Accounts Notes

Introduction to Accounting Standards
Key Terms and Concepts
1. Generally Accepted Accounting Principles (GAAP)
• Definition: A common set of accounting principles, standards, and procedures that

companies must follow when they compile their financial statements.
• Example: Inventory valuation methods like FIFO and Weighted Average.
2. International Financial Reporting Standards (IFRS)
• Definition: Global standards for financial reporting, issued by the International

Accounting Standards Board (IASB).
• Example: IFRS 1 - First-time Adoption of IFRS.
3. Indian Accounting Standards (Ind AS)
• Definition: IFRS-converged standards issued by the Indian government.

• Example: Ind AS 101 - First-time Adoption of Indian Accounting Standards.
Objectives and Benefits of Accounting Standards
1. Standardization of Accounting Treatments
• Benefit: Reduces variations in accounting treatments, ensuring comparability.

• Example: Standard policies for inventory valuation.
2. Additional Disclosures
• Benefit: Provides necessary information not statutorily required.

• Example: Disclosure of accounting policies used.
3. Comparability of Financial Statements
• Benefit: Enhances the ability to compare financial statements across different enterprises.
• Example: Comparing financial health of companies using similar accounting policies.
Standards Setting Process
1. Identification of Area
• Step: ASB identifies broad areas for formulation of standards.
2. Constitution of Study Groups

• Step: ASB forms study groups to draft preliminary standards.
3. Preparation and Circulation of Draft
• Step: Drafts are circulated for comments from various bodies.
4. Finalization and Issuance
• Step: Final drafts are issued as standards after public comments and revisions.
Convergence vs. Adoption
1. Convergence
• Definition: Aligning local standards with IFRS while making necessary adjustments.
• Example: Ind AS are converged with IFRS but include carve-outs for Indian context.
2. Adoption
• Definition: Directly adopting IFRS without modifications.

• Example: Some countries adopt IFRS as issued by IASB.
Carve Outs and Carve Ins
1. Carve Outs
• Definition: Deviations from IFRS to suit local economic conditions.

• Example: Terminology changes like ‘balance sheet’ instead of ‘statement of financial
position’.
2. Carve Ins
• Definition: Additional guidance provided in Ind AS over IFRS.

• Example: Specific guidance on certain accounting treatments.
Roadmap for Ind AS Implementation
1. Voluntary Basis
• Date: From 1st April 2015.
2. Mandatory Basis
• Date: From 1st April 2016 for companies with net worth of INR 500 crore or more.
❓ Questions and Answers
Q1: What is the purpose of Accounting Standards?
• A1: To ensure comparability, transparency, and reliability of financial statements.
Q2: What are the benefits of standardizing accounting treatments?
• A2: It reduces variations, enhances comparability, and improves the credibility of

financial data.
Q3: How does the standard-setting process work?
• A3: It involves identifying areas, forming study groups, preparing drafts, seeking
comments, and issuing final standards.
Q4: What is the difference between convergence and adoption of IFRS?
• A4: Convergence aligns local standards with IFRS with necessary adjustments, while
adoption directly implements IFRS without changes.
Framework for Preparation and Presentation of
Financial Statements 📊
1. Introduction
• Foundation of Accounting Standards: The development of accounting

standards relies on underlying principles.
• Framework Issued by ICAI: The Accounting Standards Board (ASB) of ICAI
issued a framework in July 2000.
2. Purpose of the Framework 🎯
• Assist Enterprises: Helps in preparing financial statements in compliance with

Accounting Standards.
• Assist ASB: Aids in the development and review of Accounting Standards.
• Assist Auditors: Helps auditors form opinions on financial statements.
• Assist Users: Provides users with information to interpret financial statements.
3. Status and Scope of the Framework 📜
• General-Purpose Financial Statements: Applies to financial statements

prepared annually for external users.
• Special Purpose Financial Reports: Not covered by the framework but may be
applied if not inconsistent with their requirements.
4. Components of Financial Statements 📈
• Balance Sheet: Shows the value of economic resources controlled by an

enterprise.
• Statement of Profit and Loss: Presents the result of operations for an
accounting period.
• Cash Flow Statement: Displays how cash is generated and used during an
accounting period.
• Notes and Other Statements: Provide supplementary information explaining
different items of financial statements.
5. Objectives and Users of Financial Statements 🎯

• Objective: Provide information about the financial position, performance, and
cash flows of an enterprise.
• Users: Investors, Employees, Lenders, Suppliers, Customers, Governments, and
the Public.
6. Fundamental Accounting Assumptions 📚
• Going Concern: Assumes the enterprise will continue in operation in the

foreseeable future.
• Accrual Basis: Revenues and costs are recognized as they are earned or incurred.
• Consistency: Accounting policies are consistent from one period to another.
7. Qualitative Characteristics of Financial Statements 🌟
• Understandability: Information should be readily understandable by users.

• Relevance: Information should be relevant to users’ decision-making.
• Reliability: Information should be free from material error and bias.
• Comparability: Financial statements should permit comparison over time and
between entities.
8. True and Fair View 🔍
• Concept: Financial statements should show a true and fair view of the
performance, financial position, and cash flows of an enterprise.
9. Elements of Financial Statements 🧩
• Asset: A resource controlled by the enterprise expected to generate future

economic benefits.
• Liability: A present obligation arising from past events expected to result in an
outflow of resources.
• Equity: Residual interest in the assets after deducting liabilities.
• Income: Increase in economic benefits during the accounting period.
• Expense: Decrease in economic benefits during the accounting period.
10. Measurement of Elements of Financial Statements 📏
• Historical Cost: Assets and liabilities are recorded at their acquisition price.
• Current Cost: Assets are carried at the amount of cash that would be paid if
acquired currently.
• Realisable Value: Amount of cash that could be obtained by selling the asset.
• Present Value: Present value of future net cash inflows or outflows.
11. Capital Maintenance 💼
• Concept: Ensures that the capital of the business is maintained and not eroded
over time.
Potential Questions and Answers ❓
1. Q: What is the purpose of the framework for financial statements?

o A: The framework assists enterprises in preparing financial statements,
helps ASB in developing standards, aids auditors in forming opinions, and
provides users with information to interpret financial statements.
2. Q: What are the fundamental accounting assumptions?
o A: The fundamental accounting assumptions are Going Concern, Accrual
Basis, and Consistency.
3. Q: What are the qualitative characteristics of financial statements?
o A: The qualitative characteristics are Understandability, Relevance,
Reliability, and Comparability.
4. Q: What is the difference between historical cost and current cost?
o A: Historical cost records assets and liabilities at their acquisition price,
while current cost records them at the amount of cash that would be paid
if acquired currently.
Applicability of Accounting Standards
Accounting Standards (AS)
• Definition: Guidelines for financial reporting issued by the Accounting Standards

Board (ASB) of the Institute of Chartered Accountants of India (ICAI).
• Purpose: Ensure transparency, consistency, and comparability in financial
statements.
Mandatory Status
• Definition: The requirement for enterprises to comply with accounting standards

as notified by the Ministry of Corporate Affairs (MCA).
• Implication: Non-compliance must be disclosed by auditors.
Materiality
• Definition: The significance of an item in financial statements, judged by its

potential impact on economic decisions.
• Example: A penalty of ₹50,000 is material if it conveys important information,
even if the company’s turnover is in crores.
Applicability of Accounting Standards
For Corporate Entities
• Criteria: Applies to all companies incorporated under the Companies Act, 1956 or
2013.
• Exceptions: Specific industries like insurance, banking, and electricity have
tailored requirements.
For Non-Corporate Entities
• Criteria: Applies to entities engaged in commercial, industrial, or business

activities, including charitable organizations if any part of their activities is
commercial.
• Exemptions: Entities solely engaged in non-commercial activities are excluded.
Income Computation and Disclosure Standards (ICDS)

• Purpose: Standardize the computation of taxable income.
• Applicability: Applies to all assesses (except individuals and HUFs not required
to audit their accounts) from AY 2017-18.
• List of ICDS: Includes standards on accounting policies, valuation of inventories,
revenue recognition, etc.
Classification of Entities
• Corporate Entities: Classified as Small and Medium-sized Companies (SMCs) and

Non-SMCs.
• Non-Corporate Entities: Classified into four levels (I to IV) based on turnover
and borrowings.
Exemptions and Relaxations
• SMCs and MSMEs: Certain accounting standards are not applicable or have
relaxed requirements for these entities.
Questions and Answers
Q1: What is the role of the Accounting Standards Board (ASB)?
A1: The ASB develops accounting standards to ensure consistency and transparency in
financial reporting.
Q2: How does materiality affect financial reporting?
A2: Materiality determines whether an item should be separately disclosed based on its
potential impact on economic decisions.
Q3: What are the criteria for classifying non-corporate entities?
A3: Non-corporate entities are classified into four levels based on their turnover and
borrowings.
Q4: What are Income Computation and Disclosure Standards (ICDS)?
A4: ICDS are standards notified by the Central Government to standardize the
computation of taxable income.
Presentation & Disclosures Based Accounting
Standards
Learning Outcomes
• Fundamental Accounting Assumptions

• Nature of Accounting Policies
• Areas with Different Accounting Policies
• Considerations in Selecting Accounting Policies
Introduction
• Diversity in Accounting Policies: Due to the varied nature of enterprises and
incomplete coverage by accounting standards, diversity in accounting policies is
inevitable.
• Purpose of AS 1: To promote better understanding and comparability of
financial statements by requiring disclosure of significant accounting policies.
Fundamental Accounting Assumptions

Going Concern
• Definition: Assumes an enterprise will continue its operations in the foreseeable

future.
• Implications: Requires sufficient profit retention for asset replacement and
liability settlement.
Consistency
• Definition: Using the same accounting policies for similar transactions across
periods.
• Implications: Enhances comparability of financial statements over time.
Accrual Basis of Accounting

• Definition: Transactions are recognized when they occur, not when cash is
received or paid.
• Implications: Ensures better matching of revenue and costs, though it may
overstate profits.
Accounting Policies
Definition
• Accounting Policies: Specific principles and methods adopted by an enterprise

in preparing financial statements.
Examples
• Inventories: FIFO, Weighted Average

• Cash Flow Statement: Direct Method, Indirect Method
Selection Considerations
• Prudence: Profits are not anticipated, but losses are provided for.
• Substance Over Form: Transactions should be accounted for based on their
substance and financial reality.
• Materiality: Disclose all material items that could influence decisions.
Disclosure of Changes in Accounting Policies

Material Effect
• Current Period: Disclose the amount affected by the change.

• Future Periods: Disclose the expected material effect.
Example
• Inventory Valuation Change: From FIFO to Weighted Average, affecting profit

and inventory value.
Q1: What are the three fundamental accounting assumptions?
• A1: Going Concern, Consistency, Accrual Basis of Accounting.
Q2: Why is the disclosure of accounting policies important?
• A2: It promotes better understanding and comparability of financial statements.
Q3: What should be disclosed if there is a change in accounting policy?
• A3: The nature of the change, its effect on financial statements, and the amount
affected.
Practical Questions
Q1: True or False: Fundamental accounting assumptions need to be
specifically stated.
• A1: False. They are usually assumed unless not followed.
Q2: Give an example of an area where accounting policies might differ.
• A2: Inventory valuation methods (FIFO vs. Weighted Average).

Cash Flow Statements
Cash and Cash Equivalents
• Definition: Cash in hand, deposits repayable on demand, and short-term, highly liquid
investments.
• Examples: Bank deposits, treasury bills.
Presentation of a Cash Flow Statement
• Objective: To provide information about cash inflows and outflows during a period.
• Importance: Helps in assessing liquidity, solvency, and financial flexibility.
Reporting Cash Flows from Operating Activities
• Direct Method: Shows major classes of gross cash receipts and payments.
• Indirect Method: Adjusts net profit for non-cash items and changes in working capital.
Reporting Cash Flows from Investing and Financing Activities
• Investing Activities: Acquisition and disposal of long-term assets.

