Advanced financial

management
Chapter 1
• 1. Accounting Standards: (6)
• 1.1 Role of Accounting Standard board.
• 1.2 Introduction to International Accounting
Standards.
• 1.3 Disclosure of Accounting Policies-Inventory,
Depreciation,
• Investment, Fixed Assets, Amalgamation, EPS.
 What is accounting standard ?
• A common standard for accounting and
reporting. Accounting Standards contain
the principles governing accounting
practices and determine the appropriate
treatment of financial transactions.
• Accounting standards are the subject of
guidelines issued by the Institute of
Chartered Accountant of India in respect
of financial transactions. 
 Further
• They are written documents , policy documents
that are issued by expert accounting body or
government or other regulatory bodies covering
aspects of recognition, measurement, treatment,
presentation and disclosure of accounting
transactions in financial statements.
• Accounting standards in India are issued by ICAI
– Institute of Chartered Accountants in India.
Objective of Accounting Standards

• Objective of Accounting Standards is to

standardize the diverse accounting policies and
practices with a view to eliminate to the extent
possible the non-comparability of financial
statements and the reliability to the financial
statements.
• The ICAI in recognizing the need of harmonizing
the diverse accounting policies constituted an
Accounting Standards Board (ASB) on 21st April
1977.
 Compliance with Accounting
Standards issued by ICAI
• Sub Section(3A) to section 211 of Companies
Act, 1956 requires that every Profit/Loss
Account and Balance Sheet shall comply with
the Accounting Standards. 'Accounting
Standards' means the standard of accounting
recommended by the ICAI and prescribed by the
Central Government in consultation with the
National Advisory Committee on Accounting
Standards (NACAs) constituted under section
210(1) of companies Act, 1956.
• Accounting Standards will be mandatory from
the respective dates mentioned in Accounting
standards. If any deviation – should be disclosed
in audit report
• It is responsibility of management to ensure
compliance in financial statements
• Financial statements cannot be described as
complying with AS unless they comply with all
requirements of each standard applicable
 Role of Accounting standard board
Functions/Objectives/Terms of Reference 
• To visualize and suggest areas in which Accounting
Standards need to be developed. 
• To formulate Accounting Standards with a view to
assisting the Council of the ICAI in evolving and
establishing Accounting Standards in India.
•   To examine how far the relevant International Accounting
Standard/International Financial Reporting Standard can be
adapted while formulating the Accounting Standard and to
adapt the same. 
• To review, at regular intervals, the Accounting Standards
from the point of view of acceptance or changed
conditions, and, if necessary, revise the same. 
• To provide, from time to time, interpretations and guidance
on Accounting Standards. 
• To carry out such other functions relating to Accounting
Standards.
 Advantages of AS
• Reduce or eliminate variations in accounting
treatments for presenting in financial statements
• There are certain areas where important
information not required by law is to be disclosed
– standards may call for such disclosure
• Facilitates comparison of financial statements of
different companies situated at different places.
 Disadvantages
• Trend towards rigidity and away from
flexibility in applying accounting standards
• AS – cannot override law. They have to be
framed within the prevailing statute though
it is not acceptable standard.
• Differences in accounting standard are
bound to be because of differences in
traditions , legal systems from one country
to another.
 Abbreviations used
• IASC – International Standards Accounting
Committee
• IASB- International Accounting Standards Board
• ASB- Accounting Standards Board
• IFRS – international Financial Reporting
Standards.
• AS Accounting Standards – by ICAI
• IAS – International Accounting Standards by
IASC now known as IFRS
• ICAI – Institute of Chartered Accountants of
India
 Information – on IASB and IFRS
• IASC was founded in June 1973 after an agreement by accountancy
bodies in Australia, Canada, France, Germany, Japan, Mexico, the
Netherlands, the United Kingdom and Ireland and the United States,
and these countries constituted the Board of IASC at that time.
• A series of accounting standards, known as the International
Accounting Standards -IAS, were released by the – International
Accounting Standards Committee between 1973 and 2000, and were
ordered numerically.
• The series started with IAS 1, and concluded with the IAS 41, in
December 2000. At the time when the International Accounting
Standards Board was established, they agreed to adopt the set of
standards that were issued by the IASC, i.e. the IAS 1 to 41, but that
any standards to be published after that would follow a series known
as the International Financial Reporting Standards (IFRS).
• On its formation in April 2001 the IASB announced that the IASC
Foundation Trustees agreed that accounting standards issued by
IASB would be designated “International Financial Reporting
Standards”.
• The IASB aims to develop a single set of high quality global
accounting standards that require transparent and comparable
information in general purpose financial statements.
The Difference between Intl AS – IAS
and IFRS
• The question of the differences between the IAS and IFRS
has arisen on a number of occasions in accounting circles,
and in fact, some would question if there is any difference at
all.
• One of the major differences is that the series of standards
in the IAS were published by the International Accounting
Standards Committee (IASC) between 1973 and 2001,
• whereas, the standards for the IFRS were published by the
International Accounting Standards Board (IASB), starting
from 2001.
• When the IASB was established in 2001, it was agreed to
adopt all IAS standards, and name future standards as
IFRS. One major implication worth noting, is that any
principles within IFRS that may be contradictory, will
definitely supersede those of the IAS
• At present, the ASB of ICAI formulates the AS
based on IFRS. However, these standards
remain sensitive to local conditions, including
the legal and economic environment.

