
residual value needs to be appropriately adjusted. However, any upward adjustment for
residual value is not allowed.
e) In case of a manufacturer or dealer lessor, finance lease will be recorded as sale. If the
lessor uses artificially low rates to boost sales, then such sale value should be restricted to
an amount that would be calculated had a commercial market of interest been used.
Section 2: Operating lease (refer ques 11 in pg 5.172)
a) Lessor and lessee should account lease payments as income and expense respectively.
Such lease rentals should be accounted on a straight-line basis or in any other
systematic basis that is more representative of the benefit obtained from the asset.
b) Asset will be retained in the lessor’s books and depreciation will also be charged in
the books of the lessor.

Section 3: Initial direct costs

Initial direct costs

Finance lease: Operating lease:

a) Lessor: Can be charged to P&L Lessor and lessee: Can be charged to P&L
immediately or deferred over the lease immediately or deferred over the lease
term in the ratio of interest income. term.
b) Lessee: Should be added to the cost of
asset and will be charged as
depreciation.
c) Manufacturer or dealer lessor:
Charged to P&L immediately as an
expense

Section 4: Sale and lease back (refer ques 14 in pg 5.174)

a) Lease back is a finance lease: Excess or deficiency of sale value over carrying amount
should be amortised over the lease term in the ratio of depreciation charged on the
asset.
b) Lease back is an operating lease:
a. Case 1: Sale value = Fair value – Profit or loss on sale should be recognized
immediately.
b. Case 2: Sale value < Fair value - Profit or loss on sale should be recognized
immediately.
However, in case of loss and if it is compensated by lower lease rentals in the
future, then such loss on sale should be amortised in the ratio of lease rentals over
the lease term.
 c. Case 2: Sale value > Fair value – Excess of sale value over fair value should be
amortised in the ratio of lease rentals over the lease term.
c) In case lease back is an operating lease, then if the fair value of the asset at the time of
sale and leaseback is lower than carrying amount of the asset, then the asset should be
written down to fair value.

Section 5: Theory points

a) Lease definition: A Lease is an agreement whereby the Lessor (legal owner of an asset)
conveys to the Lessee (another party) in return for a payment or series of periodic
payments (Lease rents), the right to use an asset for an agreed period of time.
b) Primary indicators of finance lease (it will be classified as a finance lease if any one
condition is met):
a. Ownership is transferred to the lessee at the end of the lease term.
b. Lessee has the option to purchase the asset at a price that is sufficiently lower
than the fair value such that it is reasonably certain that the lessee will exercise
the option.
c. Lease term is for a major part of the economic life of the asset.
d. At the inception, present value of minimum lease payment is substantially
equal to all of the fair value of the asset.
e. The leased asset is of a specialized nature such that only lessee can use it
without major modifications.
c) Secondary indicators of finance lease (even if all the conditions are met, it is not
necessarily a finance lease)
a. If the lessee can cancel the lease and lessor’s losses associate with the cancellation
are borne by the lessee
b. Any gain or loss arising due to change in residual value will be borne by the
lessee.
c. Lessee is allowed to continue the lease for a secondary term at a rent that is
substantially that is lower than the market rent.
d) Applicability of AS 19: This standard is applicable to all the leases other than:
a. Lease agreements to explore or use natural resources
b. Licensing agreements for items such as motion picture films, video recordings,
plays, manuscripts, patents and copyrights.
c. Lease agreements to use lands
e) Lease term = non-cancellable period (lock-in period) + period for which lessee has the
option to continue the lease where it is reasonably certain that lessee will exercise that
option.
 AS 20 – Earnings Per Share
 As per AS 20, there are two types of EPS: (i) Basic EPS and (ii) Diluted EPS.
 Basic EPS:
o Formula – Earnings attributable to equity shareholders / Weighted average
number of equity shares.
o Earnings attributable to equity shareholders = Earnings after tax – Preference
dividend.
o Treatment of preference dividend:
 Cumulative preference dividend: deducted whether or not declared
by the company. Previous year cumulative preference dividend
declared during the current year is not deducted while calculating
current years’ earnings attributable to equity shareholders.
 Non-cumulative preference dividend: deducted only when declared
by the company.
o Earnings after tax should be calculated after considering all incomes and
expenses for the period. We should not exclude any abnormal or
extraordinary items.
o If an enterprise has more than one class of equity shares, then net profit or
loss is apportioned over different classes of shares as per their dividend
rights.
o Weighted average number of equity shares:
 Weighted average number of equity shares are calculated by
multiplying the number of equity shares by a time weighting factor.
 As per the standard, the time weighting factor is calculated based on
number of days. However, the standard allows a reasonable
approximation, hence time weighting factor can be calculated based
on number of months in exams.
 Date of inclusion for shares:

Situation Date of inclusion

Issue of shares for cash From the date on which the
cash is receivable
Issue of shares for acquisition of From the date on which the
an asset asset is recognised in books.
Issue of shares for services From the date on which the
rendered services have been received.
Issue of shares for settlement of From the date of settlement of
liability liability
Issue of shares against conversion From the date of conversion
of convertible instruments

 Partly paid shares:

 Case 1: Where partly paid shares are not eligible for
dividend, then such shares will be included for
calculation of basic EPS only from the date on which it
becomes fully paid up shares.
 Case 2: Where partly paid shares are eligible for
dividend, then such shares will be included from the
date of issue by converting them into equivalent fully
paid up shares.

Equivalent number of shares = No of partly paid shares

 * paid up value / Face value

 Bonus shares: Bonus shares included in the calculation of basic EPS

from the beginning of the earliest period presented in the FS as no
consideration is received for issue of such shares.

Note: The above principle is also applicable for other cases like (i)
consolidation of share and (ii) sub-division of shares where there is
change in number of shares without change in resources.

 Rights issue:
 In case of rights issue, shares are issued to existing
shareholders at a discount from market value.
 Step 1: Calculate theoretical ex-rights price
Theoretical ex-rights price = (no. of shares before rights
issue * market price + no. of rights shares * rights issue
price) / Total number of shares after rights issue.
 Step 2: Bonus element = No. of rights shares – no. of
shares that would have been issued had the shares
been issued at ex-rights market price.
 Step 3: Calculate basic EPS by including the bonus
element from the beginning of the earliest period
presented in the FS and remaining number of rights
shares will be included from the date of rights issue.

