Overview of Indian Accounting Standards For SMEs

An overview of Indian Accounting Standards (IAS)
By Samrat Joneja
Chartered Accountant
Agenda
Background Why do we need AS Applicability of IAS to companies IAS notified for companies Applicability of IAS for non corporate entities International Harmonization of IAS Convergence with IFRS Road map for convergence Key features of the existing IAS
Y.K. Joneja & Co., Chartered Accountants
Overview of Indian Accounting Standards
Background
Why do we need AS?

Rationale Ensure a True and Fair view of financial position
To reduce accounting alternatives and thereby ensure comparability and meaningful information to users of financial statements
Applicability of IAS to companies

The Companies (Amendment) Act, 1999 has inserted new sub-sections 3A, 3B and 3C to Section 211, with a view to ensure that the financial statements are prepared in accordance with the Accounting Standards Section 211 (3A): Every profit and loss account and balance sheet of the company shall comply with the accounting standards Further section 211(3C) prescribes that the expression accounting standards means the standards of accounting recommended by the Institute of Chartered Accountants of India, constituted under the Chartered Accountants Act, 1949 (38 of 1949), as may be prescribed by the Central Government in consultation with the National Advisory Committee on Accounting Standards
Y.K. Joneja & Co., Chartered Accountants Overview of Indian Accounting Standards
IAS prescribed for companies

The Central Government has notified Companies (Accounting Standards) Rules 2006 (The Rules). These rules prescribes accounting Standards 1 to 7 and 9 to 29 as recommended by the Institute of Chartered Accountants of India (ICAI) Further ICAI has also issue Accounting Standard 30,31 and 32 The Rules state that every Company and its auditor shall comply with Accounting Standards
IAS prescribed for companies

Relaxation from certain provisions has been provided to Small & Medium Sized companies (SMCs). SMCs include companies which fulfill all the following conditions:
i. The company is not listed on a recognized stock exchange;
ii.
iii. iv. v.
The company is not a bank, financial institution or insurance company;

Turnover does not exceed Rs. 50 crore in the preceding accounting year; The company does not have borrowings in excess of Rs. 10 crore at any time during preceding accounting year; and Is not a holding or subsidiary of a company which is not a SMC.
Applicability of IAS for non corporate assessee

The accounting standards apply equally to Non Corporate Assesses. The Preface to the Statements of Accounting Standards issued by the ICAI, inter alia state: While discharging their attest functions, it will be the duty of the members of the Institute to ensure the Accounting Standards are implemented in the presentation of financial statements covered by their audit reports
Thus, in case of sole proprietorship concerns, partnership firms and other non corporate entities subject to tax audit, the ISA issued by ICAI will apply. ( Para 10.5 of The Guidance Note on Tax Audit under Section 44AB of the Income Tax Act issued by the ICAI)
Applicability of IAS for non corporate entities

Are IAS applicable to Charitable and religious institutions? Para 10.6 of the Guidance Note on Tax Audit u/s 44AB of the Income Tax Act 1961 states:AS apply in respect of commercial, industrial or business activities of an enterprise. In case of charitable or religious institutions, AS will not apply if all the activities of such organization are not of commercial, industrial or business nature The ICAI has also prescribed certain relaxation to applicability of AS to non corporate entities.
International Harmonization of AS
As the cross-border transfers of capital are became increasingly common there was a need to harmonize AS in different countries Recognizing this need for international harmonization of accounting standards, in 1973, the International Accounting Standards Board (IASB) was established. The Institute of Chartered Accountants of India (ICAI) being a member body of the IASB, constituted the Accounting Standards Board (ASB) on 21st April, 1977. While formulating accounting standards, the ASB gives due consideration to International Financial Reporting Standards (IFRSs) issued by IASB and tries to integrate them, to the extent possible, in the light of conditions and practices prevailing in India.
Convergence with IFRS

The Core Group constituted by the Ministry of Corporate Affairs for convergence of IAS with IFRS has laid out a roadmap for convergence of IAS with IFRS in toto. This decision came in light of the benefits associated with full convergence with IFRS which is now accepted in more than 100 countries world over. The benefits are : One language Comparability enhanced Understanding enhanced One set of books Access to global capital markets Low cost of capital Attract foreign investment Elimination of multiple reports
Roadmap for Convergence with IFRS

The Group agreed that in view of the roadmap for achieving convergence, there will be two separate sets of Accounting Standards
IAS Converged with IFRS