• Accordingly, AS issued by ICAI head from

corresponding and equivalent IFRS in order to
ensure consistency with legal, regulatory and
economic environment of India.
• As mentioned earlier The accounting standards
are formulated on the basis of international
financial reporting standards (IFRS)/
International accounting standards issued by
IASB
• Of the 41 issued so far, 31 are at present in
force in India and remaining are withdrawn
• Apart from this 8 IFRS have been also issued
by IASB
• Full adoption of IFRS from accounting period
commencing on or after 1 April 2011
• The following is the list of International
accounting standards.
• International Accounting Standards
• IAS 1 Presentation of Financial Statements
• IAS 2 Inventories
• IAS 3 Consolidated Financial Statements – Originally issued
1976, effective 1 Jan 1977. Superseded in 1989 by IAS 27 and
IAS 28.
• IAS 4 Depreciation Accounting – Withdrawn in 1999, replaced by
IAS 16, 22, and 38, all of which were issued or revised in 1998.
• IAS 5 Information to Be Disclosed in Financial Statements –
Originally issued October 1976, effective 1 January 1997.
Superseded by IAS 1 in 1997
• IAS 6 Accounting Responses to Changing Prices – Superseded
by IAS 15, which was withdrawn December 2003
• IAS 7 Statement of Cash Flows
• IAS 8 Accounting Policies, Changes in Accounting Estimates and
Errors
• IAS 9 Accounting for Research and Development Activities –
Superseded by IAS 38 effective 1.7.99
• IAS 10 Events After the Reporting Period
• IAS 11 Construction Contracts
• IAS 12 Income Taxes
• IAS 13 Presentation of Current Assets and Current Liabilities –
Superseded by IAS 1.
• IAS 14 Segment Reporting
• IAS 15 Information Reflecting the Effects of Changing Prices –
Withdrawn December 2003
• IAS 16 Property, Plant and Equipment
• IAS 17 Leases
• IAS 18 Revenue
• IAS 19 Employee Benefits
• IAS 20 Accounting for Government Grants and Disclosure of
Government Assistance
• IAS 21 The Effects of Changes in Foreign Exchange Rates
• IAS 22 Business Combinations – Superseded by IFRS 3 effective
31 March 2004
• IAS 23 Borrowing Costs
• IAS 24 Related Party Disclosures
• IAS 25 Accounting for Investments – Superseded by IAS 39 and
IAS 40 effective 2001
• IAS 26 Accounting and Reporting by Retirement Benefit Plans
• IAS 27 Consolidated and Separate Financial Statements
• IAS 28 Investments in Associates
• IAS 29 Financial Reporting in Hyperinflationary Economies
• IAS 30 Disclosures in the Financial Statements of Banks and
Similar Financial Institutions – Superseded by IFRS 7 effective
2007
• IAS 31 Interests In Joint Ventures
• IAS 32 Financial Instruments: Presentation – Disclosure
provisions superseded by IFRS 7 effective 2007
• IAS 33 Earnings Per Share
• IAS 34 Interim Financial Reporting
• IAS 35 Discontinuing Operations – Superseded by IFRS 5
effective 2005
• IAS 36 Impairment of Assets
• IAS 37 Provisions, Contingent Liabilities and Contingent Assets
• IAS 38 Intangible Assets
• IAS 39 Financial Instruments: Recognition and Measurement
• IAS 40 Investment Property
• IAS 41 Agriculture
 Status of Indian Accounting
Standards
• AS -1disclosure of accounting policies mandatory from 1 April 1993 to all
enterprises
• AS2 -valuation of inventories w.e.f a april1 1999
• AS 3 -cash flow statement 1 April 2001 applicable for level 1 enterprises
• AS4- contingencies and events occurring after balance sheet date a
april1998
• AS5 -net profit or loss for the period, prior period items changes in
accounting policies - April 1996
• AS 6 – Depreciation accounting – 1 April 1995
• AS – 7 construction contracts – 1 April 2002
• AS – 8 is withdrawn and included in AS 26
• AS - 9 revenue recognition w.e.f 1 April 1993
• AS - 10 accounting for fixed assets w.e.f 1 April 1993
• AS – 11 effects of changes in foreign exchange rates – 1995/ 1 April 2004
• AS -12 Accounting for government grants – 1 April 1994
• AS -13 – Accounting for investments – 1 April 1995
• AS – 14 Accounting for amalgamations – 1 April 1995
• AS – 15 Accounting for retirement benefits in
financial statements of Employers – 1 April
1995
• AS – 16 Borrowing Costs – w.e.f 1 April 2000
• AS-17 Segment Reporting w.e.f 1 April 2001
• AS -18 Related party disclosures w.e.f 1 April
2001
• AS – 19 Leases w.e.f 1 April 2001
• AS – 20 Earnings per Share - w.e.f 1 April 2001
• AS -21 Consolidated financial statements -
w.e.f 1 April 2001
• AS -22 Accounting for taxes on income - w.e.f 1
April 2001
• AS – 23 Accounting for investment in
associates in consolidated financial statements
– w.e f 1 April 2002
• AS – 24 Discontinuing operations w.e f 1 April
2004
• AS-25 Interim Financial Reporting – w.e.f April
2002
• AS-26 Intangible Assets – 1April 2003
• AS -27 Financial Reporting of Interests in Joint
ventures w.e.f f 1 April 2002
• AS – 28 Impairment of Assets – 1 April 2004
• As -29 Provisions, contingent liabilities and
contingent assets – w.e.f 1 April 2004
• Accounting Standard (AS) 30, Financial
Instruments: Recognition and Measurement,
issued by
• the Council of the Institute of Chartered
Accountants of India, comes into effect in
respect of accounting periods commencing on
or after 1-4-2009 and will be recommendatory
in nature for an initial period of two years.
• This Accounting Standard will become
mandatory in respect of accounting periods
commencing on or after 1-4-2011 for all
commercial, industrial and business entities
except to a Small and Medium-sized Entity
• AS 31
(Financial Instruments: Presentation

• While AS 30 is the equivalent of

International Accounting Standard IAS 39,
AS 31 corresponds to IAS
32.
 Applicability of accounting
standards
• AS are applicable to all enterprises but some
relaxation in applicability to some industries. For
this purpose,
• The enterprises are classified into 3 categories:
• Level I – equity / debt listed in India or abroad
and turnover exceeds 50 cr . All AS applicable.
• Level II – turnover exceeds 40 lacs but not 50cr
• Level III – enterprises not covered under above
 AS -1 Disclosure of Accounting Policies:

• Accounting Policies refer to specific accounting

principles and the method of applying those principles
adopted by the enterprises in preparation and
presentation of the financial statements.
• Accounting statements portray the effect of past
events. Users must be able to compare:
– Financial statements of any one enterprise for movements in
performance
– Status of different enterprises for evaluation.
• The disclosure enables the users to understand the
past and estimate the future
• Accounting policies refer to:
– Specific accounting principles
– Methods adopted by enterprises in applying these principles
in preparation and presentation of financial statements.
• Differentiation of Accounting Policy
Components:
• Principle: Providing depreciation for an asset –
• Method of applying the principle – Written down
value method or straight line method.
– Why disclosure need arises ?
• The accounting principles and method differs from one
enterprise to other in areas of recognition, valuation of
assets etc
• Following is a brief list examples :
– Basis of accounting – historical costs or current
costs.
– Valuation of inventory –
– Treatment of goodwill etc
 AS – 2 Inventory
• Valuation of Inventories: The objective of
this standard is to formulate the method of
computation of cost of inventories / stock.
• Helps to determine the value of closing stock /
inventory at which the inventory is to be
shown in balance sheet till it is not sold and
recognized as revenue.
• Inventory comprises of:
– Goods purchased held for resale
– Finished goods produced for sale
– Work in progress
– Materials, supplies, loose tools awaiting use in production
process.
• Does not include :
– Shares, debentures held for trade
– Livestock
– WIP under construction contracts
– Machinery or spares used only in connection with an item of
a fixed asset.
• The inventories are to be valued at lower of
– Cost or
– Net realizable value.
 Cost of inventory
• Costs include
– Cost of purchase net of discounts, duties, freight etc
– Cost of conversion – labour costs, production overheads
– Other cost incurred in bringing the inventories into the present location
• Does not include ;
– Selling distribution costs
– Abnormal wastage.
• Costs do not remain static and keep changing from time to time
– for valuation with reference to flow of production - which
items have been sold and which have remained for production
are to be determined. TO determine the value there are
standard 3 methods
– Specific identification method
– FIFO method
– Weighted Average cost method
 Specific identification method
• Method is also known as actual cost
method.
• Units in inventory are identified and unit
cost is identified with a particular invoice.
• This method tracks the actual physical
flow of goods avlble for production
• Goods produced for specific projects
should be assigned specific identification
• Suitable for automobiles, jewellery etc
 FIFO method
• materials purchased first issued first,
pricing in incoming sequence
• Method successful when size of raw
materials huge and cost is high
• Materials can be easily identified
• Not more than 2 -3 receipts on material
card
 Weighted average cost
• Calculated by dividing the total cost by the
quantity
• This method evens out effect of widely
varying prices
 Net realizable value
• Estimated selling price in ordinary course
of business less the estimated costs of
completion and the estimated costs
necessary to make the sale.
• If NRV exceeds cost it is to be ignored and
valuation should be at cost.
• The amount to be reckoned to the balance
sheet should be lower of the two
• Consider the following example.
 AS – 6 Depreciation
• Depreciation Accounting : It is a measure of
wearing out, consumption or other loss of value
of a depreciable asset arising from use, passage
of time.
• Depreciation is distribution of total cost of asset
over its useful life.
• Depreciation is linked to fixed assets :
– Items of use in business . Held NOT for sale.
– Necessary to write off a portion of the assets against
the revenues produced – the charge is depreciation
– It is a measure of wearing out, consumption or with
passage of time due to technological obsolescence.