 Diluted EPS:
 Formula = (Earnings attributable to equity shareholders +/- changes in
earnings due to conversion of potential shares into equity shares) / (Weighted
average no. of equity shares + weighted average no. of potential equity
shares).
 In case of convertible preference shares, preference dividend on such shares
will be added back and in case of convertible debentures, interest (1-tax rate)
will be added back in the numerator.
 Period of inclusion for potential equity shares
Situation From date To date
Potential equity shares Date of issue Till the end of the year
issued during the year
Potential equity shares From the beginning of Till the end of the year
issued during the the year
previous year and yet
to be converted into
equity shares
Potential equity shares From the beginning of Till the date of
issued during the the year conversion
previous year and
converted into equity
shares during the year
Potential equity shares From the beginning of Till the date of
issued during the the year cancellation
previous year but
cancelled during the
year
 Calculation of diluted EPS in case of options:
  Options are considered to be dilutive if the shares are being
offered at a strike price that is lower than average market price
during the year. In that case we have to compute the bonus
element and include them in the calculation of diluted EPS.
 Bonus element = Number of shares to be issued under
options – No. of shares that would have been issued had the
shares been issued at average market price during the year.
 However, if the strike price under options is greater than the
average market price during the year, then options are
considered to be anti-dilutive and are not considered in diluted
EPS calculation.
Other points:

 Diluted EPS is disclosed in the FS only if it is lesser than basic EPS.

 For this comparison, we should consider only basic and diluted EPS from continuing
operations.
 Contingently issuable shares:
o These are the shares that will be issued upon satisfaction of certain
conditions.
o These shares will be included in the calculation of basic EPS only if they have
been actually issued upon satisfaction of conditions.
o However, in diluted EPS, these shares will be included only if the conditions
are expected to be met based on the situation as at the end of the year.
 Share application money pending allotment is also a potential equity share
 Even partly paid shares that are not eligible for dividend are considered as potential
equity shares and the equivalent fully paid up shares are included in the calculation
of diluted EPS till these shares are converted into fully paid up shares.
 In case of amalgamation in the nature of purchase, shares issued to the seller are
included from the date of acquisition. However, in case of amalgamation in the nature
of merger, such shares are included from the beginning of the reporting period.
 AS 22 – Notes
Section 1: Objective of AS 22
a) Tax benefit in respect of an expense should recognized in the year in which expense is
incurred irrespective of the year in which it is allowed as a deduction as per tax law.
b) Similarly tax expense in respect of an income should be recognized in the year in
which the income is accrued irrespective of the year in which it is charged to tax.

Section 2: Definitions
a) Accounting income (loss): Net profit / loss as per P&L before tax.
b) Taxable income (loss): Amount of income (loss) determined as per the provisions of the
tax law.
c) Current tax: Income tax amount that is payable or recoverable based on the taxable
income or tax loss for that period.
d) Deferred tax: Tax impact of timing differences.
e) Tax expense = Current tax +/- deferred tax
f) Timing differences: Difference between accounting and taxable income that originates
in one period and is capable of reversal in one or more subsequent periods.
Examples: Section 43B payments, PDD, depreciation, preliminary expenses, deduction
for scientific research etc.
g) Permanent differences: Difference between accounting and taxable income that
originates in one period and is not capable of reversal in one or more subsequent periods.
Examples: Permanent disallowances such as penalties, CSR expenditure etc. and
exemptions granted under Income tax Act.

Permanent differences will not result in DTA or DTL.

Section 3: Recognition of DTA

a) DTA should be recognized only if there is reasonable certainty that sufficient future
taxable profits will be available against which the respective deductions can be claimed.
b) However, if an enterprise has carried forward tax losses or unabsorbed depreciation, then
DTA should be recognized only if there is virtual certainty supported by convincing
evidence that sufficient taxable profits will be available.
c) At each balance sheet date, an entity needs to re-assess and to the extent there is a
reasonable or virtual certainty, unrecognized DTAs can be recognized.
d) Similarly, in respect of previously recognized DTAs, an enterprise should write down
these assets to the extent there is no reasonable or virtual certainty anymore.
Section 4: Measurement
a) Current tax should be measured at the amount that is expected to be paid or recoverable
from the tax authorities.
b) DTA or DTL are usually measured using the tax rates that have been substantially
enacted by the BS date.
c) DTA and DTL should not be discounted to their present value.

Section 5: Disclosure
a) Current tax asset and liability should be offset if an enterprise:
a. Has a legally enforceable right to set off current tax liabilities against current tax
assets.
b. Intends to settle the liability on a net basis.
b) Deferred tax asset and liability should be set off if:
a. The entity has legally enforceable right to set off current tax assets against
liabilities.
b. DTA and DTL should relate to taxes on income levied by the same governing
taxation laws.

Section 6: Tax holiday

a) An entity is not required to create DTA or DTL in respect of timing differences that
reverse within the tax holiday period. Such deferred tax should be created in the year
in which such timing differences originate.
b) For this purpose, timing differences that originate first are expected to reverse first
(FIFO)

Section 7: MAT
a) Current tax will be higher of (i) amount payable as per normal tax provisions and (ii) tax
payable on book profits as per MAT provisions
b) Deferred tax should always be calculated using the normal tax rate and not the MAT
rate.
c) Timing difference is the differences between accounting income and taxable income
calculated as per normal tax provisions. Book profit is never considered for deferred
tax calculation.
 AS 24 – Notes
Section 1: Definition of discontinuing operations
A discontinuing operation is a component of an enterprise:
1. That the enterprise pursuant to a single plan is:
a. disposing it off in entirety (either by sale or demerger or spin off of ownership to
the entity’s shareholders)
b. disposing it off in piecemeal basis (selling assets and settling liabilities
individually).
c. terminating through abandonment
2. That represents a separate or major lines of business or geographical area of
operations (business or geographical segment as per AS 17, part of a segment or a major
product or service line will normally satisfy this definition).
3. That can be distinguished operationally and for financial reporting purposes (i.e.
assets, liabilities, revenue and majority of the operating expenses can be directly
attributed to it).

Section 2: Initial disclosure event (IDE)

With respect to a discontinuing operation, the IDE is earlier of the following events:
a) Entity has entered into a binding sale agreement for substantially all of the assets.
b) Entity’s BoD has both:
a. Approved a detailed formal plan for discontinuance and
b. Made an announcement of the plan to those who are affected by it such as
lenders, stock exchanges, creditors etc. in a sufficient manner that demonstrates
that the entity to committed to the discontinuance.
c) A detailed formal plan will normally include:
a. Identification of major assets to be disposed.
b. Expected method of disposal.
c. Period required for completion of disposal.
d. Principal locations affected.
e. Location, function and approx. number of employees who will be compensated
for termination of their services.
f. Estimated sale proceeds to be realized from disposal of assets.