Phase I ( Reporting date 31 March 2012): Companies which are part of NSE- Nifty 50 or BSE Sensex 30, or Listed outside India or whether listed or not having net worth in excess of 1000 crore
Existing IAS
Phase 2 : The companies, whether listed or not, having a net worth exceeding Rs. 500 crore but not exceeding Rs. 1,000 crore
Phase 3: Listed companies which have a net worth of Rs. 500 crore or less
Applicable to Non-listed companies which have a net worth of Rs. 500 crore or less and SMCs
Key features of the Existing/Notified IAS
Notified AS
AS1: Disclosure of Accounting Policies AS 2 Valuation of Inventories AS 3 Cash Flow Statements AS 4 Contingencies and Events Occurring after the Balance Sheet Date AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies AS 6 Depreciation Accounting AS 7 Construction Contracts AS 8 Accounting for Research and Development (Withdrawn pursuant to AS 26 becoming mandatory) AS 9 Revenue Recognition AS 10 Accounting for Fixed Assets AS 11The Effects of Changes in Foreign Exchange Rates AS 12 Accounting for Government Grants AS 13 Accounting for Investments AS 14 Accounting for Amalgamations AS 15 Employee Benefits AS 16 Borrowing Costs AS 17 Segment Reporting AS 18 Related Party Disclosures AS 19 Leases AS 20 Earnings Per Share AS 21Consolidated Financial Statements AS 22 Accounting for Taxes on Income AS 23 Accounting for Investments in Associates in Consolidated Financial Statements AS 24 Discontinuing Operations AS 25 Interim Financial Reporting AS 26 Intangible Assets AS 27 Financial Reporting of Interests in Joint Ventures AS 28 Impairment of Assets AS 29 Provisions, Contingent Liabilities and Contingent Assets AS 30 Financial Instruments: Recognition and Measurement AS 31 Financial Instruments: Presentation
AS 1: Disclosure of Accounting Policies

All significant accounting policies adopted needs to be disclosed. The disclosure should form part of FS and at one place Any change in accounting policy having material effect should be disclosed including the amount of impact due to such change Disclosure of Fundamental Accounting Assumptions ( Going Concern, Consistency and Accrual) is necessary if these are not followed Primary consideration for selection of accounting policy is that the FS should give a true and fair view. Other factors for selection are : prudence, substance over form and materiality
AS 2: Valuation of Inventories
Inventories should be valued at lower of cost or Net realizable value The cost of inventories should comprise of all costs of purchase, cost of conversion and other cost in bringing the inventories to their present location and condition Cost formulas: Specific identification ( in case goods are not interchangeable), FIFO or Weighted average The FS should disclose accounting policy measuring the inventories including cost formula and total carrying amount of inventories in appropriate classification
AS 3: Cash Flow Statements

An enterprise shall prepare cash flow statement for each period a FS is prepared The cash flow should report cash flows during the period classified by operating , investing and financing activities An enterprise may use either the direct method or indirect method
Not mandatory for SMC
AS 4: Events Occurring After Balance Sheet Date

Assets and liabilities should be adjusted for events occurring after the balance sheet date that
Provide additional evidence to assist the estimation of amounts relating to conditions existing at the balance sheet date ; or that indicate that fundamental accounting assumptions of going concern is not appropriate
Disclosure is required of
Nature of the event
An estimate of the financial effect, or a statement that such estimated cannot be made
AS 5: Net Profit or Loss for the Period , Prior Period items & Changes in Accounting Policy
Items
Profit or loss from ordinary activities
Meaning
Profit or loss from activities undertaken as part of business or incidental to it
Disclosure required
Profit or loss from ordinary activities to be disclosed on the face of P&L Items within profit or loss from ordinary activities to be disclosed separately if the nature size or incidence is relevant to explain the performance of an entity The disclosure is required on the face of P&L in a manner so that their impact can be perceived Nature and amount to be separately disclosed in such manner that their impact on current profit or loss can be ascertained.
Extraordinary items
Income or expenses from events distinct from ordinary activities. Income or expenses which arise in current period as a result of errors or omissions in prior periods
Prior Period items
AS 5: Net Profit or Loss for the Period , Prior Period items & Changes in Accounting Policy
Items
Change in Accounting Estimates
Meaning
Estimates could be due to uncertainties inherent in business activities e.g.. Bad debts, inventory obsolescence or the useful life of depreciable assets
Disclosure required
The effect of change in accounting estimate should be classified using the same classification as was previously for the estimate. The nature and amount of change in accounting estimate which has a material effect should be disclosed
Change in Accounting Policy
Change in accounting policy can be made only if the change is required for complying with statute or for compliance with accounting standard or for better presentation
Any change in accounting policy which has a material impact should be disclosed along with the amount of such impact
AS 6: Depreciation
The depreciable amount of assets should be allocated on a systematic basis to each accounting period over the useful life of the asset The depreciation method should be applied consistently from period to period Method of depreciation can be changed only if the change : Is required by statute or Is required for compliance with a accounting standard or results in better presentation of the financial statements
Change in method of depreciation shall be retrospective and any deficiency or surplus arising shall be charged to or credited to profit and loss account
AS 7: Construction Contracts
This AS prescribes accounting in the books of contractors Meaning of construction Contracts Construction contract is a contract specifically negotiated for the construction of an asset or a combination of assets that are closely interrelated in term of design, technology and function or ultimate use. AS 7 is to be applied to each contract separately What is to be included in contract revenue? The initial amount of revenue agreed; and
Revenue for variations in the contract work, - To the extent that it is probable that they will result in revenue; and - They are capable of being reliably measured
This AS prescribes accounting in the books of contractors Meaning of construction Contracts Construction contract is a contract specifically negotiated for the construction of an asset or a combination of assets that are closely interrelated in term of design, technology and function or ultimate use. AS 7 is to be applied to each contract separately What is to be included in contract revenue? The initial amount of revenue agreed; and
Revenue for variations in the contract work, - To the extent that it is probable that they will result in revenue; and - They are capable of being reliably measured
What is to be included in contract cost?
Cost that are directly related to the specific contract Costs that is generally related and which can be allocated
Recognition principles
When the outcome of the contract
Can be Estimated Reliably