• Financing Activities: Changes in the size and composition of the equity capital and
borrowings.
Q1: What are the main components of cash and cash equivalents?
A1: Cash in hand, demand deposits with banks, and short-term investments that are readily
convertible to known amounts of cash.
Q2: Why is the cash flow statement important?
A2: It helps users understand the historical changes in cash and cash equivalents, assess the
ability to generate future cash flows, and evaluate the liquidity and solvency of an enterprise.
Q3: What is the difference between the direct and indirect methods of reporting cash flows
from operating activities?
A3: The direct method lists major classes of gross cash receipts and payments, while the indirect
method adjusts net profit for non-cash items and changes in working capital.
Structure
1. Introduction
o Definition and importance of cash flow statements.
2. Cash and Cash Equivalents
o Components and examples.
3. Presentation of Cash Flow Statement
o Objectives and significance.
4. Reporting Cash Flows
o Operating activities (Direct and Indirect methods).
o Investing and financing activities.
5. Examples and Illustrations
o Practical examples to illustrate the concepts.
📊 Accounting Standard 17: Segment Reporting
Definition and Identification of Reportable Segments
• Business Segment: A distinguishable component of an enterprise providing

individual or related products/services with different risks and returns.
• Geographical Segment: A distinguishable component providing
products/services within a specific economic environment with different risks and
returns.
Primary and Secondary Segment Reporting Formats
• Primary Format: Based on the dominant source of risks and returns (business or
geographical).
• Secondary Format: Provides additional information not covered in the primary
format.
Business and Geographical Segments
• Business Segments: Determined by the nature of products/services, production

processes, customer types, distribution methods, and regulatory environment.
• Geographical Segments: Determined by economic and political conditions,
relationships between operations, proximity, special risks, exchange control
regulations, and currency risks.
Objectives and Scope
Objective
• Purpose: To establish principles for reporting financial information about

different products/services and geographical areas.
• Benefits: Helps users understand enterprise performance, assess risks and
returns, and make informed judgments.
Scope
• Application: Mandatory for non-SMCs and Level I entities. Encouraged for

others.
• Compliance: Full compliance required; selective compliance not allowed.
Segment Revenue, Expense, Assets, and Liabilities
Segment Revenue
• Components: Directly attributable revenue, reasonably allocable revenue, and

inter-segment transactions.
• Exclusions: Extraordinary items, interest/dividend income (unless financial
nature), and gains on sales of investments/debt extinguishment.
Segment Expense
• Components: Directly attributable expenses, reasonably allocable expenses, and

inter-segment transactions.
• Exclusions: Extraordinary items, interest expense (unless financial nature), losses
on sales of investments/debt extinguishment, income tax expense, and general
administrative expenses.
Segment Assets and Liabilities
• Assets: Operating assets directly attributable or reasonably allocable to the

segment.
• Liabilities: Operating liabilities directly attributable or reasonably allocable to the
segment.
Reporting and Disclosure
Primary Reporting Format
• Disclosures: Segment revenue, result, assets, liabilities, capital expenditure,

depreciation/amortization, and significant non-cash expenses.
Secondary Segment Information
• Disclosures: Segment revenue, assets, and capital expenditure by geographical

area or business segment.
Potential Questions
1. What is a business segment?

o A business segment is a distinguishable component of an enterprise
providing individual or related products/services with different risks and
returns.
2. What are the primary and secondary segment reporting formats?
o The primary format is based on the dominant source of risks and returns
(business or geographical), while the secondary format provides additional
information not covered in the primary format.
3. What are the components of segment revenue?
o Segment revenue includes directly attributable revenue, reasonably
allocable revenue, and inter-segment transactions.
4. What should be disclosed in the primary reporting format?
o Disclosures include segment revenue, result, assets, liabilities, capital
expenditure, depreciation/amortization, and significant non-cash
expenses.
Advanced Accounting: AS-18 Related Party Disclosures
Introduction
AS-18 prescribes the requirements for disclosure of related party relationships and transactions
between the reporting enterprise and its related parties. These requirements apply to both
individual and consolidated financial statements.
Why Disclosure is Needed?
• Arm’s-Length Transactions: Transactions are presumed to be at arm’s length between

independent parties, but this may not hold true for related parties.
• Impact on Financial Statements: Related party transactions may not be at the same
terms as unrelated parties, affecting the financial position and operating results.
Related Party Relationships
Related Party: Parties are considered related if one party controls or significantly influences the
other during the reporting period.
Types of Related Party Relationships
1. Control Relationships: Holding companies, subsidiaries, and fellow subsidiaries.

2. Associates and Joint Ventures: Enterprises where the reporting enterprise has
significant influence.
3. Individuals with Control: Individuals owning significant voting power and their
relatives.
4. Key Management Personnel: Those with authority and responsibility for planning,
directing, and controlling activities.
5. Enterprises Influenced by Key Personnel: Enterprises controlled by directors or major
shareholders.
Who Are Not Related Parties?
• Companies with a common director (unless the director influences both companies).
• Single customers, suppliers, franchisers, distributors, or agents.
• Providers of finance, trade unions, public utilities, and government departments in normal
dealings.
Exemptions from Disclosure
1. Confidentiality Conflicts: When disclosure conflicts with statutory or regulatory

confidentiality requirements.
2. Intra-Group Transactions: No disclosure needed in consolidated financial statements.
3. State-Controlled Enterprises: No disclosure required for transactions between state-
controlled enterprises.
Key Definitions
• Related Party Transaction: Transfer of resources or obligations between related parties,

regardless of price.
• Control: Ownership of more than half the voting power or control of the board of
directors.
• Significant Influence: Participation in financial and operating policy decisions without
control.
Disclosure Requirements
• Name and Relationship: Disclose the name and nature of the related party relationship.
• Transaction Details: Describe the nature, volume, and other elements of transactions.
• Outstanding Items: Disclose amounts due from or to related parties at the balance sheet
date.
Examples of Related Party Transactions
1. Purchases or Sales of Goods: Finished or unfinished.

2. Purchases or Sales of Fixed Assets.
3. Rendering or Receiving Services.
4. Agency Arrangements.
5. Leasing or Hire Purchase Arrangements.
6. Transfer of Research and Development.
7. Licence Agreements.
8. Finance: Including loans and equity contributions.
9. Guarantees and Collaterals.
10. Management Contracts.
Accounting Standard 20: Earnings Per Share (EPS)
Introduction
Objective: To describe principles for the determination and presentation of EPS, improving
performance comparison among enterprises and periods.
Equity Share
• Definition: A share other than a preference share.

• Example: Common stock in a company.
Preference Share
• Definition: A share with preferential rights to dividends and repayment of capital.

• Example: Preferred stock with fixed dividends.
Financial Instrument
• Definition: Any contract that gives rise to a financial asset of one enterprise and a
financial liability or equity share of another enterprise.
• Example: Bonds, stocks, and derivatives.
Basic Earnings Per Share (EPS)
• Formula: [ \text{Basic EPS} = \frac{\text{Net profit (loss) attributable to equity

shareholders}}{\text{Weighted average number of equity shares outstanding during the
period}} ]
• Example: If net profit is ₹10,00,000 and weighted average shares are 2,00,000, Basic EPS
= ₹5.
Detailed Topics
Numerator Adjustments for Basic EPS
• Tax Expense: Include current and deferred tax.

• Exceptional Items: As per AS 5.
• Extraordinary Items: As per AS 5.
• Changes in Accounting Estimates and Policies: As per AS 5.
• Preference Dividends: Deduct non-cumulative and cumulative preference dividends.
Denominator for Basic EPS

• Weighted Average Number of Shares: Adjust for shares issued or bought back during
the period.
• Time-Weighting Factor: [ \text{Time-Weighting Factor} = \frac{\text{Number of days
shares are outstanding}}{\text{Number of days in the period}} ]
Diluted Earnings Per Share (EPS)
• Adjustments: Include dividends, interest, and other expenses or income from potential
equity shares.
• Formula: [ \text{Diluted EPS} = \frac{\text{Adjusted net profit}}{\text{Weighted average
number of shares + Potential equity shares}} ]
Examples and Illustrations
Example 1: Basic EPS Calculation
• Scenario: Net profit = ₹18,00,000, Shares = 20,00,000, Bonus issue = 2 shares for each
share.
• Calculation: [ \text{EPS} = \frac{₹18,00,000}{20,00,000 + 40,00,000} = ₹0.30 ]
Example 2: Diluted EPS Calculation
• Scenario: Net profit = ₹1,00,00,000, Shares = 50,00,000, Convertible debentures =

1,00,000.
• Calculation: [ \text{Diluted EPS} = \frac{₹1,08,40,000}{60,00,000} = ₹1.81 ]
1. What is the objective of AS 20?

o To describe principles for the determination and presentation of EPS, improving
performance comparison among enterprises and periods.
2. How is Basic EPS calculated?
o Basic EPS is calculated by dividing the net profit attributable to equity
shareholders by the weighted average number of equity shares outstanding
during the period.
3. What adjustments are made to the numerator for Basic EPS?
o Adjustments include tax expense, exceptional items, extraordinary items, changes
in accounting estimates and policies, and preference dividends.
4. What is the time-weighting factor in EPS calculation?
o The time-weighting factor is the number of days shares are outstanding divided
by the number of days in the period.
Accounting Standard 24: Discontinuing Operations
Discontinuing Operation
• Definition: A component of an enterprise that is being disposed of substantially

in its entirety, piecemeal, or through abandonment.
• Criteria:
o Represents a separate major line of business or geographical area.
o Can be distinguished operationally and for financial reporting purposes.
Initial Disclosure Event
• Definition: The occurrence of either a binding sale agreement for substantially all
assets or the approval and announcement of a detailed, formal plan for
discontinuance.
Main Ideas
Objectives of AS 24
• Purpose: To establish principles for reporting information about discontinuing

operations, enhancing users’ ability to project cash flows, earnings, and financial
position.
Recognition and Measurement
• Guidelines: AS 24 does not provide specific guidelines for recognition and

measurement; relevant Accounting Standards should be referred to.
Examples
Example 1: Restaurant Chain
• Scenario: Sale of one restaurant contributing 5% of total revenue.

• Conclusion: Not a discontinuing operation as it does not represent a major line
of business.
Example 2: Airline Business

• Scenario: Sale of the airline business constituting 25% of total group revenue.
• Conclusion: Considered a discontinuing operation due to the sale of assets as
part of a single plan.
Presentation and Disclosures
Initial Disclosure
• Requirements:
o Description of the discontinuing operation.
o Business or geographical segment.
o Date and nature of the initial disclosure event.
o Expected completion date.
o Carrying amounts of assets and liabilities.
o Revenue, expenses, and pre-tax profit or loss.
o Net cash flows from operating, investing, and financing activities.
Other Disclosures
• Events: Include information on gains or losses recognized on the disposal of

assets or settlement of liabilities.
What are the disclosure and presentation requirements of AS 24 for

discontinuing operations?
• Answer: An enterprise should include prescribed information in its financial

statements starting from the period in which the initial disclosure event occurs.
This includes descriptions, segment reporting, dates, carrying amounts, revenue,
expenses, pre-tax profit or loss, and net cash flows.
What are examples of activities that do not necessarily satisfy the criteria of a
discontinuing operation but might do so in combination with other circumstances?
• Answer:
o Gradual phasing out of a product line.
o Discontinuing several products within an ongoing line of business.
o Shifting production or marketing activities.
o Closing a facility for productivity improvements or cost savings.
Accounting Standard 25: Interim Financial
Reporting
Objective and Scope of AS 25
• Objective: To prescribe the minimum content of an interim financial report and

the principles for recognition and measurement in complete or condensed
financial statements for an interim period.
• Scope: Applies to enterprises that elect or are required to prepare and present an
interim financial report.
Content of an Interim Financial Report
• Complete Set of Financial Statements: Includes Balance Sheet, Statement of

Profit & Loss, Cash Flow Statement, and Notes.
• Condensed Financial Statements: Minimum required information, focusing on
new activities, events, and circumstances.
Minimum Components of an Interim Financial Report
• Condensed Financial Statements: Should include each heading and sub-

heading from the most recent annual financial statements and selected
explanatory notes.
Form and Content of Interim Financial Statements
• Complete Set: Should conform to annual financial statements requirements.