Section 3: Disclosure requirements

Disclosures should start from the FY in which the initial disclosure event occurs. An entity
should disclose the following:
a) Description of the discontinuing operation
b) Business or geographical segment in which it is reported as per AS 17.
c) Date and nature of IDE.
d) Date or period in which discontinuance is expected to be completed.
 e) Carrying amount of the assets to be disposed and liabilities to be settled.
f) Revenue and expenses attributable to the discontinuing operation.
g) Pre-tax profit or loss from discontinuing operation and tax expenses thereon.
h) Net cash flow from operating, investing and financing activities of the discontinuing
operation.
Note: All the above disclosures should be presented in notes to accounts except for pre-tax profit
or loss and tax expense thereon which should be presented in the face of P&L. Also, profit or
loss on sale of asset along with tax thereon should be presented in the face of P&L.

Section 4: Other disclosures

When an asset is disposed or a liability is settled or the entity enters into a binding sale
agreement, then it should disclose the following:
a) Gain or loss on disposal of asset or settlement of liability (pre-tax profit or loss (to be
disclosed on the face of P&L) and tax expense should be disclosed separately)
b) Net selling price or range of prices of assets for which the entity has entered into a
binding sale agreement along with expected timing of receipt of cash flows and carrying
amount of such assets.

Section 5: Other theory points

a) In the periods subsequent to the FY in which IDE occurs, entity should disclose
description of any significant changes in the amount or timing of cash flows and the
events that have caused such changes.
b) Disclosures in FS should continue till the period in which discontinuance is completed.
Discontinuance is completed when the plan is substantially completed or abandoned
though full payments are yet to be received.
c) If the entity withdraws or abandons its plans to discontinue the operations, such fact
should be disclosed along with the reasons and impact.
d) AS 24 disclosures should be presented separately for each discontinuing operation.
e) Comparative information for prior periods that is presented in FS prepared after the IDE
occurs should be restated to segregate the balances related to discontinuing operation.
f) Disclosures in an interim financial report in respect of a discontinuing operation should
be made in accordance with AS 25 which should include:
a. Description of any significant event since the end of the recent annual period
relating to a discontinuing operation.
b. Any significant changes in the amount or timing of cash flows relating to assets to
be disposed or liabilities to be settled.
g) Following are not considered as discontinuing operations:
a. Gradual or evolutionary phasing out of a product or service line.
b. Discontinuing, even if abruptly several products with an ongoing line of business.
c. Shifting of production or marketing activities from one location to another.
d. Closing out a facility to achieve productivity improvements or other cost savings.
 AS 25 – Interim Financial Reporting
 AS 25 doesn’t mandate preparation of interim FS. However, if an entity is required to
prepare an interim FS, then it has to comply with AS 25 and present the minimum
contents of an interim financial report as prescribed by the standard.

 At times, a statute governing an enterprise or a regulator may also require an entity

to present interim financial report and present information which may be different
from the information required by AS 25.
In such a case, the recognition and measurement principles as laid down in this
Standard are applied in respect of such information, unless otherwise specified in the
statute or by the regulator.

 Definitions:
o Interim Period: A financial reporting period shorter than a full financial year.
o Interim Financial Report: Contains either complete or condensed financial
statements for an interim period.

Note: During the first year of operations, an enterprise may prepare its
financial statements for a period less than a full year. In such a case, such
shorter period is not considered as an interim period.

 Contents of an interim financial report:

o Interim financial report may contain a complete set of FS or condensed FS. If
the entity opted for a complete set of financial statements, it will be like annual
set of financial statements. The condensed financial statements would include
the limited information as required by this standard.
o A complete set of financial statements includes a balance sheet, statement of
profit and loss, cash flow statement, and explanatory notes.
o As a minimum, an entity is required to present condensed financial
statements which should focus on new activities without duplicating prior
information.
o Complete set of interim financial statements must conform to annual reporting
requirements.
o Condensed statements must include relevant headings and notes from the
most recent annual statements. It should also include certain selected
explanatory notes as required by AS 25.
o Additional line items or notes should be included if their omission would make
the condensed interim financial statements misleading.
o If an enterprise has presented basic and diluted EPS in its annual FS, then it
has presented in the interim FS also.

 Selected explanatory notes as required by AS 25: An enterprise should include as

a minimum the following in its interim financial statements:
o Description of accounting policies followed
o Explanatory comments about the seasonality of interim operations.
o Exceptional items as per AS 5.
o Nature and amount of changes in estimates.
o Issuances, buy-backs, repayments and restructuring of debt, equity and
potential equity shares.
o Dividends separately for equity and other shares
o Segment revenue, segment capital employed and segment result for primary
segments if segment information is presented in annual FS.
 o Changes in composition of the enterprise such as amalgamations,
acquisitions, disposals etc.
o Material changes in contingent liabilities since the last annual balance sheet
date.
o Any other events or transactions that are material to an understanding of the
current interim period.

 Reporting periods: Interim FS should include:

o Balance sheet: End of current interim period vs. end of preceding financial
year.
o Profit and loss: Current interim period and year-to-date vs. comparable prior
interim period and year to date of preceding financial year.
o Cash flow: Year-to-date vs. comparable year to date in the previous financial
year.

 Materiality: Materiality should be assessed in relation to interim financial data,

recognizing that interim measurements may rely more on estimates.

 Disclosure in Annual Financial Statements: Changes in accounting estimates

presented in interim periods must be disclosed in annual statements if significant.

 Accounting Policies:
o Same policies as last annual statements should be applied, with adjustments
for any changes made after the last annual report.
o However, the frequency of an enterprise’s reporting should not affect the
amounts recognized in the annual FS. Hence, measurement of amounts for
interim FS should be made on a year-to-date basis.
o For example, a cost that doesn’t meet the definition of an asset is not
deferred to await future information as to whether it meets the definition of an
asset or to smooth earnings over interim periods over the FY.
o Similarly, income tax expense is recognized in each interim period based on
the best estimate of the weighted average tax rate for the full year. Tax
amounts recognized in one interim period, may have to be adjusted in the
subsequent periods if the estimate of the annual effective tax rate changes.
o Any changes in accounting estimates will only be given a prospective effect in
the current interim period.