Recognize revenue and expenses having regard to the stage of completion of the contract activity at the reporting date
Cannot be Estimated Reliably

Recognize the revenue only to the extent of such contract costs incurred,, the recovery of which is probable.
Irrespective of the reliably or otherwise of the outcome of the contract, any expected loss on the contract should be immediately recognized as an expense
AS 9: Revenue Recognition
Revenue is recognized to the extent that it is probable that the economic benefits will flow to the entity and the revenue can be reliably measured. Sale of Goods Revenue is recognized when the significant risks and rewards of ownership of the goods have passed to the buyer. Interest Revenue is recognized on a time proportion basis taking into account the amount outstanding and the rate applicable. Income from service contracts Income from service contracts is recognized pro-rata over the period of the contract as and when services are rendered. Dividends Revenue is recognized when the shareholders right to receive payment is established by the balance sheet date. Dividend from subsidiaries is recognised even if same are declared after the balance sheet date but pertains to period on or before the date of balance sheet as per the requirement of schedule VI of the Companies Act, 1956
AS 10: Accounting for fixed assets

The method of gross book value of the fixed assets should either be the Historical cost or the revalued amounts as per standard Historical costs means purchase price and any attributable costs in bringing the asset to its present location or condition Subsequent expenditure related to an item of fixed asset should be added to its book value only if the increase in future benefits from the existing asset beyond its previously assessed standard of performance. Loss or gain from retirement or disposal of fixed asset carried at cost should be recognized in the profit and loss account When fixed assets are revalued, an entire class of the asset should be revalued .Such revaluation should not result in net book value of the class greater than recoverable amounts. The increase on revaluation should be credited to revaluation reserve and decrease should be charged to profit and loss account
AS 12 : Accounting for Government Grants

Government grants should not be recognized until there is reasonable assurance that the enterprise will comply with the conditions attached to the grant and Grants will be received
Type of grant Grant for specific fixed assets which are depreciable Recognition Option1: To be shown as a deduction from gross book value ; or Option 2: to Treat as deferred income to be credited to profit and loss account on a systematic basis
Grant for specific fixed assets which are non depreciable
To be Credited to capital reserve account However if grants related to non depreciable assets require fulfillment of certain obligations, the grant should be credited to income over the same period over which the cost of meeting such obligation is charged to income
To be credited to profit and loss account To be Credited to capital reserve account
Revenue Grants Promoters contribution
Note: Government Grant that has become refundable should be treated as extraordinary item
AS 13 : Accounting for Investments

An enterprise should disclose current investments and long term investments distinctly in the financial statements The cost of investments should include acquisition charges such as brokerage fee and duties An enterprise holding investment properties should account them as long term investments Current Investments is an investments that is by its nature readily realizable and is intended to be held for not more than one year from the date on which such investment is made Long term investment is an investment other than current investment
AS 13 : Accounting for Investments

Recognize Current investments: At Costs or fair value whichever is lower Long term investments: At Costs
However provision for diminution in value of investments of permanent nature should be recognized
Any changes in carrying values to be debited or credited to P&L Account Gains or losses on disposal of assets to be recognized in P&L Account
AS 16 : Borrowing Costs
Meaning : Interest and other costs incurred in connection with the borrowing of funds When should Borrowing Costs be capitalized? Borrowing costs , that are directly attributable to the acquisition, construction or production of qualifying asset should be capitalized as part of costs of that asset Qualifying Asset? It is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale Ordinarily a period of 12 months is considered as substantial period unless a shorter period can be justified
AS 22 : Accounting for Taxes on Income Concept

Accounting for taxes on income, has been traditionally based on Tax payable method. Globally, Tax effect accounting method is used Seeking to accrue taxes, in accordance with the matching concept, in the same period as the revenue and expenses to which they relate By which DTA\DTL created after considering deductible and\or taxable timing differences
AS 22 : Accounting for Taxes on Income Definitions

Tax expense: Current Tax (+ or -) Deferred tax Current tax: Income tax payable in respect of taxable income for a period Deferred tax: Tax effect of timing differences Timing differences: Differences between taxable income and accounting income for a period, that originate in one period and are capable of reversal in one or more subsequent periods.