• Condensed Set: Should include minimum headings and sub-headings, with
additional line items or notes if necessary.
Selected Explanatory Notes
• Accounting Policies: Statement that the same policies are followed as in the
most recent annual financial statements.
• Seasonality: Explanatory comments about the seasonality of interim operations.
• Unusual Items: Nature and amount of unusual items affecting assets, liabilities,
equity, net income, or cash flows.
• Changes in Estimates: Nature and amount of changes in estimates from prior
periods.
• Debt and Equity: Issuances, buy-backs, repayments, and restructuring.
• Dividends: Aggregate or per share, separately for equity and other shares.
• Segment Information: Segment revenue, capital employed, and result for
business or geographical segments.
• Changes in Composition: Effects of amalgamations, acquisitions, disposals,
restructurings, and discontinuing operations.
• Contingent Liabilities: Material changes since the last annual balance sheet
date.
Periods for Which Interim Financial Statements are Required
• Balance Sheet: End of current interim period and end of the immediately
preceding financial year.
• Statement of Profit and Loss: Current interim period and cumulatively for the
year-to-date, with comparable periods.
• Cash Flow Statement: Cumulatively for the current financial year-to-date, with
comparable periods.
Materiality
• Assessment: Materiality should be assessed in relation to the interim period

financial data, recognizing that interim measurements may rely more on
estimates.
Disclosure in Annual Financial Statements
• Changes in Estimates: Disclosure of the nature and amount of changes in

estimates that have a material effect.
Accounting Policies
• Consistency: Same accounting policies as annual financial statements, with

changes reflected in the next annual financial statements.
Revenue and Costs
• Seasonal Revenue: Recognized when they occur, not anticipated or deferred.

• Uneven Costs: Anticipated or deferred only if appropriate at the end of the
financial year.
Use of Estimates
• Reliability: Measurement procedures should ensure reliable and relevant

information.
Restatement of Previously Reported Interim Periods
• Consistency: Single accounting policy applied throughout the financial year.
Transitional Provision
• First Interim Report: Certain comparative statements need not be presented.
Applicability of AS 25 to Interim Financial Results
• Interim Financial Report: Presentation and disclosure requirements apply only if

an enterprise prepares and presents an interim financial report as defined in AS
25.

What is the objective of AS 25?
Answer: The objective is to prescribe the minimum content of an interim financial report
and the principles for recognition and measurement in complete or condensed financial
statements for an interim period.
What are the minimum components of an interim financial report?
Answer: The minimum components include condensed financial statements with each
heading and sub-heading from the most recent annual financial statements and
selected explanatory notes.
How should materiality be assessed for interim financial reporting?
Answer: Materiality should be assessed in relation to the interim period financial data,
recognizing that interim measurements may rely more on estimates.
What should be included in the explanatory notes of interim financial

statements?
Answer: The explanatory notes should include information on accounting policies,

seasonality, unusual items, changes in estimates, debt and equity transactions,
dividends, segment information, changes in composition, and contingent liabilities.
Accounting Standard 2: Valuation of Inventory
1. Definition of Inventory
• Inventory: Assets held for sale, in production for sale, or for consumption in
production.
2. Measurement of Inventories
• Cost of Inventories: Includes purchase price, conversion costs, and other costs to
bring inventories to their present location and condition.
• Net Realisable Value (NRV): Estimated selling price in the ordinary course of
business, less estimated costs of completion and selling.
3. Cost Formulas
• First-In, First-Out (FIFO): Assumes that the earliest goods purchased are the first
to be sold.
• Weighted Average Cost: Average cost of all similar items available during the
period.
Detailed Insights
1. Costs Included in Inventory
• Purchase Costs: Purchase price, import duties, transport, handling, and other
costs directly attributable to acquisition.
• Conversion Costs: Direct labor, fixed and variable production overheads.
• Other Costs: Costs incurred to bring inventories to their present location and
condition.
2. Exclusions from Inventory Costs
• Abnormal Wastage: Wasted materials, labor, or other production costs.

• Storage Costs: Unless necessary in the production process.
• Administrative Overheads: Not contributing to bringing inventories to their
present location and condition.
• Selling and Distribution Costs: Costs related to selling the product.
Examples
Example 1: Valuation of Partly Finished Unit
• Cost of partly finished unit: ₹150

• Estimated cost of completion: ₹100
• Net selling price: ₹250
• Brokerage: 4% of selling price
• NRV Calculation: ₹250 - ₹100 - ₹10 = ₹140
• Value of Inventory: Lower of cost (₹150) and NRV (₹140) = ₹140
Q1: What is the definition of inventory according to AS 2?
• A1: Inventory includes assets held for sale, in production for sale, or for
consumption in production.
Q2: How is the cost of inventory measured?
• A2: Inventory is measured at the lower of cost and net realisable value.
Q3: What costs are included in the cost of inventory?
• A3: Costs of purchase, conversion, and other costs to bring inventories to their
present location and condition.
Q4: What costs are excluded from the cost of inventory?
• A4: Abnormal wastage, storage costs (unless necessary), administrative

overheads, and selling and distribution costs.
Summary
• Inventory Definition: Assets for sale, production, or consumption.

• Measurement: Lower of cost and NRV.
• Included Costs: Purchase, conversion, and other relevant costs.
• Excluded Costs: Abnormal wastage, storage, administrative overheads, selling,
and distribution.
Accounting Standard 10 (AS 10) - Property, Plant, and
Equipment (PPE)
Introduction
Objective: To prescribe the accounting treatment for Property, Plant, and Equipment (PPE).
Scope
• General Principle: AS 10 (Revised) applies to accounting for PPE.

• Exceptions: When another Accounting Standard requires or permits a different treatment (e.g.,
AS 19 on Leases).
Definition of PPE
PPE are tangible items that:
1. Held for Use: In production, supply of goods/services, rental, or administrative purposes.

2. Expected to be Used: For more than 12 months.
Recognition Criteria for PPE
• Probable Future Economic Benefits: The item will bring future economic benefits to the
enterprise.
• Reliable Measurement of Cost: The cost of the item can be measured reliably.
Measurement at Recognition
• Elements of Cost:
o Purchase Price: Includes import duties, non-refundable taxes, less trade discounts.
o Directly Attributable Costs: Costs necessary to bring the asset to its working condition.
o Decommissioning and Restoration Costs: Initial estimate of dismantling and restoring
the site.
Measurement After Recognition
• Cost Model: PPE is carried at cost less accumulated depreciation and impairment losses.
• Revaluation Model: PPE is carried at a revalued amount, being its fair value at the date of
revaluation less subsequent depreciation and impairment losses.
Depreciation
• Depreciable Amount: Cost of an asset less its residual value.

• Depreciation Method: Should reflect the pattern in which the asset’s future economic benefits
are expected to be consumed.
Derecognition
• Retirement or Disposal: Remove the carrying amount of the asset from the balance sheet.
• Gain or Loss: Recognize in the Statement of Profit and Loss.
• General Information: About the measurement bases used for determining the gross carrying
amount.
• Depreciation Methods: Used and the useful lives or depreciation rates.
• Reconciliation: Of the carrying amount at the beginning and end of the period.
Potential Questions and Answers

Q1: What is the objective of AS 10 (Revised)?
A1: The objective is to prescribe the accounting treatment for Property, Plant, and Equipment (PPE).
Q2: What are the recognition criteria for PPE?
A2: The cost of an item of PPE should be recognized as an asset if it is probable that future economic
benefits associated with the item will flow to the enterprise and the cost can be measured reliably.
Q3: What are the elements of cost included in the measurement of PPE at recognition?
A3: The elements of cost include the purchase price, directly attributable costs, and decommissioning and
restoration costs.
Q4: How is PPE measured after recognition?
A4: PPE can be measured using either the cost model or the revaluation model.
Q5: What is the treatment of depreciation under AS 10?
A5: Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.
The method should reflect the pattern in which the asset’s future economic benefits are expected to be
consumed.
Accounting Standard 13: Accounting for Investments
1. Introduction
• Investments: Assets held for earning income, capital appreciation, or other benefits.
• Fair Value: The price at which an asset could be exchanged between knowledgeable,
willing parties.
• Market Value: The amount obtainable from the sale of an investment in an open
market.
2. Forms of Investments
• Current Investments: Held for not more than one year.

• Long-term Investments: Held for more than one year.
• Investment Properties: Investments in land or buildings not intended for use by the
enterprise.
3. Classification of Investments
• Current Investments: Readily realisable and intended to be held for not more than one
year.
• Long-term Investments: Any investment other than current investments.
4. Cost of Investments
• Acquisition Cost: Includes brokerage, fees, and duties.

• Example: X Ltd invests in a long-term deposit worth ₹200 lakhs and incurs a brokerage
cost of ₹1 lakh.
5. Carrying Amount of Investments
• Current Investments: Lower of cost and fair value.

• Long-term Investments: Usually carried at cost unless there is a decline other than
temporary.
6. Investment Properties
• Definition: Investments in land or buildings not intended for use by the enterprise.
• Accounting: Accounted for using the cost model as per AS 10.
7. Disposal of Investments
• Recognition: Difference between carrying amount and disposal proceeds is recognized
in the profit and loss statement.
8. Reclassification of Investments
• From Long-term to Current: Transfers made at the lower of cost and carrying amount.
• From Current to Long-term: Transfers made at the lower of cost and fair value.
Q1: What are the different forms of investments?
A1: Investments can be classified into current investments, long-term investments, and
investment properties.
Q2: How is the cost of an investment determined?
A2: The cost includes acquisition charges such as brokerage, fees, and duties.
Q3: How are current investments valued?
A3: Current investments are valued at the lower of cost and fair value.
Q4: What is the treatment for disposal of investments?
A4: The difference between the carrying amount and disposal proceeds is recognized in the
profit and loss statement.
Summary
• Introduction: Defines investments, fair value, and market value.

• Forms of Investments: Current, long-term, and investment properties.
• Classification: Current investments are held for not more than one year; long-term
investments are held for more than one year.
• Cost of Investments: Includes acquisition charges.
• Carrying Amount: Current investments at lower of cost and fair value; long-term
investments at cost unless there is a decline.
• Investment Properties: Accounted for using the cost model.
• Disposal: Recognize the difference in profit and loss.
• Reclassification: Transfers at the lower of cost and carrying amount or fair value.
Accounting Standard 16: Borrowing Costs
1. Borrowing Costs
• Definition: Interest and other costs incurred by an enterprise in connection with

the borrowing of funds.
• Examples: Interest on loans, amortization of discounts or premiums on
borrowings, finance charges on finance leases, and exchange differences
regarded as an adjustment to interest costs.
2. Qualifying Asset
• Definition: An asset that necessarily takes a substantial period of time to get

ready for its intended use or sale.
• Examples: Manufacturing plants, power generation facilities, inventories
requiring a substantial period to become saleable, and investment properties.
Accounting Treatment
3. Specific and General Borrowings
• Specific Borrowings: Funds borrowed specifically for acquiring a qualifying

asset. The borrowing costs directly related to that asset are capitalized.
• General Borrowings: Funds borrowed generally and used for acquiring a
qualifying asset. The amount eligible for capitalization is determined by applying
a capitalization rate to the expenditure on that asset.
4. Commencement, Suspension, and Cessation of Capitalization
• Commencement: Capitalization begins when expenditures for the asset are

being incurred, borrowing costs are being incurred, and activities necessary to
prepare the asset for its intended use or sale are in progress.
• Suspension: Capitalization is suspended during extended periods in which active
development is interrupted.
• Cessation: Capitalization ceases when substantially all the activities necessary to
prepare the qualifying asset for its intended use or sale are complete.
• Policy Disclosure: The accounting policy adopted for borrowing costs.