 Changes in Accounting Policies: Any changes in accounting policies must be

disclosed in interim reports, and these changes should be applied for interim
reporting purposes.

 Seasonal Revenue and Costs: Seasonal revenues should be recognized when they
occur, and costs incurred unevenly can only be deferred if it is appropriate to do so at
the end of the financial year.

 Estimates and Restatements: Estimates should ensure reliable information, and

any changes in accounting policy should be applied retrospectively within the
financial year.

 Applicability: Quarterly reports presented by listed companies doesn’t meet the

definition of interim financial report as per AS 25. However, the recognition and
measurement principles laid down in AS 25 should be applied for recognition and
measurement of items contained in such interim financial results.
 AS 26 – Notes
Section 1: Definition of an intangible asset
a) It is an identifiable non-monetary asset without physical substance held for use in the
production or supply of goods or services or for rental to others or for administrative
purposes.
b) Identifiability: An intangible asset is identifiable if it can be clearly distinguished from
goodwill. An asset can be distinguished from goodwill if it is separable (can be rented or
sold separate from business).
c) Control: For an item to qualify as intangible, it is necessary for the entity to have the
power to obtain future economic benefits (revenue increase, cost savings or other
benefits) or restrict others from obtaining the benefits.
d) If an item covered by AS 26 doesn’t meet the definition of an intangible asset,
expenditure to acquire it or generate it internally is recognized as an expense.
e) With respect to intangible assets contained in a physical substance, such assets are treated
as intangible in cases where the cost of physical substance is not significant. (eg. CD
containing a software, legal documents relating to a license etc.)
f) Where an intangible asset is an integral part of a tangible asset, then it is treated as a
tangible fixed asset (eg. Operating system is treated as a part of a computer as it is
integral to functioning of the computer). However, if the intangible asset is not integral to
the tangible asset, then it is treated as an intangible asset.

Section 2: Initial recognition

a) An intangible asset can be recognized only when:
a. It is probable that the future economic benefits will flow to the enterprise; and
b. The cost of an asset can be measured reliably.
b) An intangible asset should be initially measured at cost. (revaluation is not permitted
in AS 26)

Section 3: Acquired intangible assets

a) Separate acquisition: Such intangible assets should be measured at cost (purchase price,
non-recoverable taxes, expenditure incurred on making the asset ready for use). Trade
discounts are deducted in arriving at cost.
However, if an intangible asset is acquired in exchange for securities, then is recorded at
fair value of the intangible asset or fair value of the securities issued whichever is more
clearly evident.
b) Acquisition as a part of amalgamation:
I. In case of an amalgamation in the nature of purchase the acquirer recognizes an
intangible asset even if was not recognized in the books of acquiree.
II. Such intangible assets are recognized at fair value. If an active market exists,
current bid price will be fair value. However, if there is no active market then
amount that would have been paid in an arm’s length transaction should be
 considered as fair value. In such a situation the fair value is restricted to an
amount that it will not result in creation or increase in capital reserve.
c) Acquisition by way of government grant:
I. An intangible asset obtained free of charge should be recognized at nominal
value.
II. An intangible asset obtained at concessional rate from government should be
recorded at actual acquisition cost.
d) Exchange of assets:
I. Intangible asset acquired as a part of exchange is recorded at fair value of the
asset given up or taken over whichever is more clearly evident.
II. However, the asset acquired is measured at carrying amount of the asset given up
if the exchange transaction lacks commercial substance or the fair value of neither
the asset received nor asset given up is reliably measurable.
e) Internally generated goodwill is not recognized as an intangible asset.
f) Other internally generated intangible assets: Cost spent on internally generated
intangible assets can be divided into two phases:
I. Research phase: Research is original and planned investigation undertaken to
gain new scientific or technical knowledge and understanding.
No intangible asset is recognized in respect of cost incurred in research phase.
The amount spent will be charged to P&L.
II. Development phase: Development is the application of research findings for
production of new or substantially improved materials, devices or products prior
to commencement of commercial production or use. An intangible asset arising
from development phase should be recognized only if the following conditions
are demonstrated:
i. Technical feasibility of completing the intangible asset.
ii. Intention to complete the asset and use or sell it.
iii. Ability to use or sell the asset.
iv. Ability of the asset to generate economic benefits.
v. Availability of adequate technical, financial and other resources to
complete the development.
vi. Ability to measure the amount spent on the asset reliably.
III. AS 26 is of the view that internally generated brands, mastheads, publishing
titles, customer lists and items similar in substance cannot be recognized as
an intangible asset.
IV. Cost of an internally generated intangible asset will include amounts spent from
the asset first meets the recognition criteria (material cost, labour cost and any
other directly attributed costs).
V. Expenditure in the past cannot be re-instated and recognized as intangible
assets.
VI. SG&A costs, abnormal and initial operating losses and training costs should not
be included as a part of the intangible asset.
Section 4: Recognition of an expenses
i) Expense on an intangible asset should be recognized as an expense unless:
a) It forms part of the cost of the intangible asset that meets the recognition criteria as per
AS 26.
b) The item is acquired as a part of amalgamation (then it will form part of goodwill or
capital reserve).
ii) The following expenses cannot be recognized as an intangible asset:
a) Expenditure on start-up activities
b) Training costs
c) Advertising and other sales promotion costs.
d) Re-locating or re-organisation expenses

Section 5: Subsequent recognition

i) Subsequent expense on an intangible asset should be recognized as an expense unless:
a) It is probable that the amount spent will generate additional future economic benefits.
b) Expenditure can be measure reliably.
ii) Subsequent expenditure on brands, mastheads, customer lists, publishing titles and other
similar items is always recognized as an expense.

