FYBCOM - SEM I: ACCOUNTANCY & FINANCIAL MANAGEMENT – PAPER I

MODULE1: ACCOUNTING STANDARDS ISSUED BY THE ICAI

1) MEANING: AS are written documents containing the Generally Accepted Accounting Principles
(GAAP)
2) WHO: ICAI  constituted ASB (1977) ASB Members are  Elected members of the ICAI +
various Central Govt nominees + nominees from other professional institutes like ICWAI, ICSI,
etc. + Representatives of Industry Associations + RBI + SEBI + C&AG + GST + Representatives
of Academic & Financial Institutions + Other eminent professionals + anyone else as considered
appropriate.
3) STEPS: Preliminary draft is prepared by the study groups  then reviewed by the ASB  then
sent to various bodies like FICCI, ASSOCHAM, SCOPE, CLB, C&AG, ICWAI, ICSI, CBDT,
etc.  after their views are considered  the draft of the AS is issued as an Exposure Draft (ED)
for comments by members of ICAI & the public at large  after the views on the ED are
considered the Final Draft is submitted by the ASB to the Council of the ICAI for its approval 
the final AS is issued by the Council after its approval.
4) FACTORS: that should be considered while setting AS  are the Indian Laws, customs &
business environment  IAS issued by Intl ASB  the purposes & limitations of published final
accounts  Auditors’ Role in examining the FS (IFRS – CONVERGE IND AS & NOT ADOPT)
5) POINTS COVERED IN AS: Concepts & Fundamental AP, Definitions, Manner of applying AP,
Presentation & Disclosure requirements, Concerns to which the AS will apply, w.e.f. date
6) MANDATORY: Almost all AS are now compulsory. A few are compulsory only for large Pub
Ltd Cos. A CA has to check if all AS have been complied with, else he has to report on non-
compliance in the Auditor’s Report
7) OBJECTIVE: Standardize the different AP & Practice followed by different business concerns in
India
8) BENEFITS: Reduces the differences in the Accounting treatments of items in the FS by various
entities, Additional disclosures not required by other Laws are made mandatory by AS which
helps the users of FS, Helps comparison of FS of different entities which helps the users of FS.
9) LIMITATIONS: It is difficult selecting from the various solutions provided by the AS to an
accounting problem. AS may be applied mechanically even if the entity’s circumstances are
different. In case of Conflict of Law & AS, then Law will prevail over the AS

ACCOUNTING POLICIES OR PRINCIPLES v/s ACCOUNTING ASSUMPTIONS

Sr. No. Accounting Policies / Principles Fundamental Accounting
Assumptions
1. Item AP are item specific i.e. they change from FAA do not differ from item to item
specific item to item i.e. they are different for
different assets, liabilities, incomes &
expenses.
2. Choice AP can be chosen / selected by the concern A concern has no choice regarding
what should be its FAA
3. Different Different concerns doing the same kind of FAA do not differ from concern to
AP business may adopt different AP concern
4. Disclosur AP disclosure should form part of FS Disclosure is required only if FAA
e are not followed
5. Examples SLM & WDV for depreciation, FIFO & Going concern, consistency, accrual
WAM for Inventory Valuation, etc

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AS-1: DISCLOSURE OF ACCOUNTING POLICIES (1-4-1991)
1) AS-1 is a MANDATORY (compulsory) standard for all entities. It is also required by some
Laws (Eg.: Cos Act, Income-tax Act)

2) FUNDAMENTAL ACCOUNTING ASSUMPTIONS (GCCA) are not required to be disclosed

if they are being followed. Disclosure will be required only if they are not being followed. Eg.: If
a concern is going to be sold off, the FAA of going concern is no longer valid for this entity,
hence this fact will have to be disclosed in the FS

3) ACCOUNTING POLICIES: means SPECIFIC Accounting Principles & METHODS of

applying those Accounting Principles

4) CHOICE of AP:
1. Since there isn’t a single list of universally used AP, the choice of AP depends upon
i. the judgement of the Management of the Concern
ii. the need to present a ‘True & Fair view’ of the FS (P/L, B/S, CFS, Notes to
Accounts)
2. Major factors which influence the choice of AP
i. Prudence (Conservatism Concept): Income, Profits, Gains & Assets are not
estimated but recorded only when realized. All known liabilities, expenses, &
losses are provided for, even though the amount can only be an estimate & not an
exact figure.
ii. Substance over Form: It is the substance (essence) of transactions & events which
are important & not its legal form. Eg.: A concern dealing in perishable goods
should follow FIFO method to value its closing stock even if Weighted Average
Method is easier to follow for the entity
iii. Materiality: FS should disclose all material items (items whose knowledge might
influence the economic decisions of the user of the FS are called material items)

5) Disclosure of AP CANNOT BE A REMEDY FOR WRONG ENTRY: Eg.: A concern cannot

write off capital expenditure as revenue expenditure by disclosing in the Notes to Accounts (FS)
that it is the AP of the concern to do so.