• Amount Disclosure: The amount of borrowing costs capitalized during the
period.
Q1: What are borrowing costs?
A1: Borrowing costs are interest and other costs incurred by an enterprise in connection
with the borrowing of funds.
Q2: What qualifies as a qualifying asset?
A2: A qualifying asset is one that necessarily takes a substantial period of time to get
ready for its intended use or sale, such as manufacturing plants or power generation
facilities.
Q3: When does the capitalization of borrowing costs commence?
A3: Capitalization commences when expenditures for the asset are being incurred,
borrowing costs are being incurred, and activities necessary to prepare the asset for its
intended use or sale are in progress.
Q4: What are the disclosure requirements for borrowing costs?
A4: The financial statements should disclose the accounting policy adopted for
borrowing costs and the amount of borrowing costs capitalized during the period.
Summary Points
• Borrowing Costs: Include interest and other costs related to borrowing funds.
• Qualifying Asset: Takes a substantial period to be ready for use or sale.
• Capitalization: Begins when expenditures and borrowing costs are incurred, and
necessary activities are in progress.
• Disclosure: Requires policy and amount of capitalized borrowing costs.
Accounting Standard 19 (AS 19) - Leases
What is a Lease?
• Definition: A lease is an agreement where the lessor (legal owner) conveys to the
lessee (another party) the right to use an asset for an agreed period in return for
payment or series of payments.
Applicability of AS 19
• Scope: Applies to all leases except:

o Exploration for natural resources.
o Licensing agreements for items like films, patents, etc.
o Lease agreements to use lands.
Types of Leases
• Finance Lease: Transfers substantially all risks and rewards of ownership.

• Operating Lease: Does not transfer substantially all risks and rewards of
ownership.
Classification of Leases
• Finance Lease Indicators:

o Transfers ownership by the end of the lease term.
o Option to purchase at a price lower than fair value.
o Lease term covers the major part of the asset’s economic life.
o Present value of lease payments equals substantially all of the asset’s fair
value.
o Specialized nature of the asset.
• Operating Lease Indicators:
o Does not meet the criteria for a finance lease.
Accounting for Leases
In the Books of Lessee
• Finance Leases:
o Recognize asset and liability at the lower of fair value or present value of
minimum lease payments.
o Apportion lease payments between finance charge and reduction of
liability.
o Depreciate the leased asset over its useful life or lease term, whichever is
shorter.
• Operating Leases:
o Recognize lease payments as an expense on a straight-line basis over the
lease term.
In the Books of Lessor
• Finance Leases:
o Recognize receivable at an amount equal to the net investment in the
lease.
o Allocate unearned finance income over the lease term.
• Operating Leases:
o Recognize lease income on a straight-line basis over the lease term.
Sale and Leaseback Transactions
• Definition: A transaction where an asset is sold and then leased back by the
seller.
• Accounting Treatment:
o If classified as a finance lease, recognize any profit or loss immediately.
o If classified as an operating lease, defer and amortize profit or loss over
the lease term.
Disclosures
• Lessee:
o Assets acquired under finance leases.
o Reconciliation of total minimum lease payments and their present value.
o Contingent rents recognized as expense.
o General description of significant leasing arrangements.
• Lessor:
o Reconciliation of total gross investment and present value of minimum
lease payments.
o Unearned finance income.
o Unguaranteed residual values.
o Contingent rents recognized as income.
o General description of significant leasing arrangements.
Q1: What is the main objective of AS 19?
A1: The objective of AS 19 is to prescribe appropriate accounting policies and

disclosures for lessees and lessors in relation to finance and operating leases.
Q2: How is a finance lease different from an operating lease?
A2: A finance lease transfers substantially all risks and rewards of ownership to the
lessee, while an operating lease does not.
Q3: What are the key indicators of a finance lease?
A3: Key indicators include transfer of ownership, option to purchase at a bargain price,
lease term covering major part of the asset’s economic life, present value of lease
payments equaling substantially all of the asset’s fair value, and specialized nature of
the asset.
Q4: How should a lessee account for a finance lease?
A4: A lessee should recognize the leased asset and corresponding liability at the lower
of fair value or present value of minimum lease payments, apportion lease payments
between finance charge and reduction of liability, and depreciate the asset over its
useful life or lease term.
Accounting Standard 26: Intangible Assets
1. Introduction
• Objective: Prescribe accounting treatment for intangible assets not covered by

other standards.
• Recognition Criteria: Recognize an intangible asset if certain criteria are met.
2. Scope
• Applicable to: All enterprises except those covered by other standards (e.g., AS
2, AS 7, AS 22, AS 19, AS 14, AS 21).
• Exclusions: Financial assets, mineral rights, insurance contracts, termination
benefits.
3. Definitions
• Intangible Asset: Identifiable, non-monetary asset without physical substance.

• Amortisation: Systematic allocation of the depreciable amount over its useful
life.
• Useful Life: Period over which an asset is expected to be used.
4. Identifiability
• Criteria: Must be distinguishable from goodwill and separable.

• Example: Computer software integral to hardware is treated as a fixed asset.
5. Control
• Definition: Power to obtain future economic benefits and restrict others’

access.
• Example: Legal rights like copyrights.
6. Future Economic Benefits
• Sources: Revenue from sales, cost savings, or other benefits.

• Example: Intellectual property reducing production costs.
7. Recognition and Initial Measurement

• Criteria: Probable future economic benefits and reliable cost measurement.
• Initial Measurement: At cost.
8. Separate Acquisition
• Cost Components: Purchase price, import duties, taxes, and directly attributable
expenses.
9. Acquisition as Part of an Amalgamation
• Recognition: Based on fair value and reliability of measurement.
10. Acquisition by Way of a Government Grant
• Measurement: At nominal value or acquisition cost.
11. Exchange of Assets
• Measurement: At fair value unless unreliable.
12. Internally Generated Goodwill
• Recognition: Not recognized as an asset.
13. Internally Generated Intangible Assets
• Phases: Research (expense) and Development (recognize if criteria met).
14. Research Phase
• Activities: Original investigation for new knowledge.

• Recognition: Expense when incurred.
15. Development Phase
• Criteria: Technical feasibility, intention, ability to use/sell, future benefits,

resources, and reliable measurement.
16. Cost of an Internally Generated Intangible Asset
• Components: Directly attributable expenditure from recognition criteria met.

17. Recognition of an Expense
• Expenditure: Recognized as an expense unless part of an intangible asset.
18. Subsequent Expenditure
• Recognition: Expense unless it enhances future benefits.
19. Measurement Subsequent to Initial Recognition
• Carrying Amount: Cost less accumulated amortisation and impairment losses.
20. Amortisation Period
• Allocation: Systematic basis over useful life, usually not exceeding ten years.
21. Amortisation Method
• Methods: Straight-line, diminishing balance, unit of production.
22. Residual Value
• Assumption: Zero unless a third-party commitment or active market exists.
23. Review of Amortisation Period and Method
• Frequency: At least annually.
24. Recoverability of the Carrying Amount - Impairment Losses
• Estimation: At least annually for certain intangible assets.
25. Retirements and Disposals
• Derecognition: When disposed or no future benefits expected.
26. Disclosure
• Requirements: Useful lives, amortisation methods, carrying amounts, and

reconciliation of changes.
27. Other Disclosures

• Additional Information: Reasons for amortisation periods over ten years,
material intangible assets, restricted titles, and research and development
expenses.
1. Q: What is the objective of AS 26?

o A: To prescribe the accounting treatment for intangible assets not
covered by other standards.
2. Q: What are the criteria for recognizing an intangible asset?
o A: Probable future economic benefits and reliable cost measurement.
3. Q: How is an intangible asset initially measured?
o A: At cost.
4. Q: What is the difference between research and development phases?
o A: Research is for new knowledge (expense), while development
applies research findings to create new products (recognize if criteria
met).
Accounting Standard 28: Impairment of Assets
• Recoverable Amount: The higher of an asset’s net selling price and its value in
use.
• Value in Use: Present value of future cash flows expected from the asset.
• Net Selling Price: Amount obtainable from the sale of an asset in an arm’s
length transaction.
• Impairment Loss: The amount by which the carrying amount of an asset exceeds
its recoverable amount.
• Cash-Generating Unit (CGU): The smallest identifiable group of assets that
generates cash inflows independently.
Main Ideas and Insights
Introduction
• AS 28: Effective from 1-4-2004 for listed enterprises and from 1-4-2005 for
others.
• Objective: Ensure assets are carried at no more than their recoverable amount.
Scope
• Exclusions: Inventories (AS 2), construction contracts (AS 7), financial assets (AS
13), deferred tax assets (AS 22).
Assessment
• Indicators of Impairment: Decline in market value, adverse changes in

environment, increased market interest rates, etc.
• Internal Indicators: Obsolescence, physical damage, worse-than-expected
economic performance.
Measurement of Recoverable Amount
• Steps: Estimate future cash inflows/outflows, apply appropriate discount rate.

• Carrying Amount: Amount at which an asset is recognized in the balance sheet
after depreciation and impairment losses.
Recognition and Measurement of Impairment Loss

• Case I: Recoverable amount > carrying amount – no impairment.
• Case II: Recoverable amount < carrying amount – recognize impairment loss.
• Case III: Impairment loss > carrying amount – recognize liability if required by
another standard.
Identification of Cash-Generating Units
• Example: A private railway supporting mining activities.
Reversal of Impairment Loss
• Conditions: Change in estimates of cash inflows/outflows or discount rates.

• Impact on Depreciation: Adjust future depreciation based on revised carrying
amount.
Disclosure
• Requirements: Amount of impairment losses and reversals, events leading to

recognition or reversal, etc.
Illustrations
• Example 1: Calculation of impairment loss for Property, Plant, and Equipment.

• Example 2: Impairment assessment for a plant with a carrying amount of `100
lakhs.
1. Q: What is the recoverable amount?

o A: The higher of an asset’s net selling price and its value in use.
2. Q: How is impairment loss recognized?
o A: When the carrying amount of an asset exceeds its recoverable amount,
the difference is recognized as an impairment loss.
3. Q: What are the indicators of impairment?
o A: Indicators include significant decline in market value, adverse changes
in the environment, increased market interest rates, obsolescence, and
physical damage.
4. Q: How is the value in use calculated?
o A: By estimating future cash inflows and outflows from the asset and
applying an appropriate discount rate.
Accounting Standard 15: Employee Benefits
Employee Benefits
• Definition: All forms of consideration given by an enterprise in exchange for

services rendered by employees.
• Types:
o Short-term employee benefits: Wages, salaries, paid annual leave, etc.
o Post-employment benefits: Gratuity, pension, provident fund, etc.
o Long-term employee benefits: Long-service leave, long-term disability
benefits, etc.
o Termination benefits: Voluntary Retirement Scheme (VRS) payments, etc.
Recognition and Measurement
• Short-term Employee Benefits: Recognized as an expense when the employee

has rendered service.
• Post-employment Benefits: Classified into defined contribution plans and
defined benefit plans.
o Defined Contribution Plans: Employer pays fixed contributions into a
fund.
o Defined Benefit Plans: Employer’s obligation is to provide agreed
benefits to employees.
Examples
• Short-term Benefits: Paid annual leave, sick leave.

• Post-employment Benefits: Pension plans, gratuity.
• Long-term Benefits: Long-service awards, long-term disability benefits.
• Termination Benefits: Payments under VRS.
Actuarial Valuation
• Purpose: To value obligations under defined benefit plans.

• Methods: Use of actuarial assumptions to estimate future benefits.
• Objective: To ensure transparency in the financial statements regarding

employee benefits.
• Components: Present value of defined benefit obligations, fair value of plan
assets, etc.

Q1: What are the types of employee benefits covered under AS 15?
A1: The types include short-term employee benefits, post-employment benefits, long-
term employee benefits, and termination benefits.
Q2: How are short-term employee benefits recognized?
A2: They are recognized as an expense when the employee has rendered the service.
Q3: What is the difference between defined contribution plans and

defined benefit plans?
A3: Defined contribution plans involve fixed contributions by the employer, while
defined benefit plans involve the employer’s obligation to provide agreed benefits.
Q4: What is the purpose of actuarial valuation in defined benefit plans?
A4: To estimate the future benefits and obligations under the plan using actuarial
assumptions.
Summary Points
• Employee Benefits: Consideration given in exchange for services.
• Types: Short-term, post-employment, long-term, and termination benefits.
• Recognition: Based on the type of benefit and the timing of the service
rendered.
• Actuarial Valuation: Essential for estimating obligations under defined benefit
plans.
• Disclosure: Ensures transparency in financial statements.
AS 29 (Revised): Provisions, Contingent Liabilities, and
Contingent Assets
Executory Contracts
• Definition: Contracts where neither party has performed any obligations or both
have partially performed to an equal extent.
Provision
• Definition: A liability that can only be measured using a substantial degree of

estimation.
Liability
• Definition: A present obligation arising from past events, expected to result in an

outflow of resources embodying economic benefits.
Obligating Event
• Definition: An event creating an obligation that leaves the enterprise with no

realistic alternative to settling it.
Contingent Liability
• Definition: A possible obligation from past events, confirmed only by uncertain

future events not wholly within the enterprise’s control.
Contingent Asset
• Definition: A possible asset from past events, confirmed only by uncertain future
events not wholly within the enterprise’s control.
Recognition of Provision ✅
• Criteria:
1. Present obligation from a past event.
2. Probable outflow of resources.
3. Reliable estimate of the obligation.
Examples
• Example 1: Warranty provision for refrigerators.