Section 6: Amortisation
a) Depreciable amount (cost minus residual value) should be amortised over useful life.
Amortisation should commence once the asset is ready for use.
b) As per AS 26, there is a rebuttable presumption that the useful life of the asset
cannot exceed 10 years.
c) However, if an entity considers a useful life of more than 10 years, then it should estimate
the recoverable amount on an annual basis to identify any impairment loss and also
disclose the reasons for considering a longer useful life.
d) Amortisation method used should reflect the pattern in which assets economic benefits
are consumed by the enterprise. In case the pattern cannot be measure reliably, then use
straight-line method. There is no restriction in AS 26 to amortise the asset basis the
revenue / cash flows generated from the intangible asset.
e) Residual value is the amount that an entity expects to receive at the end of its useful life
net of selling expenses. Residual value is assumed to be zero unless:
I. there is a commitment to purchase the asset at the end of its useful life.
II. there is an active market through which residual value can be determined and
such market is expected to exist till the end of its useful life.
f) Change in amortisation method or useful life should be given a prospective effect as
per AS 5.
g) Intangible assets that are under development and intangible assets with a useful life of
more than 10 years should be tested for impairment annually even though there are no
indicators for impairment.
Section 7: Retirement and disposal
a) An intangible asset should be de-recognised upon disposal or when no future economic
benefits are expected from the asset.
Gain or loss on disposal of the asset should be recognized in P&L.
b) An intangible asset that is retired from active use and held for disposal is carried at
carrying amount from the date of retirement.
 AS 28 – Notes
Key terms used in the standard:
a) Carrying amount: Value of the asset as at the balance sheet date.
b) Recoverable amount: Higher of value in use and net selling price
c) Net Selling Price: Selling price – cost of disposal (incremental cost of
selling the asset excluding finance costs and income taxes).
d) Value in use (VIU): Present value of estimated future cash flows from
continuing use of the asset and from its disposal at the end of useful life.
e) Cash generating unit: Smallest identifiable group of assets that generates
cash flows that are independent of cash flows from other assets. (refer
example 1 and 2 in page 5.223)
Recognition of impairment loss for an asset (refer illustration 1 and 3):

a) If there are indicators that an asset is impaired, we need to put the asset to
put the asset to impairment test and estimate the recoverable amount.
b) If recoverable amount is less than carrying amount, then asset is impaired
and impairment loss needs to be recognized.
c) The impairment loss needs to be recognized in P&L. If the asset is revalued,
then charge it to revaluation reserve to the extent available. Excess loss
should be charged in P&L.
d) If impairment loss is greater than carrying amount, then a liability needs to
be recognized if required by another accounting standard.

Reversal of impairment loss:

a) If there are indicators that impairment loss has reduced, then estimate the
recoverable amount.
b) Case 1: If impairment loss was earlier charged to P&L, then the reversal
also should be recorded as income in P&L.
c) Case 2: If the impairment loss was earlier adjusted against revaluation
reserve, then add the reversal to revaluation reserve to that extent.
d) Revised carrying amount after reversal of impairment loss should not be
more than the amount had no impairment loss been charged.
Impairment loss for a CGU
a) If an individual asset cannot generate cash flows that is independent from
other assets and its VIU is different from its scrap value, then we have to
estimate recoverable of CGU.
b) In case of a CGU, impairment loss should first be charged against goodwill,
then the remaining loss needs to be charged to individual assets in the ratio
of their carrying amount.
c) After charging the impairment loss, the carrying amount of each assets
should not be reduced to below the higher of (i) NSP; (ii) VIU and (iii) Zero
d) Extra loss due to the above restriction needs to be charged to the remaining
assets.
Reversal of impairment loss for a CGU
a) First the impairment loss reversal needs to be allocated to assets other than
goodwill in the ratio of their carrying amounts.
b) Then the remaining loss needs to be allocated to goodwill if certain
conditions are satisfied.
c) After reversing the impairment loss, the carrying amount should not
increased above the lower of (i) recoverable amount and (ii) carrying amount
had there been no impairment.
d) Any extra reversal due to the above restriction needs to be allocated to other
assets.
Consideration related to goodwill and corporate assets (refer example in page
5.225):
a) In case goodwill and corporate assets can be allocated to a CGU on a
reasonable basis, then allocate them to CGUs and perform impairment test.
(bottom-up test)
b) In case goodwill and corporate assets cannot be allocated to any CGU, then
an entity needs to carry out both bottom-up and top-down test.
c) Impairment loss charged on goodwill can be reversed only if (i) impairment
loss was caused by a specific event that is not expected to recur and (ii)
Subsequent events have occurred reversed the effect of that event causing
impairment loss.
Key points on calculation of value in use:
a) Cash flows should be based on most recent budgets or forecasts for a
maximum period of 5 years. Beyond the period of 5 years cash flows are to
be estimated based on a constant / declining growth rate. Such growth rate
should not be more than the long-term industry growth rate.
b) Cash outflows relating to obligations that are already recorded on the
balance sheet date should not be considered.
c) Future cash flows from restructuring are not included in the estimation of
value in use unless the entity is committed to restructuring.
d) Any future capital expenditure that will enhance the capacity of the asset
should be excluded.
e) Discount rate used should be pre-tax rate that investors would expect from
any other asset having similar cash flows.
Other points:
a) Even assets that are used internally can also be a CGU if there is a market
for its output. Cash flows should be estimated based on market price of such
output.
b) We should always calculate carrying amount, value in use and NSP should
be calculated consistently. (refer example 3 in page 5.224)
c) Impairment loss in case of discontinuing operations:
a. Approval of a plan to discontinue certain operations may indicate that
the assets have been impaired.
b. If such operation is being sold as a group, then recoverable amount
needs to be calculated for the group as a whole as none of the
individual assets can generate cash flows on their own.
c. If the operation is being sold on a piecemeal basis, the calculate
recoverable amount for individual assets.
d. In case of abandonment of operations as well, recoverable amount
needs to be calculated for each asset separately.
d) Indicators of impairment:
a. External indicators:
i. Market value of the asset has declined.
ii. Significant changes have taken place in legal, economic or
technological environment or are expected to take place that
will affect the asset.
 iii. Increase in market rate of interest leading to increase in
discount rate.
iv. Carrying amount of net assets > Market capitalization
b. Internal indicators:
i. Evidence of obsolescence or physical damage of an asset.
ii. Significant changes have taken place in the manner in which an
asset is expected to be used (eg.: discontinuation of operations,
restructuring etc.)
iii. Evidence is available that performance of the asset is worse
than expected.
e) Indicators of reversal of impairment will be opposite to the above indicators
of impairment loss.
f) Whenever there is an indicator of impairment, then we have to review useful
life, residual value and depreciation method of an asset as per AS 10.
g) In case NSP of an asset cant be determined, then VIU will be the recoverable
amount.
h) In case of an asset that is held for disposal, VIU will not be materially
different from NSP, hence NSP can be taken as recoverable amount. (refer
example 4 in page 5.229)
 AS 29 – Notes
Section 1: Provisions
Definition of a provision: It is a liability which can be measured only by using a substantial
degree of estimation.
Definition of a liability: It is a present obligation arising out of past events the settlement of
which will require outflow of resources embodying economic benefits.
Definition of present obligation: an obligation which is considered probable (more likely than
not) based on the evidence as at the balance sheet date. (Probability of occurrence >50%)
Definition of possible obligation: an obligation which is not probable based on the evidence as
at the balance sheet date. (Probability of occurrence <= 50%)
Recognition criteria for a provision (all the conditions should be satisfied):
a) There is a present obligation arising out of past events (obligations or losses arising out
of future events without any connection with the past should not be recognized as a
provision)
b) It is probable that there will be outflow of resources.
c) A reliable estimate of the amount of obligation can be made.
Other points
a) When details of a new law which may lead to an obligation is yet to be finalized, then a
provision is required to be recognized for such obligation only when it is virtually
certain that the law will be enacted.
b) Only in extremely rare circumstances a reliable estimate of the obligation is not
possible as per AS 29.
c) A provision should not be discounted to is present value (except for provision for
decommissioning recognized as per AS 10). Discount rate to be used for discounting
provision for decommissioning should be a pre-tax rate.
d) Future events that may affect the amount of obligation can be considered in the
estimating the amount of provision.
e) Expected gain on disposal of assets should not be considered while creating a provision.
f) A provision should be used only for the purpose for which it has been created.
g) No provision is required to be created for future operating losses.