– Fair proportion of the amount is charged during the
useful life of the asset.
Calculation of depreciation amount
• The amount of depreciation is calculated as
under :
– On historical cost – basis which is the purchase price
+ the transportation cost, commissioning cost,
alterations and improvements costs etc.
– Useful life of the asset
– Residual value –is realizable value at the end of its
useful economic life.
– Therefore depreciation = cost – residual value /
estimated useful life in number of years
• There are 2 methods of depreciation :
– Straight line method
– Written down value method
• selection of appropriate method depends on:
– Type of asset
– Nature of asset
– Circumstances prevailing in the business.
– Combination of both methods may be used
• Selected depreciation method to be applied consistently
• In case of any change in the method
– Depreciation to be recomputed applying new method from date of
acquisition till date of change.
– Difference in total depreciation under new and old method may be a
surplus or deficiency.
– In case of surplus – credited to profit and loss account – depreciation
written back.
– In case of deficiency – charged to profit and loss account.
– Such a change should be quantified and disclosed.
AS -10 accounting for fixed assets
• Accounting for Fixed Assets : It is an
asset, which is:- Held with intention of
being used for the purpose of producing or
providing goods and services.
• Not held for sale in the normal course of
business.
• Expected to be used for more than one
accounting period.
• Examples of Fixed Assets Land , Bldg, Plant ,
machinery etc
• Fixed assets to be shown at historical cost or revalued
cost
– Historical costs are purchase price +
duties+installation+delivery +handling cost
– All costs attributable to a particular asset are to be allocated
to a specific asset
– Any internal profit should be eliminated
• Revalued Price
– Revaluation is done by a competent valuer through an
appraisal.
– Revaluations can be done using price index to the
concerned fixed assets.
• Methods of presentation of revalued asset :
– By re-stating the gross book value and accumulated
depreciation
– Restating the net book value adding the net increase on
account of revaluation.
• Any additions to the existing asset is made
– is added to the gross block
– Or can be considered a separate identity and accounted
separately
• Fixed assets are deleted from financial statements
– When disposed or economic benefit is over
– Gains or losses arising are recognized in profit and loss
account
• Disclosure:
– Gross and net book values at beginning and end of
accounting period showing addition , disposal etc to be
shown
– Expenditure incurred on account of acquisition or
construction
– Revalued amount substituted for historical cost
 AS -13 Accounting for investments
• Accounting for Investments : It is the assets held
for earning income by way of dividend, interest and
rentals, for capital appreciation or for other benefits.
• Investments are assets that generate benefits
eligible for distribution among the stakeholders and
assets that appreciate in value.
• It relates to current investment and is applicable to
shares, debentures and other securities held
• The standard deals with following aspects
– Classification of investment
– Cost of investment
– Carrying amount or valuation of investment
– Disposal of investment
– Reclassification of investment
– Disclosure in financial statements
• Investment classification into
– Long term investment
– Current investment or short term
– Investment in property
• Cost of investment is the purchase price and
acquisition charges such as brokerage, fees etc
• Carrying amount :is realizable value.
• Disposal of investment – if there is a difference in the
realizable value and the net proceeds after sale, the
differential amt if any is recognized in profit and loss
account
• Reclassification of investments: if any short term are
converted into a long term
• Disclosure: - to be shown as per Schedule VI
– Aggregate amount of quoted and unquoted securities to me
given separately
– Any specific restriction on investment such as minimum
holding period etc to be disclosed
AS – 14 Accounting for Amalgamation