• Example 2: Lease contract requiring restoration costs.
Measurement and Disclosure
• Best Estimate: The amount recognized should be the best estimate of the
expenditure required to settle the present obligation.
• Disclosure Requirements: Include carrying amount, additional provisions,
amounts used, and unused amounts reversed.
Contingent Liabilities and Assets
• Contingent Liabilities: Disclosed unless the outflow of resources is remote.

• Contingent Assets: Not recognized but disclosed if the inflow of economic
benefits is probable.
Questions and Answers ❓
Q1: When should a provision be recognized?
• A: When there is a present obligation from a past event, a probable outflow of

resources, and a reliable estimate can be made.
Q2: What is a contingent liability?
• A: A possible obligation from past events, confirmed only by uncertain future

events not wholly within the enterprise’s control.
Q3: How should provisions be measured?
• A: Provisions should be measured as the best estimate of the expenditure

required to settle the present obligation.
Q4: What are the disclosure requirements for provisions?
• A: Disclose the carrying amount, additional provisions, amounts used, and

unused amounts reversed.
Accounting Standard 4: Contingencies and Events
Occurring After the Balance Sheet Date
Contingencies
• Definition: A condition or situation where the outcome, gain, or loss will be known only
upon the occurrence or non-occurrence of one or more uncertain future events.
• Example: ABC has filed a case against a debtor for a recovery of ₹25 Lakhs. If the
chances of recovery are nil, ABC should make a provision for doubtful debt.
Events Occurring After the Balance Sheet Date
• Definition: Significant events that occur between the balance sheet date and the date on
which the financial statements are approved.
• Types:
o Adjusting Events: Provide further evidence of conditions that existed at the
balance sheet date (e.g., a trade receivable declared insolvent after the reporting
date).
o Non-adjusting Events: Indicative of conditions that arose after the balance sheet
date (e.g., plant damage due to fire).
Contingent Losses
• Recognition: If it is likely that a contingency will result in a loss, it is prudent to provide

for that loss in the financial statements.
• Estimation: Based on management’s judgment and available information.
Contingent Gains
• Recognition: Not recognized in financial statements unless the realization of the gain is
virtually certain.
• Nature of the Event: Describe the event.

• Financial Effect: Provide an estimate or state that an estimate cannot be made.
Q1: What is a contingency?

A: A contingency is a condition or situation where the outcome, gain, or loss will be known only
upon the occurrence or non-occurrence of one or more uncertain future events.
Q2: What are adjusting events?
A: Adjusting events provide further evidence of conditions that existed at the balance sheet date
and require adjustments to assets and liabilities.
Q3: How should contingent losses be treated in financial statements?
A: If it is likely that a contingency will result in a loss, it should be provided for in the financial
statements based on management’s judgment and available information.
Example 1: Adjusting Event
• Scenario: A trade receivable declared insolvent after the reporting date.

• Treatment: Adjust the financial statements to reflect the loss.
Example 2: Non-adjusting Event
• Scenario: Plant damage due to fire after the balance sheet date.
• Treatment: No adjustment to assets and liabilities, but disclose the event in the report.
Summary Points
• Contingencies: Conditions with uncertain outcomes.

• Adjusting Events: Affect conditions existing at the balance sheet date.
• Non-adjusting Events: Arise after the balance sheet date.
• Disclosure: Nature and financial effect of events.
AS 5 - Net Profit or Loss for the Period, Prior Period
Items, and Changes in Accounting Policies
Learning Outcomes
By the end of this unit, you will be able to understand:
• Net Profit or Loss for the Period

• Extraordinary Items
• Profit or Loss from Ordinary Activities
• Prior Period Items
• Changes in Accounting Estimates
• Changes in Accounting Policies
Introduction
Objective of AS 5: To prescribe the classification and disclosure of certain items in the

statement of profit and loss, enhancing comparability of financial statements over time
and across enterprises.
Key Concepts and Terms

Net Profit or Loss for the Period
• Definition: All items of income and expense recognized in a period should be

included in the determination of net profit or loss unless otherwise required or
permitted by an Accounting Standard.
• Components:
o Profit or Loss from Ordinary Activities: Activities undertaken as part of
the business.
o Extraordinary Items: Income or expenses from events distinct from
ordinary activities.
o Exceptional Items: Significant items within ordinary activities that require
separate disclosure.
Extraordinary Items
• Definition: Income or expenses from events or transactions that are clearly

distinct from ordinary activities and not expected to recur frequently.
• Examples: Losses from an earthquake, attachment of property.
Prior Period Items
• Definition: Income or expenses arising in the current period due to errors or

omissions in the preparation of financial statements of one or more prior periods.
• Examples: Errors in inventory valuation, mathematical mistakes.
Changes in Accounting Estimates
• Definition: Revisions of estimates due to changes in circumstances or new

information.
• Examples: Change in the useful life of an asset, adjustments for bad debts.
Changes in Accounting Policies
• Definition: Specific accounting principles and methods adopted by an enterprise.

• Conditions for Change:
o Required by statute.
o Compliance with an Accounting Standard.
o More appropriate presentation of financial statements.

Q1: What constitutes an extraordinary item?
A1: Extraordinary items are income or expenses arising from events or transactions that
are clearly distinct from ordinary activities and not expected to recur frequently, such as
losses from an earthquake.
Q2: How should prior period items be disclosed?
A2: Prior period items should be separately disclosed in the statement of profit and loss
to indicate their impact on the current profit or loss.
Q3: What is the difference between a change in accounting estimate

and a prior period item?
A3: A change in accounting estimate is a revision due to new information or changes in
circumstances, while a prior period item arises from errors or omissions in previous
financial statements.
Summary of Key Points

• Net Profit or Loss: Includes all recognized income and expenses.
• Extraordinary Items: Distinct from ordinary activities, infrequent.
• Prior Period Items: Result from past errors or omissions.
• Changes in Estimates: Adjustments based on new information.
• Changes in Policies: Must be disclosed and justified.
Accounting Standard 11: The Effects of Changes in
Foreign Exchange Rates
Foreign Currency Transactions
• Initial Recognition: Transactions in foreign currencies are recorded using the

exchange rate at the date of the transaction.
• Reporting at Subsequent Balance Sheet Dates: Monetary items are reported
using the closing rate, while non-monetary items are reported using the
exchange rate at the date of the transaction.
• Recognition of Exchange Differences: Exchange differences arising on
settlement or reporting of monetary items are recognized as income or expenses.
Net Investment in a Non-integral Foreign Operation
• Definition: The reporting enterprise’s share in the net assets of a non-integral

foreign operation.
• Classification: Foreign operations are classified as integral or non-integral based
on their relationship with the reporting enterprise.
Classification of Foreign Operations
• Integral Foreign Operations: Operate as an extension of the reporting

enterprise.
• Non-integral Foreign Operations: Operate independently of the reporting
enterprise.
Accounting for Forward Exchange Contracts
• Definition: Agreements to exchange different currencies at a forward rate.

• Recognition: Premium or discount on forward contracts is amortized over the life
of the contract.
Disclosures
• Exchange Differences: Amounts included in net profit or loss and accumulated

in foreign currency translation reserves must be disclosed.
Q1: What is the initial recognition of foreign currency transactions?
A1: Foreign currency transactions are recorded using the exchange rate at the date of
the transaction.
Q2: How are monetary and non-monetary items reported at subsequent balance
sheet dates?
A2: Monetary items are reported using the closing rate, while non-monetary items are
reported using the exchange rate at the date of the transaction.
Q3: What is the difference between integral and non-integral foreign operations?
A3: Integral foreign operations operate as an extension of the reporting enterprise,

while non-integral foreign operations operate independently.
Q4: How are forward exchange contracts accounted for?
A4: Premium or discount on forward contracts is amortized over the life of the contract,
and exchange differences are recognized in the profit and loss statement.
Summary of Key Points
1. Foreign Currency Transactions: Initial recognition, reporting at balance sheet

dates, and recognition of exchange differences.
2. Net Investment: Definition and classification of foreign operations.
3. Classification: Integral vs. non-integral foreign operations.
4. Forward Exchange Contracts: Definition, recognition, and accounting treatment.
5. Disclosures: Requirements for exchange differences and foreign currency
translation reserves.
Accounting Standard 22: Accounting for Taxes on
Income
Introduction
• Objective: This standard prescribes the accounting treatment of taxes on income,

following the concept of matching expenses against revenue for the period.
• Key Insight: The matching concept is crucial for income taxes due to differences
between taxable income and accounting income.
Definitions
• Accounting Income: Net profit or loss before income-tax expense.

• Taxable Income: Income determined per tax laws for tax payable.
• Tax Expense: Sum of current tax and deferred tax.
• Current Tax: Tax payable for the period.
• Deferred Tax: Tax effect of timing differences.
Types of Differences
• Timing Differences: Differences that originate in one period and reverse in

subsequent periods (e.g., depreciation).
• Permanent Differences: Differences that do not reverse (e.g., fines).
Recognition
• Tax Expense: Includes current and deferred tax, matched with revenue and
expenses of the period.
• Deferred Tax Assets: Recognized if there is reasonable certainty of future
taxable income.
Measurement
• Current Tax: Measured using applicable tax rates and laws.

• Deferred Tax: Measured using enacted or substantively enacted tax rates.
Re-assessment and Review
• Unrecognized Deferred Tax Assets: Re-assessed at each balance sheet date.

• Previously Recognized Deferred Tax Assets: Reviewed and adjusted based on
future taxable income certainty.
Presentation and Disclosure
• Profit and Loss Statement: Disclose current and deferred tax.

• Balance Sheet: Separate headings for deferred tax assets and liabilities.
Practical Examples
1. Depreciation Differences: Excess depreciation as per tax records leads to

deferred tax liability.
2. Unamortized Expenses: Recognized as deferred tax assets if future profits are
sufficient.
1. What is the objective of AS 22?

o To prescribe the accounting treatment of taxes on income, ensuring
matching of tax expenses with revenue.
2. How are deferred tax assets recognized?
o Recognized if there is reasonable certainty of future taxable income.
3. What are timing differences?
o Differences between taxable and accounting income that reverse in
subsequent periods.
Accounting Standard 7: Construction Contracts
Introduction and Scope of Construction Contract
• Definition: A construction contract is specifically negotiated for the construction

of an asset or a combination of assets that are closely interrelated or
interdependent.
• Examples: Bridges, buildings, dams, pipelines, roads, ships, tunnels, refineries,
and complex equipment.
• Scope: Includes contracts for services directly related to construction, such as
project managers and architects, and contracts for destruction or restoration of
assets.
Combining and Segmenting Construction Contracts
• Combining Contracts: Treat multiple contracts as a single contract if they are

negotiated as a single package, closely interrelated, and performed concurrently.
• Segmenting Contracts: Treat parts of a single contract as separate contracts if
separate proposals were submitted, each part was separately negotiated, and
costs and revenues can be identified.
Types of Construction Contracts
• Fixed Price Contract: The contractor agrees to a fixed contract price or fixed rate
per unit of output, which may include cost escalation clauses.
• Cost-Plus Contract: The contractor is reimbursed for allowable costs plus a
percentage of these costs or a fixed fee.
Recognition of Contract Revenue and Expenses
• Contract Revenue: Includes the initial amount agreed in the contract, variations,
claims, and incentive payments.
• Contract Costs: Comprise costs directly related to the contract, attributable costs,
and other costs specifically chargeable to the customer.
Percentage Completion Method
• Definition: Recognizes revenue and expenses in proportion to the work

completed during the accounting period.
• Conditions: Total contract revenue can be measured reliably, economic benefits
will flow to the enterprise, costs to complete and stage of completion can be
measured reliably, and costs attributable to the contract can be identified.
Recognition of Expected Losses
• Immediate Recognition: If total contract costs are expected to exceed total

contract revenue, the loss should be recognized as an expense immediately.
Changes in Estimates
• Accounting for Changes: Changes in estimates of contract revenue or costs are

accounted for as changes in accounting estimates in accordance with AS 5.
Disclosures
• Required Disclosures: Amount of contract revenue recognized, methods used to

determine contract revenue and stage of completion, costs incurred, recognized
profits, advances received, and retentions.