Section 2: Contingent liabilities

Definition of a contingent liability:
a) It is a possible obligation the settlement of which is dependent on one or more future
uncertain events not wholly within control of the entity.
 b) It is a present obligation which is not recognized as a provision because it fails to satisfy
either point (b) or (c) under recognition criteria for a provision.
Other points:
a) A contingent liability is not recorded in books of accounts but is only disclosed in the
financial statements.
b) There is no need to disclose as well if the possibility of outflow of resources is remote.
c) Where an entity is jointly and severally liable, then its share of liability will be
recognized as a provision and others share of liability will be disclosed as a
contingent liability.
d) Contingent liabilities need to be continually re-assessed and if it becomes probable that
there is an outflow of resources, then a provision is required to be recognized.

Section 3: Contingent assets

Definition of a contingent asset: It is a possible benefit arising from past events the existence
of which will be confirmed by one or more future uncertain events not wholly within the
control of the entity.
Other points:
a) An entity is allowed neither to recognize nor to disclose contingent assets in the
financial statements.
b) It can be disclosed in the boards’ report.
c) Contingent assets are assessed continually and once it becomes virtually certain that
inflow of economic benefits will arise, then the asset and related income can be
recognized.

Section 4: Reimbursements
a) A reimbursement asset should be recognized separately from the related obligation.
b) A reimbursement asset can be recognized only when it is virtually certain that it will be
received.

Section 5: Restructuring
a) Definition of restructuring: It is a program that is planned and controlled by
Management resulting in a material change in (i) scope of business or (ii) the manner in
which business is conducted.
b) Examples of restructuring:
a. Sale or termination of line of business
b. Relocation of business from one location to another
c. Change in management structure
d. Fundamental re-organisations that have a material affect on the company’s
operations.
 c) A provision for restructuring is recognized only when the recognition criteria for
provision is met. For instance, no obligation arises for sale of an operation unless there is
a binding sale agreement.
d) A restructuring provision should only consider direct costs required by restructuring.
No provision should be created for costs associated with ongoing / future operations of
the entity.
e) No provision is required to be created for costs related to (i) retraining staff; (ii)
marketing costs and (iii) investment in new systems or distribution networks. These costs
are related to future operations.
f) Gain on expected sale of assets is not considered while measuring restructuring
provision.

Section 6: Scope of the standard

AS 29 is not applicable to provisions, contingent liabilities or contingent assets arising out of:
a) Executory contracts (contracts yet to be executed or executed partially) except when
contracts are onerous (loss making contract).
b) Insurance contracts with policy holders.
c) Those covered by another accounting standard.
 Branch accounts
Debtors system – Branch a/c (prepared from HO perspective) - Nominal a/c
Particulars Amount Particulars Amount
To branch assets (opening assets) XXX By branch liabilities (opening liabilities) XXX
- Branch stock (including goods in - Branch creditors
transit) - Branch outstanding expenses
- Branch debtors - Branch stock reserve (if
- Branch furniture accounting is done at invoice
- Branch petty cash (including cash price)
in transit) - Branch manager commission
- Branch main cash (including cash payable
in transit)
- Branch prepaid expenses
To Goods sent to branch (goods sent by HO XXX By Goods sent to branch (goods returned by XXX
whether or not received by the branch) branch and received by HO)
To bank (branch expenses paid by HO) XXX By bank (remittances sent by branch and XXX
received by HO)
To bank (branch creditors paid by HO) XXX By goods sent to branch (removal of XXX
loading on goods sent to branch net of
returns)
To bank (branch fixed assets purchased by XXX By branch assets (closing assets) XXX
HO)
To cash (cash sent to branch to meet petty - Branch stock (including goods in
expenses) transit)
- Branch debtors
- Branch furniture
- Branch petty cash (including cash
in transit)
- Branch main cash (including cash
in transit)
- Branch prepaid expenses
To abnormal loss (removal of loading on By abnormal loss (if H&M method is XXX
abnormal loss) followed. If Tulsian method is followed
then no entry)
To branch liabilities (closing liabilities) XXX By general P&L (net loss – balancing XXX
figure)
- Branch creditors
- Branch outstanding expenses
- Branch stock reserve (if
accounting is done at invoice
price)
- Branch manager commission
payable
To general P&L (net profit – balancing XXX
figure)

Calculation of goods sent to branch

Particulars Amount
Goods sent by HO to branch XXX
Goods sent by one branch to another XXX
Calculation of goods returned by branch
Particulars Amount
Goods sent by branch and received by HO XXX
Goods sent by one branch to another XXX
Goods returned directly to HO by branch customers XXX

Calculation of remittances
Particulars Amount
Cash sales XXX
Cash received from debtors XXX
Cash sale of fixed assets XXX
Scrap value of normal and abnormal loss (if Tulsian method is followed) XXX
XXX
Less: Branch expenses paid by branch (XXX)
Less: Branch creditors paid by branch (XXX)
Less: Branch fixed assets purchased by branch (XXX)
Less: Cash purchases made by branch (XXX)
Less: Cash balance retained by the branch (XXX)
Remittances (cash sent by branch and received by HO) XXX
Note: If H&M method is followed for accounting abnormal loss, then scrap value of abnormal loss will be taken to
general P&L