Examples of timing difference: Differences between book and tax depreciation Expenditure allowed only on payment basis u/s 43B of the Income-tax Act, 1961 Unabsorbed depreciation and carry forward of losses. Taxable income: Income computed in accordance with tax laws Accounting income: Net profit before tax, as per financial statements

Permanent differences: Differences between taxable income and accounting income that originate in one period and do not reverse subsequently. Examples Disallowance of expenditure charged to Profit & Loss Account Donations where only 50% deduction u/s 80G is available under tax laws Weighted deduction for scientific research expenditure under tax laws Tax exemption to new industries setup in backward areas u/s 80IA

DTA Any item which will reduce the future taxable income Provision for bad and doubtful debts Section 43B items Unabsorbed depreciation and carry forward of losses Other provisions Payments u/s 40(a)(i) DTL Any item which will increase the future taxable income Deferred revenue expenditure Tax Depreciation, if > book depreciation
AS 22 : Accounting for Taxes on Income

Accounting for Income taxes
Recognize effect of timing difference between book profit and tax profit
Taxes payable method

Tax payable based on tax income, no recognition of timing difference
Tax effect accounting method
Timing differences eg
Permanent differences
No effect
DTA
Recognise if realisation is probable
DTL
Recognise for all items
Apply current tax rate on accumulated balances

AS 22 : Accounting for Taxes on Income Recognition criteria

DTA should be recognised subject to consideration of prudence in respect to DTA. DTA should be recognised and carried forward only to the extent that there is reasonable certainty that sufficient future taxable income will be available against which such DTA can be realised. In case of unabsorbed depreciation or carry forward of losses under tax laws, DTAs should be recognised only to the extent that there is virtual certainty supported by convincing evidence that sufficient future taxable income will be available against which such DTAs can be realised.
AS 22 : Accounting for Taxes on Income Steps

Determine current income tax (or benefit) and related payable START Permanent differences Identify and accumulate timing differences as of the end of the current year Identify operating losses and tax credit carry forwards
The application of AS 22 to a particular entitys situation generally involves these steps.
Timing differences
Recognize DTL for taxable timing differences
END Perform intraperiod allocation
Recognize DTA for deductible timing differences and operating loss and carry forwards Calculate the income tax liability
AS 26 : Intangible Assets
Conditions for an asset to be treated as an intangible asset for AS 26: It is identifiable Non monetary asset which does not have a physical substance and Is held by the enterprise for use in the production and supply of goods and services, for rental to others and for administrative purposes I Control of the asset is with the enterprise Future Economic benefits are expected from such asset
Conditions for recognizing an Intangible Asset in the books: It is probable that future economic benefits attributable to such assets shall flow to the enterprise The cost of the asset can be measured reliably
Intangible Item vs. Intangible Assets: An enterprise may incur expenditure to provide future economic benefits, but no intangible assets may be created since any of the conditions mentioned above are not met. Such expenditure has to be written off in the profit and loss Account in the year in which it is incurred
AS 29: Provisions Contingent Liabilities and Contingent Assets

When should Contingent Liability be disclosed?
If there is a Possible Obligation arising from Past Events; and Existence of such obligation shall be confirmed by a uncertain future events not within the control of the enterprise OR A Present Obligation that arises from Pasts Events but is not recognized Because it is not probable that outflow of recourses will be required or A reliable estimate of the obligation cannot be made
Present Obligation? If existence of the obligation is considered probable i.e. more likely than not (Probability >50%) on the balance sheet date Possible Obligation? If existence of obligation is not probable (Probability <50%) on the balance sheet date
AS 29: Provisions Contingent Liabilities and Contingent Assets

When should Provisions be Recognized?
If there is a Present Obligation that arises from Pasts Events; It is probable that an outflow of resources shall be required to settle the obligation and Reliable estimate can be made of the amount of obligation
QUESTIONS?
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Overview of Indian Accounting Standards For SMEs

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An overview of Indian Accounting Standards (IAS)

Y.K. Joneja & Co., Chartered Accountants