Q1: What is a construction contract?
A: A construction contract is a contract specifically negotiated for the construction of an

asset or a combination of assets that are closely interrelated or interdependent.
Q2: What are the types of construction contracts?
A: The main types are fixed price contracts and cost-plus contracts.
Q3: How is contract revenue recognized?
A: Contract revenue includes the initial amount agreed in the contract, variations, claims,
and incentive payments. It is recognized using the percentage completion method.
Q4: When should expected losses be recognized?
A: Expected losses should be recognized as an expense immediately if total contract

costs are expected to exceed total contract revenue.
Q5: What disclosures are required under AS 7?

A: Disclosures include the amount of contract revenue recognized, methods used to
determine contract revenue and stage of completion, costs incurred, recognized profits,
advances received, and retentions.
Accounting Standard 9: Revenue Recognition
Revenue
• Definition: Gross inflow of cash, receivables, or other consideration from the sale
of goods, rendering of services, and use of enterprise resources yielding interest,
royalties, and dividends.
• Example: Sale of land by a real estate developer.
Recognition of Revenue
• Sale of Goods: Revenue recognized when significant risks and rewards of

ownership are transferred.
• Rendering of Services: Revenue recognized as services are performed.
• Use of Enterprise Resources: Revenue from interest, royalties, and dividends
recognized when no significant uncertainty exists.
Main Ideas
Effect of Uncertainties on Revenue Recognition
• Revenue recognition postponed if ultimate collection is uncertain.

• Separate provision made if uncertainty arises after sale/service.
Agency Relationship
• Revenue is the commission amount, not the gross inflow.

• Example: Food delivery service recognizing delivery charges as revenue.
Required Disclosures
• Circumstances where revenue recognition is postponed due to uncertainties.
Examples
Sale of Goods
• Example 1: Sale of a machine by Entity XY.

• Example 2: Sale of land by ST Ltd.
Rendering of Services
• Example: Proportionate completion method for ongoing services.
Use of Enterprise Resources
• Example: Interest and royalties received by X Ltd.
Q1: What is revenue?
A1: Revenue is the gross inflow of cash, receivables, or other consideration from the sale
of goods, rendering of services, and use of enterprise resources yielding interest,
royalties, and dividends.
Q2: When is revenue from the sale of goods recognized?
A2: Revenue is recognized when significant risks and rewards of ownership are
transferred to the buyer, and no significant uncertainty exists regarding the amount of
consideration.
Q3: How is revenue from services recognized?
A3: Revenue from services is recognized as the service is performed, either

proportionately or upon completion, depending on the nature of the service.
Q4: What are the conditions for recognizing revenue from interest, royalties, and
dividends?
A4: Revenue is recognized when no significant uncertainty exists regarding

measurability or collectability.
Summary
1. Revenue Definition: Gross inflow from ordinary activities.

2. Recognition Criteria: Transfer of risks and rewards, performance of services, and
certainty of collection.
3. Agency Relationship: Revenue is the commission amount.
4. Disclosures: Circumstances of postponed revenue recognition.
Accounting Standard 12: Accounting for Government
Grants
Government Grants
• Definition: Assistance by the government in cash or kind to an enterprise for past or

future compliance with certain conditions.
• Exclusions: Forms of government assistance that cannot reasonably have a value placed
upon them and transactions with the government that cannot be distinguished from
normal trading transactions.
Accounting Treatment of Government Grants
• Capital Approach: Grants treated as part of shareholders’ funds.

• Income Approach: Grants taken to income over one or more periods.
Recognition of Government Grants
• Criteria: Reasonable assurance that the enterprise will comply with the conditions and
the grant will be received.
Non-Monetary Government Grants
• Definition: Grants in the form of non-monetary assets, such as land or other resources,
given at concessional rates.
• Accounting: Accounted for at acquisition cost or nominal value if given free of cost.
Presentation of Grants
Grants Related to Specific Fixed Assets
• Method I: Deduction from the gross value of the asset.

• Method II: Treated as deferred income recognized over the useful life of the asset.
Grants Related to Revenue
• Presentation: Credited in the profit and loss statement or deducted from the related
expense.
Grants of the Nature of Promoters’ Contribution
• Treatment: Credited to capital reserve, not distributed as dividends or considered as

deferred income.
Refund of Government Grants
• Conditions: Treated as an extraordinary item if conditions are not fulfilled.

• Accounting: Adjusted against unamortized deferred credit or charged to profit and loss
statement.
Disclosure
• Requirements: Accounting policy for government grants and the nature and extent of
grants recognized.
• Example 1: X Ltd. applies for a grant but may not meet all conditions.
• Example 2: Non-monetary grant of land to X Convent for a school.
• Example 3: F Ltd. receives a grant for constructing a factory with employment
conditions.
Potential Questions
1. What are government grants?

o Government grants are assistance by the government in cash or kind to an
enterprise for past or future compliance with certain conditions.
2. What are the two broad approaches for accounting treatment of government
grants?
o The capital approach and the income approach.
3. When is a government grant recognized?
o When there is reasonable assurance that the enterprise will comply with the
conditions and the grant will be received.
4. How are non-monetary government grants accounted for?
o At acquisition cost or nominal value if given free of cost.
Detailed Answers
1. Government Grants: Assistance provided by the government to an enterprise, excluding

forms that cannot reasonably have a value placed upon them.
2. Capital Approach vs. Income Approach: The capital approach treats grants as part of
shareholders’ funds, while the income approach takes grants to income over one or
more periods.
3. Recognition Criteria: Grants are recognized when there is reasonable assurance of
compliance with conditions and receipt of the grant.
4. Non-Monetary Grants: Accounted for at acquisition cost or nominal value if given free
of cost.
Accounting Standard 14: Accounting for
Amalgamations
Amalgamation
• Definition: Amalgamation refers to the merging of two or more companies

pursuant to the provisions of the Companies Act, 2013.
• Types:
o Merger: Genuine pooling of assets, liabilities, and shareholders’
interests.
o Purchase: One company acquires another, and the acquired company’s
shareholders do not retain a proportionate share in the new entity.
Transferor and Transferee Companies
• Transferor Company: The company being amalgamated.

• Transferee Company: The company into which the transferor company is
amalgamated.
Types of Amalgamations
Merger
• Conditions:
1. All assets and liabilities of the transferor company become those of the
transferee company.
2. Shareholders holding at least 90% of the equity shares of the transferor
company become shareholders of the transferee company.
3. Consideration is discharged by issuing equity shares in the transferee
company.
4. The business of the transferor company is continued by the transferee
company.
5. No adjustments to the book values of assets and liabilities, except for
uniformity in accounting policies.
Purchase
• Conditions: Does not meet one or more conditions of a merger.

Methods of Accounting for Amalgamations
Pooling of Interests Method
• Description: Treats the amalgamation as a continuation of the businesses of the

amalgamating companies.
• Accounting: Assets, liabilities, and reserves are recorded at their existing carrying
amounts.
Purchase Method
• Description: Accounts for the amalgamation by incorporating assets and

liabilities at their fair values.
• Accounting: Consideration is allocated to individual identifiable assets and
liabilities.
Consideration
• Definition: Aggregate of shares, securities issued, and payments made by the

transferee company to the shareholders of the transferor company.
• Methods:
o Net Payment Method
o Net Assets Method
Treatment of Reserves
• Merger: Reserves retain their identity.

• Purchase: Reserves do not retain their identity, except for statutory reserves.
Goodwill
• Definition: Payment made in anticipation of future income.

• Amortization: Over a period not exceeding five years unless justified otherwise.
• General: Names of amalgamating companies, effective date, method of

accounting, and particulars of the scheme.
• Pooling of Interests Method: Description and number of shares issued,
difference between consideration and net identifiable assets.
• Purchase Method: Consideration paid, difference between consideration and net
identifiable assets, and period of amortization of goodwill.
Amalgamation Post Balance Sheet Date
• Disclosure: As per AS 4, but not incorporated in the financial statements.
1. What is the difference between a merger and a purchase in the context of

amalgamations?
o Answer: A merger involves a genuine pooling of assets, liabilities, and
shareholders’ interests, whereas a purchase is an acquisition where the
acquired company’s shareholders do not retain a proportionate share in
the new entity.
2. What are the conditions for an amalgamation to be considered a merger?
o Answer: The conditions include the transfer of all assets and liabilities,
shareholders holding at least 90% of equity shares becoming shareholders
of the transferee company, consideration discharged by issuing equity
shares, continuation of the transferor company’s business, and no
adjustments to book values except for uniformity in accounting policies.
3. How is goodwill treated in an amalgamation?
o Answer: Goodwill is treated as an asset and amortized over a period not
exceeding five years unless a longer period can be justified.
4. What are the disclosure requirements for amalgamations?
o Answer: Disclosures include the names of amalgamating companies,
effective date, method of accounting, particulars of the scheme, and
additional disclosures based on the method of accounting used.
Accounting Standards for Consolidated Financial
Statements
Group, Holding Company, and Subsidiary Company
• Group: A parent company and all its subsidiaries.

• Holding Company: A company that controls one or more subsidiary companies.
• Subsidiary Company: A company controlled by a holding company, either
through ownership of more than half of its voting power or control over its board
of directors.
Purpose and Method of Preparing Consolidated Financial Statements
• Purpose: To provide financial information about the economic activities of a

group as a single economic entity.
• Method: Consolidation procedures involve combining the financial statements of
the parent and its subsidiaries on a line-by-line basis and making necessary
adjustments.
Components of Consolidated Financial Statements
• Consolidated Balance Sheet

• Consolidated Profit & Loss Statement
• Notes to Accounts
• Consolidated Cash Flow Statement (if applicable)
Calculation of Goodwill/Capital Reserve
• Goodwill: Arises when the cost of acquisition exceeds the parent’s share in the
equity of the subsidiary.
• Capital Reserve: Arises when the parent’s share in the equity of the subsidiary
exceeds the cost of acquisition.
Minority Interests
• Definition: The portion of net assets and net income of a subsidiary attributable
to interests not owned by the parent.
• Presentation: Presented separately in the consolidated balance sheet and
income statement.
Q1: What is the definition of a holding company as per the Companies Act, 2013?
A1: As per Section 2(46) of the Companies Act, 2013, a holding company is one that has
one or more subsidiary companies and enjoys control over them.
Q2: What are the main components of consolidated financial statements?
A2: The main components are the Consolidated Balance Sheet, Consolidated Profit &
Loss Statement, Notes to Accounts, and the Consolidated Cash Flow Statement (if
applicable).
Q3: How is goodwill calculated in consolidated financial statements?
A3: Goodwill is calculated as the excess of the cost of acquisition over the parent’s
share in the equity of the subsidiary on the date of investment.
Q4: What is minority interest and how is it presented?
A4: Minority interest is the part of the net assets and net income of a subsidiary
attributable to interests not owned by the parent. It is presented separately in the
consolidated balance sheet and income statement.
Consolidation Procedures
1. Eliminate Cost of Investment: Eliminate the parent’s investment in each

subsidiary against the parent’s portion of equity in each subsidiary.
2. Eliminate Intragroup Transactions: Eliminate intragroup transactions, including
sales, expenses, and dividends.
3. Adjust Unrealized Profits/Losses: Make adjustments for unrealized
profits/losses.
4. Identify Minority Interests: Identify and adjust minority interests in the net
income and net assets of consolidated subsidiaries.
5. Include Results of Operations: Include the results of operations of subsidiaries
from the date of acquisition to the date of disposal.
Examples
Example 1: Calculation of Goodwill
• Scenario: P Ltd. acquires 100% of S Ltd. for ₹1,000.