Calculation of closing balance of goods transit (onward)

Particulars Amount
Opening onward goods in transit XXX
Add: Goods sent to branch by HO whether or not received by branch XXX
Less: Goods sent by HO and received by the branch during the year XXX

Calculation of closing balance of goods transit (inward)

Particulars Amount
Opening inward goods in transit XXX
Add: Goods returned by branch whether or not received by HO XXX
Less: Goods returned by branch and received by the HO during the year XXX

Memorandum ledger accounts (prepared to find out opening and closing balances of assets
and liabilities
1) Memorandum branch debtors
Particulars Amount Particulars Amount
Opening balance XXX Sales return XXX
Credit sales XXX Cash received XXX
Discount allowed XXX
Bad debts XXX
Closing balance XXX
 2) Memorandum branch creditors
Particulars Amount Particulars Amount
Discount received XXX Opening balance XXX
Purchases return XXX Credit purchases XXX
Cash paid XXX
Closing balance XXX

3) Memorandum branch stock

Particulars Amount Particulars Amount
Opening balance (including onwards and XXX Goods returned by branch and received by XXX
inwards transit) HO
Goods sent by HO XXX Sales (at cost price) XXX
Cash sales
Credit sales
Less: Sales return
Less: Gross profit
Normal loss at cost price XXX
Abnormal loss at cost price XXX
Closing balance XXX

4) Memorandum branch petty cash

Particulars Amount Particulars Amount
Opening balance (including cash in transit) XXX Petty expenses paid by branch XXX
Cash sent to branch XXX Closing balance XXX

5) Memorandum branch cash

Particulars Amount Particulars Amount
Opening balance (including cash in transit) XXX Branch expenses paid by branch XXX
Cash sales XXX Branch cash purchase XXX
Cash received XXX Branch fixed assets purchase XXX
Cash sales of fixed assets XXX Branch creditors paid
Scrap value of normal and abnormal loss XXX Remittances
Closing balance XXX

6) Memorandum branch furniture

Particulars Amount Particulars Amount
Opening balance XXX Cash received from sale of furniture XXX
Branch furniture purchased by HO XXX Depreciation XXX
Branch furniture purchased by branch XXX Loss on sale of furniture XXX
Profit on sale of furniture XXX
Closing balance XXX
Items that should not be taken to branch a/c as these are indirectly accounted
1. Cash sales
2. Credit sales
3. Bad debts
4. Discount allowed
5. Depreciation
6. Profit / loss on sale of branch assets
7. Branch expenses paid by branch
8. Cash purchases made by branch
9. Purchase return
10. Discount received

Stock and debtors system – ledger account formats

1) Branch stock a/c at invoice price
Particulars Amount Particulars Amount
To balance b/d (including onwards and XXX By goods sent to branch a/c – IP XXX
inwards transit) – IP
To goods sent to branch a/c – IP XXX By branch cash a/c - SP XXX
To branch debtors a/c - SP XXX By branch debtors a/c – SP XXX
To branch adjustment a/c (loading on goods XXX By Normal loss a/c - IP XXX
sent to branch net of returns)
To branch adjustment a/c (surplus) XXX By branch creditors a/c (purchase returns) XXX
To branch adjustment a/c (Excess of sales XXX By branch adjustment a/c (loading on XXX
price over invoice price) purchase returns)
By Abnormal loss a/c - IP XXX
By balance c/d (including onwards and XXX
inwards transit) – IP
Note: If surplus is material (rare situation), then loading will be credited to branch adjustment a/c and cost of such
surplus material will be credited to P&L as abnormal gain.

2) Branch debtors a/c

Particulars Amount Particulars Amount
To balance b/d XXX By branch cash a/c XXX
To branch stock a/c XXX By branch expenses a/c (bad debts and XXX
discount allowed)
By branch stock a/c XXX
By balance c/d XXX

3) Branch petty cash a/c

Particulars Amount Particulars Amount
To balance b/d XXX By branch expenses a/c XXX
To HO cash a/c XXX By balance c/d XXX
 4) Branch cash a/c
Particulars Amount Particulars Amount
To balance b/d (including cash in transit) XXX By branch expenses a/c XXX
To branch stock a/c (cash sales) XXX By branch assets a/c (purchase of assets) XXX
To branch debtors a/c (cash received from XXX By branch creditors a/c (payment to XXX
debtors) creditors)
To branch assets a/c (cash received from XXX By HO cash a/c (remittances) XXX
sale of assets)
By balance c/d (including cash in transit) XXX

5) Branch creditors a/c

Particulars Amount Particulars Amount
To branch cash a/c (payment to creditors) XXX By balance b/d XXX
To branch stock a/c (purchase returns) XXX By branch stock a/c (purchase of goods at XXX
cost price)
To branch P&L a/c (discount received) XXX
To balance c/d XXX

6) Branch fixed assets a/c

Particulars Amount Particulars Amount
To balance b/d XXX By branch cash a/c (sale value of fixed XXX
assets)
To branch cash a/c (purchase of assets) XXX By branch expenses (depreciation) XXX
To HO cash a/c (purchase of assets by HO) XXX By branch expenses a/c (loss on sale) XXX
To branch P&L a/c (profit on sale) XXX By balance c/d XXX

7) Branch expenses a/c

Particulars Amount Particulars Amount
To balance b/d (prepaid expenses as at the XXX By balance b/d (outstanding expenses as at XXX
beginning) the beginning)
To branch petty cash a/c (branch petty By branch P&L (expenses for the year) XXX
expenses paid by branch)
To branch cash a/c (branch expenses paid XXX
by branch)
To HO cash a/c (branch expenses paid by XXX
HO)
To branch debtors a/c (bad debts and XXX
discount allowed)
To branch assets a/c (loss on sale and XXX
depreciation)
To balance c/d (outstanding expenses as at XXX By balance c/d (prepaid expenses as at the
the end) end)
 8) Branch adjustment a/c
Particulars Amount Particulars Amount
To branch stock a/c (loading on purchase XXX By branch stock reserve a/c (loading on XXX
returns) opening stock)
To normal loss a/c (invoice price of normal XXX By branch stock a/c (loading on goods sent XXX
loss) to branch net of returns)
To abnormal loss a/c (loading included in XXX By branch stock a/c (Excess of sales price XXX
abnormal loss) over invoice price)
To branch P&L (gross profit) XXX
To branch stock reserve (loading on closing XXX
stock)