6) AREAS in which different AP can be applied - examples:

1. Fixed Assets valuation
2. Expenditure during Construction period
3. Goodwill Accounting
4. Depreciation methods
5. Investment valuation
6. Stock Valuation
7. Treatment of Retirement benefits
8. Recognition of profit on long-term contracts
9. Foreign currency items
10. Contingent liabilities treatment

7) MAIN FEATURES:
1. All SIGNIFICANT Accounting Policies (AP) adopted in the Preparation & Presentation of
F/S (B/S, P/L, CFS & NOTES) should be DISCLOSED
2. The disclosure should FORM PART OF THE FS & It should be disclosed in ONE
PLACE (instead of being scattered in several schedules & notes to the accounts)
3. If the fundamental accounting assumptions i.e. Going Concern, Consistency & Accrual
(mercantile) (GCCA) are being followed  no need of any Disclosure but,
If the fundamental accounting assumptions are not being followed  this fact should be
disclosed in the FS
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 4. Change in AP:
i. If the change in AP has a MATERIAL effect in the current period or in later
period, then such change should be disclosed in the year in which the change is
made
ii. The amount by which any item in the FS is affected by such change should be
disclosed
iii. If the amount cannot be determined by which any item in the FS is affected by
such change, then this fact should also be disclosed

AS-2: VALUATION OF INVENTORIES (1-4-1999)

1) WHAT IS INVENTORY
1. Raw Materials (also maintenance supplies, consumables, loose tools to be used in the
production process)
2. WIP
3. Finished Goods
4. Bought-Outs -> goods purchased & held for resale

2) AS-2 DOES NOT APPLY To:

1. Machinery Spares –> AS -10: Accounting for Fixed Assets
2. WIP under Construction Contracts -> AS-7: Accounting for Construction Contracts
3. WIP for Service Contracts -> Consultant, Hospital, Merchant banker, etc.
4. Investment held as Stock-in-Trade (SIT). Eg.: Shares, Debentures, etc. held by Finance
Co.
5. Livestock, agriculture or forest produce, mineral oil, ores and gases  these are Valued at
NRV as per the established practice in such industries.

3) VALUATION:
1. Costs = See point (4) below
2. NRV = Estimated SP (-) Estimated Costs of Completion
(-) Estimated Costs necessary to make the Sale
3. Cost or NRV w/e is . This has to be done ITEM WISE (Also called PICK & CHOOSE
METHOD) & not in totality (or global basis) as it will be against the accounting principle
of Prudence or Conservatism.
4. Done at the YEAR END & not everyday
5. Why COSTS  ‘Matching Principle – Matching Costs with Revenue’  so that the cost
of unsold goods is c/fd to be deducted from the Income from their sale in future.
6. Why NRV if < than Costs  because to make provision for LOSS
7. Why not NRV if > than Cost  because of ‘Principle of Conservatism’ which states to
account for only Realized Profits and not Expected Profits
8. RM, Stores & Spares are valued at COST even if NRV is lower as these will be anyway
consumed and not sold to outsiders AND also if the FG in which they will be used are
expected to be sold at or above cost. BUT if the FG in which they will be used are
expected to be sold below cost, THEN RM, Stores & Spares are valued at NRV if it is
lower than the cost
(Eg: RM: Cost = 10, NRV = 8 & FG: Cost = 100, NRV = 98, Then RM = 8, FG = 98)
(Eg: RM: Cost = 10, NRV = 8 & FG: Cost = 100, NRV = 102, Then RM = 10, FG = 100)
(Eg: RM: Cost = 10, NRV = 12 & FG: Cost = 100, NRV = 98, Then RM = 10, FG = 98)
(Eg: RM: Cost = 10, NRV = 12 & FG: Cost = 100, NRV = 102, Then RM = 10, FG = 100)
9. Only FG & Bought-outs are valued at COST or NRV w/e is

4) COSTS:
1. PURCHASE COSTS:
i. Purchase price
ii. Duties & Taxes (Other than those recovered from the Government)
iii. Freight Inwards
iv. Other Expenses directly related to the acquisition
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 v. Less: Trade Discounts, Rebates, Duty Drawback (refunds)
2. COSTS OF CONVERSION
i. Direct Labour
ii. Fixed & Variable Production Overheads
3. OTHER COSTS INCURRED IN BRINGING THE INVENTORIES TO THEIR
PRESENT LOCATION
i. Non-Production Overheads
ii. Designing Costs, etc.
4. COSTS THAT SHOULD NOT BE INCLUDED
i. Abnormal Costs (Eg.: Abnormal Wastages)
ii. Storage Costs
iii. Costs incurred after bringing the goods to the present location
iv. General Administrative Exp, Selling & Distribution (S&D) Exp, Interest on loans