• Calculation:
o Tangible Assets: ₹500
o Net Current Assets: ₹500
o Net Worth of S Ltd.: ₹1,000
o Purchase Consideration: ₹1,000
o Goodwill: ₹0 (since purchase consideration equals net worth)
Example 2: Minority Interest
• Scenario: P Ltd. acquires 80% of S Ltd. for ₹1,000.

• Calculation:
o Net Worth of S Ltd.: ₹1,000
o Parent’s Share (80%): ₹800
o Minority Interest (20%): ₹200
o Purchase Consideration: ₹1,000
o Goodwill: ₹200 (since purchase consideration exceeds parent’s share in
net worth)
Statements
Learning Outcomes
• Define: Associates, Significant influence, Control, Equity method.

• Examine: Circumstances for using the Equity Method.
• Apply: Equity Method in accounting for investments in associates.
• Disclose: Contingencies in consolidated financial statements.
• Comply: With other disclosure requirements.
Introduction
AS 23: Effective from 1-4-2002, it outlines principles for recognizing investments in

associates in consolidated financial statements.
Objective
• Principles and Procedures: For recognizing investments in associates and their

effects on financial operations.
• Reference: Compulsory for companies following AS 21 and preparing
consolidated financial statements.
Key Definitions
• Subsidiary: Controlled by another enterprise (parent).

• Parent: Has one or more subsidiaries.
• Group: Parent and all its subsidiaries.
• Equity Method: Investment recorded at cost, adjusted for post-acquisition
changes.
• Equity: Residual interest after deducting liabilities.
• Consolidated Financial Statements: Financial statements of a group presented
as a single enterprise.
• Associate: Enterprise with significant influence but not a subsidiary or joint
venture.
• Significant Influence: Power to participate in financial/operating policy decisions
without control.
Equity Method Application

• Initial Recording: At cost, identifying goodwill/capital reserve.
• Adjustments: For post-acquisition changes in net assets.
• Profit & Loss: Reflects investor’s share of investee’s operations.
Examples
1. Example 1: A Ltd. (70% in C Ltd.), B Ltd. (28% in C Ltd.) - A Ltd. is the parent, B
Ltd. is an associate.
2. Example 2: A Ltd. (90% in B Ltd., 10% in C Ltd.), B Ltd. (11% in C Ltd.) - A Ltd. has
a total holding of 21% in C Ltd., making C Ltd. an associate.
Circumstances for Equity Method
• Temporary Control: Investment intended for disposal.

• Severe Restrictions: Impair ability to transfer funds.
• Contingencies: Share of contingencies and capital commitments.

• Goodwill/Capital Reserve: Disclosed separately.
1. Q: What is an associate?
A: An enterprise with significant influence but not a subsidiary or joint venture.
2. Q: When is the equity method not used?
A: When control is temporary or there are severe long-term restrictions.

Statements
Introduction
• Joint Ventures: Examples include Hindustan Unilever Ltd (HUL), Tata Starbucks
Ltd, and Tata SIA Airlines Ltd. (Vistara).
• Purpose: Sharing risk and expense, collaboration of know-how and skill-set,
impacted by different work-cultures and management styles.
• AS 27: Effective from 01.04.2002, sets principles and procedures for accounting
of interests in joint ventures and reporting of joint venture assets, liabilities,
income, and expenses.
Scope
• Application: Accounting for interests in joint ventures and reporting of joint

venture assets, liabilities, income, and expenses in the financial statements of
venturers and investors.
Definitions
1. Joint Venture: A contractual arrangement where two or more parties undertake

an economic activity subject to joint control.
2. Joint Control: Contractually agreed sharing of control over an economic activity.
3. Control: Power to govern financial and operating policies of an economic activity
to obtain benefits.
4. Venturer: A party to a joint venture with joint control.
5. Investor: A party to a joint venture without joint control.
6. Proportionate Consolidation: Method of accounting where a venturer’s share
of each asset, liability, income, and expense of a jointly controlled entity is
reported as separate line items in the venturer’s financial statements.
Contractual Arrangement
• Essentials: Activity, duration, reporting obligations, appointment of the board,

capital contributions, sharing of output, income, expenses, or results.
• Purpose: Distribute economic control among venturers, ensuring no unilateral
control.
Forms of Joint Ventures

1. Jointly Controlled Operations (JCO):
o No separate entity.
o Venturers use their own resources.
o Common agreement for sharing revenue and expenses.
o Example: Mr. A, Mr. B, and Mr. C in a construction joint venture.
2. Jointly Controlled Assets (JCA):
o No separate legal identity.
o Joint ownership of assets.
o Shared expenses and liabilities.
o Example: ABC Ltd., BP Ltd., and HP Ltd. sharing a pipeline.
3. Jointly Controlled Entities (JCE):
o New entity created.
o Joint control over economic activity.
o Separate accounting records.
o Example: A Ltd. and B Ltd. forming AB Ltd. for a metro project.
Consolidated Financial Statements of a Venturer
• Proportionate Consolidation Method: Venturer’s share of joint assets,

liabilities, expenses, and income shown on separate lines in consolidated financial
statements.
• Exceptions: Temporary investments or severe long-term restrictions.
Transactions Between a Venturer and Joint Venture
• Asset Transfers: Recognize only the portion of gain or loss attributable to other
venturers.
• Purchases: Venturer does not recognize share of profits unless assets are
disposed of.
Q1: What is a joint venture?
A1: A joint venture is a contractual arrangement where two or more parties undertake
an economic activity subject to joint control.
Q2: What are the different forms of joint ventures?
A2: The three broad types of joint ventures are:

1. Jointly Controlled Operations (JCO)
2. Jointly Controlled Assets (JCA)
3. Jointly Controlled Entities (JCE)
Q3: What is proportionate consolidation?
A3: Proportionate consolidation is a method of accounting where a venturer’s share of

each asset, liability, income, and expense of a jointly controlled entity is reported as
separate line items in the venturer’s financial statements.
Q4: What are the key features of Jointly Controlled Operations (JCO)?
A4: Key features include:
• No separate entity.
• Venturers use their own resources.
• Common agreement for sharing revenue and expenses.
Financial Statements of Companies
Meaning of Company
• Company: As per Section 2(20) of the Companies Act, 2013, a company is an

entity incorporated under the Companies Act, 2013 or any previous company law.
• Types of Companies:
o Company Limited by Guarantee: Liability of members is limited to the
amount they undertake to contribute in the event of winding up.
o Company Limited by Shares: Liability of members is limited to the unpaid
amount on their shares.
o Foreign Company: Incorporated outside India but has a place of business
in India.
o Government Company: At least 51% of the paid-up share capital is held
by the government.
o One Person Company: Has only one person as a member.
o Private Company: Restricts the right to transfer shares, limits members to
200, and prohibits public invitations for securities.
o Public Company: Not a private company and has a minimum paid-up
share capital as prescribed.
o Small Company: Not a public company, with paid-up share capital not
exceeding ₹50 lakhs and turnover not exceeding ₹2 crores.
Maintenance of Books of Account
• Section 128: Every company must maintain books of account at its registered
office, on an accrual basis and according to the double entry system.
• Electronic Mode: Books can be kept electronically, accessible in India, with an
audit trail feature from April 1, 2022.
Preparation of Financial Statements
• Financial Statements: Include balance sheet, profit and loss account, cash flow
statement, statement of changes in equity, and explanatory notes.
• Schedule III: Financial statements must comply with Schedule III of the
Companies Act, 2013.
Divisible Profits and Dividends

• Dividend: Distribution of profits among members according to their shares.
• Section 123: Dividends can only be declared out of profits or free reserves, after
providing for depreciation.
What is a company as per the Companies Act, 2013?
Answer: A company is an entity incorporated under the Companies Act, 2013 or any
previous company law.
What are the different types of companies defined under the Companies Act,
2013?
Answer: The types include company limited by guarantee, company limited by shares,
foreign company, government company, one person company, private company, public
company, and small company.
What are the requirements for maintaining books of account?
Answer: As per Section 128, books of account must be maintained at the registered
office, on an accrual basis, and according to the double entry system. They can also be
kept electronically with an audit trail feature.
What should financial statements include as per the Companies Act, 2013?
Answer: Financial statements should include a balance sheet, profit and loss account,
cash flow statement, statement of changes in equity, and explanatory notes, complying
with Schedule III.
Summary
1. Meaning of Company: Definitions and types of companies as per the Companies

Act, 2013.
2. Maintenance of Books of Account: Requirements under Section 128, including
electronic maintenance.
3. Preparation of Financial Statements: Components and compliance with
Schedule III.
4. Divisible Profits and Dividends: Definition of dividends and conditions for
declaration under Section 123.
Cash Flow Statements
1. Definition of Cash Flow Statement
• Cash Flow Statement: A financial statement that provides information about the
cash inflows and outflows of an enterprise during a specific period.
• Purpose: To assess the ability of the enterprise to generate cash and cash
equivalents and to understand the needs for utilizing those cash flows.
2. Elements of Cash and Cash Equivalents
• Cash: Includes cash in hand and demand deposits with banks.

• Cash Equivalents: Short-term, highly liquid investments that are readily
convertible to known amounts of cash and subject to an insignificant risk of
changes in value (e.g., securities with a short maturity period of three months or
less).
3. Classification of Cash Flow Activities
• Operating Activities: Principal revenue-generating activities of the enterprise

(e.g., cash receipts from sales, cash payments to suppliers).
• Investing Activities: Acquisition and disposal of long-term assets and other
investments (e.g., purchase of fixed assets, sale of investments).
• Financing Activities: Activities that result in changes in the size and composition
of the owner’s capital and borrowings (e.g., issuing shares, repaying loans).
Preparation Methods
1. Direct Method
• Definition: Major classes of gross cash receipts and gross cash payments are
considered.
• Example: Cash received from trade receivables, payments to trade payables.
2. Indirect Method
• Definition: Net profit or loss is adjusted for the effects of transactions of a non-
cash nature, deferrals, or accruals of past or future operating cash receipts or
payments.
• Example: Adjusting net profit for changes in inventories, receivables, and
payables.
Benefits of Cash Flow Statements
• Liquidity Assessment: Provides information about the changes in cash and cash
equivalents.
• Investment Planning: Identifies cash generated from operations that can be
used for investment in fixed assets.
• Dividend and Tax Payments: Shows the portion of cash from operations used to
pay dividends and taxes.
Q1: What is the primary purpose of a cash flow statement?
A1: The primary purpose is to provide information about the cash inflows and outflows
of an enterprise, helping users assess the ability to generate cash and the needs for
utilizing those cash flows.
Q2: What are cash equivalents?
A2: Cash equivalents are short-term, highly liquid investments that are readily
convertible to known amounts of cash and subject to an insignificant risk of changes in
value.
Q3: How are cash flows classified in a cash flow statement?
A3: Cash flows are classified into three categories: operating activities, investing
activities, and financing activities.
Q4: What is the difference between the direct and indirect methods of preparing a
cash flow statement?
A4: The direct method considers major classes of gross cash receipts and payments,
while the indirect method adjusts net profit or loss for non-cash transactions and
changes in working capital.
Buy-Back of Securities
Definition
Buy-back of shares: The process where a company purchases its own shares from the
shareholders, leading to a reduction in the number of outstanding shares.
Objectives/Advantages of Buy-Back
• Increase Earnings Per Share (EPS): Reduces the number of shares, potentially
increasing EPS.
• Increase Promoters’ Holding: Shares bought back are canceled, increasing the
promoters’ percentage holding.
• Prevent Hostile Takeovers: Increases promoters’ holding, making hostile
takeovers difficult.
• Support Share Price: Helps maintain or increase the share price in the market.
• Utilize Surplus Cash: Distributes surplus cash to shareholders.
Provisions of the Companies Act, 2013
Section 68 (1)
• Sources for Buy-Back: Free reserves, securities premium account, or proceeds of