• Accounting for Amalgamation : This accounting

standard deals with accounting to be made in books of
Transferee company in case of amalgamation.
• Amalgamation is to come together – it is dissolution of
one of more companies and transfer of business
dissolved in to another entity
• Why do amalgamations take place – business
advantage, tax savings etc
• Transferor company – the co selling its business also
known as vendor company
• The company into which the transferor company is
amalgamated is transferee company
• A purchase consideration is paid by
transferee company
• Consideration is total of shares and other
securities issued and payment made in form
of cash and other assets to the shareholders
of transferor company
• As per this standard there are two types of
amalgamation:
– Amalgamation in the nature of merger
– Amalgamation in nature of purchase
• Amalgamation in nature of merger :
– All assets and liabilities are taken over by transferee
company
– The shareholders holding at least 90% or more shares of
transferor company
– Consideration for amalgamation is paid in equity shares by
the transferee company to the equity shareholders of
transferor company
– Business of transferor company is intended to be carried on
by transferee company
– No adjustment is to be made in the book values of assets
and liabilities of the transferor companies by way of
revaluation
• Amalgamation in the nature of purchase :
– Only if the conditions in nature of merger is not satisfied it
will be considered as nature of purchase.
• Disclosure:
– Name , nature of business
– Date of amalgamation
– Method of accounting
– Particulars of scheme under the statute
• Accounting
– Amalgamation under pooling interest method,
where description and number of shares issued and
the difference between the net consideration and
assets acquired.
– Amalgamation under purchase method is
consideration for amalgamation and difference
between the consideration and the net assets
acquired.
 Earning Per Share AS - 20
• Earning per share (EPS) is a financial ratio that
gives the information regarding earning
available to each equity share.
• It is very important financial ratio for assessing
the state of market price of share.
• This accounting standard gives computational
methodology for the determination and
presentation of earning per share, which will
improve the comparison of EPS.
• The statement is applicable to the enterprise
whose equity shares or potential equity shares
are listed in stock exchange.
• Earnings per share is net profit attributable for
equity share holders / average number of
equity shares