9) Branch P&L a/c

Particulars Amount Particulars Amount
To branch stock a/c (loading on purchase XXX By branch adjustment a/c (gross profit) XXX
returns)
To branch expenses a/c XXX By branch assets a/c (profit on sale) XXX
To abnormal loss a/c (if Tulsian method is XXX By branch creditors (discount received) XXX
followed)
To General P&L (transfer of profit) XXX By General P&L (transfer of loss) XXX

10) Normal loss a/c

Particulars Amount Particulars Amount
To branch stock a/c – IP of normal loss XXX By branch adjustment a/c XXX

11) Abnormal loss a/c

Particulars Amount Particulars Amount
To branch stock a/c – IP of Abnormal loss XXX By branch adjustment a/c (loading included XXX
in abnormal loss)
By branch P&L a/c (net loss after removal XXX
of loading)

12) Goods sent to branch a/c

Particulars Amount Particulars Amount
To branch stock - cost price of goods XXX By branch stock a/c – cost price of goods XXX
returned sent
To purchases a/c XXX
 13) Branch stock reserve a/c
Particulars Amount Particulars Amount
To branch adjustment a/c (transfer of XXX By balance b/d (loading included in XXX
loading on opening stock) opening stock)
XXX By branch adjustment a/c (loading on XXX
closing stock)
To balance c/d XXX

Final accounts system – ledger account formats

1) Memorandum Branch trading a/c
Particulars Amount Particulars Amount
Opening stock (including stock in transit) XXX Sales (cash and credit) XXX
Goods sent to branch XXX Abnormal loss XXX
Less: Goods returned by branch received by
HO
Direct expenses XXX Scrap value of normal loss XXX
Gross profit XXX Closing stock XXX

2) Memorandum Branch P&L a/c

Particulars Amount Particulars Amount
Branch expenses paid by branch XXX Gross profit XXX
Branch expenses paid by HO XXX Discount received XXX
Depreciation and amortisation XXX Scrap value of abnormal loss XXX
Abnormal loss XXX
Bad debts XXX
Discount allowed XXX
Net profit XXX

3) Branch a/c (personal a/c) – not a memorandum ledger (perfect ledger a/c)
Particulars Amount Particulars Amount
To balance b/d (opening branch assets – XXX By goods sent to branch a/c (goods returned XXX
opening branch liabilities) by branch and received by HO)
To goods sent to branch a/c XXX By bank a/c (remittances) XXX
To bank a/c (expenses paid by HO) XXX By balance c/d (closing branch assets – XXX
closing branch liabilities)
To bank a/c (branch creditors paid by HO) XXX
To bank a/c (branch assets purchased by XXX
HO)
To cash a/c (petty expenses paid by HO) XXX
To General P&L (net profit) XXX
Note: Practically, values of branch assets and liabilities are calculated by preparing memorandum ledger accounts as
prepared under the debtors system to present in the company balance sheet.
 Wholesale price method – ledger account formats
1) Head office trading a/c
Particulars Amount Particulars Amount
To opening stock a/c XXX By sales a/c: XXX
- To customers (retail price)
- To own retail branches (wholesale
price)
- To other retail outlets (wholesale
price)
To purchases a/c XXX By closing stock a/c XXX
To HO P&L a/c XXX

2) Head office P&L a/c

Particulars Amount Particulars Amount
To Indirect expenses XXX By HO trading a/c XXX
To branch stock reserve (loading on closing XXX By branch stock reserve (loading on XXX
stock) opening stock)
To general P&L (net profit) XXX

3) Branch trading a/c

Particulars Amount Particulars Amount
To opening stock a/c XXX By sales a/c XXX
To goods sent to branch a/c XXX By abnormal loss a/c XXX
To branch P&L a/c XXX By closing stock a/c XXX

4) Branch P&L a/c

Particulars Amount Particulars Amount
To Indirect expenses XXX By branch trading a/c XXX
To abnormal loss a/c (If Tulsian method is XXX
followed, otherwise take abnormal loss to
general P&L)
To general P&L (net profit) XXX
Note: In case of sums with invoice price, we have to remove loading only on opening stock and closing stock. No
need to remove loading from goods sent to branch and abnormal loss.

Independent branches (important points)

a) Inter-branch transactions should always be routed through head office. A branch cannot
use ledger account of another branch.
b) Two platinum rules for accounting goods / cash in transit:
i. Goods / cash in transit should always be debited in original entry (not in reversal entry).
In the next year, goods / cash in transit entry should be reversed.
ii. Goods / cash in transit entries can be passed either in the books of head-office or in the
books of the branch (generally it is advisable to pass the entry in the books of
receiving entity).
 c) Even if branch fixed assets a/cs are maintained in the books of head office, depreciation
expenses should be charged only to branch P&L.

Methods of finding profit or loss of an independent branch

i) Separate final accounts method – Branch will prepare its own trading, P&L and BS in
its books and HO will pass entry in its books only for the final net profit of the branch.
Only net profit is incorporated in the books of HO.
ii) Abridged consolidation method – Branch will prepare its own trading and P&L a/c. The
balances will then be consolidated into HO books where company BS will be prepared.
In this method, not only net profit but even assets and liabilities of the branch will
be incorporated in the books of HO.
iii) Detailed consolidation method – Branch will only prepare its trial balance. Then all the
ledger accounts will be consolidated into HO books and HO will prepare branch trading,
and P&L and company BS.

Foreign branch (separate books will be maintained – independent branch)

a) Branches are of two types – integral (IFO) and non-integral (NIFO).
b) Trial balances of foreign branches will be translated into INR based on the following
exchange rates:
FS item IFO NIFO
Opening stock Opening rate Opening rate
Closing stock Closing rate Closing rate
Revenue items (expenses Average rate Average rate
and incomes except
depreciation and goods
received from HO)
Depreciation At the date of purchase of asset Average rate
Goods received from HO Take it from the HO books – Take it from the HO books – no
and HO a/c no need to convert need to convert
Fixed assets and other Original rate on the date of Closing rate
non-monetary items transaction
Other monetary assets Closing rate Closing rate
and liabilities
Treatment of difference P&L FCTR
in the TB