5) METHODS OF VALUATION:
1. SPECIFIC COSTS or NOT INTERCHANGEABLE ITEMS:
i. Items not ordinarily interchangeable are valued at their specific costs
ii. Specific Projects are valued at their specific costs
iii. If we can link particular item  particular purchase  specific costs
 Eg.: Capital goods industry  Textile Machinery being
manufactured for a specific customer
 Exporter  Specific Export Order
 Bar coded items
 Antique work
2. NON-SPECIFIC COSTS or COSTS FOR INTER-CHANGEABLE ITEMS:
i. FIFO (Stock  is valued at its Latest Purchase Price)
ii. WEIGHTED AVERAGE (Stock  is valued at the Weighted Average of all
Purchase Costs)
iii. Use w/e method helps to ascertain the FAIR COSTS incurred in bringing the items
of inventory to their present location and condition
3. AS-2 allows two other methods of valuing Inventory IF it would result in an estimated
cost which is close to the actual cost
i. RETAIL METHOD OF STOCK VALUATION:
 Applicable to a retail trader who normally deals with numerous
small value items at a fixed rate of Gross Profit (GP)
 Closing stock at cost = Closing stock at sale value – Gross Profit
ii. STANDARD COST METHOD OF STOCK VALUATION:

6) DISCLOSURE REQUIREMENTS:
1. Accounting policies adopted and the cost formula in valuing inventories.
2. Total amount of inventory & its Classification (RM, WIP, FG, etc.)

7) MAIN FEATURES:
1. AS-2 applies to the valuation of all inventories except: [see point (2) above]
i. Machinery Spares –> AS -10: Accounting for Fixed Assets
ii. WIP under Construction Contracts -> AS-7: Accounting for Construction Contracts
iii. WIP for Service Contracts -> Consultant, Hospital
iv. Investment held as Stock-in-Trade. Eg.: Shares, Debentures, etc. held by a Finance
Co.
v. Livestock, agriculture or forest produce, mineral oil, ores and gases  these are
Valued at NRV as per the established practice in such industries.
2. Inventories should be valued at Cost or NRV w/e is on an Item-by-Item basis:
i. Costs of Inventories include
 All costs of Purchase
 Costs of conversion
 Other costs incurred in bringing the inventories to their present
location & condition
ii. NRV =
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 Estimated Selling Price (-) Estimated Costs of Completion (-) Estimated
Costs necessary to make the Sale
3. Inventories that are NOT-INTERCHANGEBALE or produced for SPECIFIC
PROJECTS should be valued by specific identification of their individual costs
4. Inventories that are INTERCHANGEBLE should be valued by using FIFO or Weighted
Average Cost Method
5. Retail Method may be used for convenience if the results give the approximate actual
costs

AS-9: REVENUE RECOGNITION (1-4-1991)

(Timing of booking of Income)
1) AS-9 DOES NOT DEAL WITH REVENUE ARISING FROM:
1. Construction contracts
2. Hire Purchase or Lease Transactions
3. Government grants or subsidies
4. Insurance contracts

2) MEANING OF:
1. REVENUE: sales, income, turnover, topline
i. Revenue is the gross inflow of cash, receivables or other consideration arising in the
course of the ordinary activities of an enterprise from the sale of goods, rendering of
services, and from the use by others of enterprise’s resources yielding Interest,
Royalties and Dividends
ii. In an AGENCY relationship, the revenue is the amount of commission and not the
gross inflow of cash, receivables or other consideration
2. PROPORTIONATE COMPLETION METHOD (PCM): Under PCM, revenue is
recognized in proportion to the degree or stage of completion or if the contract is for a
definite period (say 4 years), revenue is recognized proportionately over the period (say
1/4th every year)
3. COMPLETED SERVICE CONTRACT METHOD (CSCM): CSCM accounts for the
entire Income only when the rendering of service is complete. Income is booked on doing
the single act or on completion of the contract
3) DISCLOSURES REQUIREMENTS:
1. AS-1: Whatever is required by AS-1 + below point 2.
2. Reasons for non-recognition of revenue: Circumstances in which revenue recorgnition
has been postponed due to uncertainties involved should also be disclosed.

4) MAIN FEATURES:
1. Revenue from Sale of Goods should be recognized when:
i. the seller has transferred to the buyer the ‘PROPERTY IN THE GOODS’ for a
‘PRICE’.
ii. Transferring ‘PROPERTY IN THE GOODS’  means all significant risks &
rewards of ownership have been transferred & the seller retains no effective control
of the goods.
2. Revenue from Rendering of Services should be recognized on the basis of the
performance of the services:
i. On the basis of PROPORTIONATE COMPLETION METHOD (PCM)
ii. On the basis of COMPLETED SERVICE CONTRACT METHOD (CSCM)
3. In other cases, revenue should be recognized as follows:
i. INTEREST: Should be recognized on a TIME PROPORTION BASIS taking into
account the PRINCIPAL OUTSTANDING
ii. ROYALTIES: Should be recognized on ACCRUAL BASIS in accordance with
the terms of the relevant agreement
iii. DIVIDENDS: Should be recognized when the RIGHT TO RECEIVE
(DECLARED) the dividend payment is established

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4. Timing of Revenue Recognition: Revenue should be recognized only when no significant
uncertainty exists
i. Measurable: regarding the amount of the consideration that will be derived &
ii. Collectible: about its ultimate collectability