any shares or specified securities.
• Limitations: Buy-back in any financial year should not exceed 25% of the total
paid-up equity capital.
Section 68 (2)
• Authorization: Buy-back must be authorized by the company’s articles and a

special resolution in a general meeting.
• Debt-Equity Ratio: Post buy-back, the company’s debt should not exceed
twice the capital and free reserves.
• Fully Paid-Up Shares: Only fully paid-up shares can be bought back.
Journal Entries
1. Sale of Investments:
2. Bank A/c Dr.
3. Profit and Loss A/c Dr.
4. To Investment A/c
5. Buy-Back Due:
6. Equity Share Capital A/c Dr.
7. Premium Payable on Buy-Back Dr.
8. To Equity Shares Buy-Back A/c
9. Payment for Buy-Back:
10. Equity Shares Buy-Back A/c Dr.
11. To Bank A/c
12. Premium Adjustment:
13. Securities Premium A/c Dr.
14. To Premium Payable on Buy-Back
15. Creation of Capital Redemption Reserve:
16. Revenue Reserve A/c Dr.
17. To Capital Redemption Reserve A/c
Q1: What are the sources from which a company can buy back its shares?
A1: A company can buy back its shares from its free reserves, securities premium
account, or the proceeds of any shares or specified securities.
Q2: What is the maximum limit for buy-back in a financial year?
A2: The buy-back of equity shares in any financial year shall not exceed 25% of the total
paid-up equity capital.
Q3: What are the conditions for the buy-back of shares?
A3: Conditions include authorization by the articles, a special resolution, the debt-equity
ratio not exceeding 2:1, and the shares being fully paid-up.
Q4: What is the purpose of creating a Capital Redemption Reserve?
A4: The Capital Redemption Reserve is created to ensure that the nominal value of
shares bought back is maintained, which can be used for issuing fully paid bonus shares.
Amalgamation of Companies
Amalgamation
• Definition: The process of merging two or more companies into a single entity.
• Types:
o Amalgamation in the nature of merger: Genuine pooling of assets, liabilities,
and shareholders’ interests.
o Amalgamation in the nature of purchase: One company takes over another.
Transferee and Transferor Company
• Transferee Company: The company that acquires another company.

• Transferor Company: The company that is acquired.
Purchase Consideration
• Definition: The total amount paid by the transferee company to the shareholders of the
transferor company.
• Methods of Calculation:
o Lump Sum Method
o Net Payment Method
o Net Assets Method
o Intrinsic Value Method
Accounting for Amalgamations
Types of Amalgamation
• Amalgamation in the Nature of Merger

o Conditions: Transfer of all assets and liabilities, 90% equity shareholders become
shareholders of the transferee company, etc.
• Amalgamation in the Nature of Purchase
o Conditions: Not all assets and liabilities need to be transferred, shareholders of
the transferor company may not become shareholders of the transferee
company.
Methods of Accounting
• Pooling of Interests Method

o Assets and Liabilities: Taken over at existing carrying amounts.
o Reserves: Adjusted in the financial statements of the transferee company.
• Purchase Method
o Assets and Liabilities: Incorporated at their fair values.
o Goodwill or Capital Reserve: Recognized based on the difference between
purchase consideration and net assets.
Journal Entries
In the Books of Vendor Company
1. Transfer of Assets and Liabilities:

o Realization Account: Used to transfer assets and liabilities.
o Purchase Consideration: Credited to the Realization Account.
2. Settlement of Liabilities: Paid off by the vendor company if not taken over by the
transferee company.
In the Books of Transferee Company
1. Business Purchase Account: Debited with the purchase consideration.

2. Assets and Liabilities: Recorded at agreed values or book values.
Q1: What is the difference between amalgamation in the nature of merger and purchase?
A1:
• Merger: All assets and liabilities are transferred, and shareholders of the transferor
company become shareholders of the transferee company.
• Purchase: Not all assets and liabilities need to be transferred, and shareholders of the
transferor company may not become shareholders of the transferee company.
Q2: How is purchase consideration calculated?
A2: Purchase consideration can be calculated using methods such as the Lump Sum Method,
Net Payment Method, Net Assets Method, and Intrinsic Value Method.
Q3: What are the journal entries for closing the books of the vendor company?
A3:
1. Transfer assets and liabilities to the Realization Account.

2. Credit the purchase consideration to the Realization Account.
3. Settle any remaining liabilities.
4. Transfer the balance of the Realization Account to the Equity Shareholders’ Account.
Internal Reconstruction
Reconstruction
• Definition: The process of reorganizing a company’s affairs by revaluation of

assets, reassessment of liabilities, and writing off losses to present a true financial
position.
• Types:
o Internal Reconstruction: Adjustments within the company without
forming a new entity.
o External Reconstruction: Formation of a new company to take over the
existing company’s business.
Capital Reduction Account
• Definition: An account used to record the reduction in share capital, often used
to write off accumulated losses or overvalued assets.
Methods of Internal Reconstruction
Alteration of Share Capital
• Sub-division and Consolidation of Shares: Changing the denomination of

shares without altering the total share capital.
o Example: Splitting one ₹100 share into ten ₹10 shares.
• Conversion of Shares into Stock: Converting fully paid shares into stock and
vice versa.
o Example: Converting 4,000 shares of ₹100 each into ₹4,00,000 stock.
Variation of Shareholders’ Rights
• Definition: Changing the rights attached to different classes of shares, such as

dividend rates or voting rights.
o Example: Converting cumulative preference shares into non-cumulative
preference shares.
Reduction of Share Capital
• Methods:
o Extinguishing Liability: Reducing unpaid amounts on shares.
o Paying Off Excess Capital: Returning excess capital to shareholders.
o Cancelling Lost Capital: Writing off capital not represented by assets.
o Example: Reducing ₹100 shares to ₹10 shares and transferring the
difference to the Capital Reduction Account.
Compromise/Arrangement
• Definition: An agreement between the company and its creditors or

shareholders to restructure liabilities and equity.
o Example: Creditors accepting less than the full amount owed.
Surrender of Shares
• Definition: Shareholders surrendering shares to the company, which are then

reallocated to reduce liabilities.
o Example: Surrendering shares to allot them to debenture holders.
1. What is the purpose of internal reconstruction?

o To reorganize the company’s financial structure, write off losses, and
present a true financial position without liquidating the company.
2. How does the sub-division of shares work?
o It involves splitting existing shares into smaller denominations,
maintaining the same total share capital.
3. What is the Capital Reduction Account used for?
o It is used to record reductions in share capital, often to write off
accumulated losses or overvalued assets.
4. What are the legal requirements for reducing share capital?
o It requires a special resolution and confirmation by the Tribunal as per
Section 66 of the Companies Act, 2013.
Summary
• Internal Reconstruction involves reorganizing a company’s financial structure

through various methods like altering share capital, varying shareholders’ rights,
reducing share capital, and arranging compromises.
• Key Concepts include the Capital Reduction Account, sub-division and
consolidation of shares, and conversion of shares into stock.
• Legal Provisions: Governed by Sections 61 and 66 of the Companies Act, 2013.
Accounting for Branches Including Foreign
Branches
Branch
• Definition: An establishment carrying on the same or substantially the same

activity as the head office.
• Types:
o Inland Branches: Located within the same country.
▪ Dependent Branches: Accounting records kept at the head office.
▪ Independent Branches: Maintain independent accounting records.
o Foreign Branches: Located outside the country.
Department
• Definition: A division of a large organization dealing with various activities at the

same location.
Classification of Branches
• Inland Branches:
o Dependent Branches: Entire accounting done by the head office.
o Independent Branches: Maintain their own accounting records.
• Foreign Branches: Branches located outside the country.
Methods of Charging Goods to Branches
• At Cost: Goods invoiced at the cost price.

• At Selling Price: Goods invoiced at the selling price.
• At Wholesale Price: For retail branches, goods invoiced at wholesale price.
Accounting for Dependent Branches
• Debtors Method: Suitable for small branches.

• Stock and Debtors Method: Provides detailed control.
• Trading and Profit & Loss Account Method: Considers the branch as a
separate entity.
Examples
• Example 1: XP Ltd opened a branch at Delhi and sent goods costing ₹50,000. The
branch sold the goods on credit for ₹62,000. The profit is ₹12,000.
• Example 2: XP Ltd sent goods costing ₹50,000 to Delhi branch, which sold them
for ₹70,000 and incurred expenses of ₹8,000. The profit is ₹12,000.
Q1: What is a branch?
A: A branch is an establishment carrying on the same or substantially the same activity

as the head office.
Q2: What are the types of branches?
A: Inland branches (dependent and independent) and foreign branches.
Q3: How are goods charged to branches?
A: Goods can be invoiced at cost, selling price, or wholesale price.
Q4: What are the methods of accounting for dependent branches?
A: Debtors method, stock and debtors method, and trading and profit & loss account
method.
Summary
• Branches: Establishments carrying on similar activities as the head office.

• Types: Inland (dependent and independent) and foreign.
• Methods of Charging Goods: At cost, selling price, or wholesale price.
• Accounting Methods for Dependent Branches: Debtors method, stock and
debtors method, trading and profit & loss account method.

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Introduction to Accounting Standards

Key Terms and Concepts

1. Generally Accepted Accounting Principles (GAAP)

• Definition: A common set of accounting principles, standards, and procedures that

2. International Financial Reporting Standards (IFRS)

• Definition: Global standards for financial reporting, issued by the International

3. Indian Accounting Standards (Ind AS)

• Definition: IFRS-converged standards issued by the Indian government.

Objectives and Benefits of Accounting Standards

1. Standardization of Accounting Treatments

• Benefit: Reduces variations in accounting treatments, ensuring comparability.

• Benefit: Provides necessary information not statutorily required.

3. Comparability of Financial Statements

Standards Setting Process

• Step: ASB identifies broad areas for formulation of standards.

2. Constitution of Study Groups

3. Preparation and Circulation of Draft

• Step: Drafts are circulated for comments from various bodies.

4. Finalization and Issuance

Convergence vs. Adoption

• Definition: Directly adopting IFRS without modifications.

Carve Outs and Carve Ins

• Definition: Deviations from IFRS to suit local economic conditions.

• Definition: Additional guidance provided in Ind AS over IFRS.

Roadmap for Ind AS Implementation

• Date: From 1st April 2015.

• A1: To ensure comparability, transparency, and reliability of financial statements.

Q2: What are the benefits of standardizing accounting treatments?

• A2: It reduces variations, enhances comparability, and improves the credibility of

Q3: How does the standard-setting process work?

Q4: What is the difference between convergence and adoption of IFRS?

• Foundation of Accounting Standards: The development of accounting

2. Purpose of the Framework 🎯

• Assist Enterprises: Helps in preparing financial statements in compliance with

3. Status and Scope of the Framework 📜

• General-Purpose Financial Statements: Applies to financial statements

4. Components of Financial Statements 📈

• Balance Sheet: Shows the value of economic resources controlled by an

5. Objectives and Users of Financial Statements 🎯

6. Fundamental Accounting Assumptions 📚

• Going Concern: Assumes the enterprise will continue in operation in the

7. Qualitative Characteristics of Financial Statements 🌟

• Understandability: Information should be readily understandable by users.

8. True and Fair View 🔍

9. Elements of Financial Statements 🧩

• Asset: A resource controlled by the enterprise expected to generate future

10. Measurement of Elements of Financial Statements 📏

Potential Questions and Answers ❓

1. Q: What is the purpose of the framework for financial statements?

Accounting Standards (AS)

• Definition: Guidelines for financial reporting issued by the Accounting Standards

• Definition: The requirement for enterprises to comply with accounting standards

• Definition: The significance of an item in financial statements, judged by its

Applicability of Accounting Standards

For Corporate Entities

For Non-Corporate Entities

• Criteria: Applies to entities engaged in commercial, industrial, or business

Income Computation and Disclosure Standards (ICDS)

• Corporate Entities: Classified as Small and Medium-sized Companies (SMCs) and

Exemptions and Relaxations