IPCC Group 1 Accounting Standard Summary
Applicability of various Accounting Standards and Ind AS
Guidance note on Ind AS Schedule III – Key clarifications
Accounting Standard 1
DISCLOSURE OF ACCOUNTING POLICIES
Introduction
1. This Standard deals with the disclosure of significant accounting policies
followed in preparing and presenting financial statements.
2. The view presented in the financial statements of an enterprise of its
state of affairs and of the profit or loss can be significantly affected by the
accounting policies followed in the preparation and presentation of the
financial statements. The accounting policies followed vary from enterprise
to enterprise. Disclosure of significant accounting policies followed is
necessary if the view presented is to be properly appreciated.
3. The disclosure of some of the accounting policies followed in the
preparation and presentation of the financial statements is required by law
in some cases.
4. The Institute of Chartered Accountants of India has, in Standards issued
by it, recommended the disclosure of certain accounting policies, e.g.,
translation policies in respect of foreign currency items.
5. In recent years, a few enterprises in India have adopted the practice of
including in their annual reports to shareholders a separate statement of
accounting policies followed in preparing and presenting the financial
statements.
6. In general, however, accounting policies are not at present regularly
and fully disclosed in all financial statements. Many enterprises include in
the Notes on the Accounts, descriptions of some of the significant accounting
policies. But the nature and degree of disclosure vary considerably between
the corporate and the non-corporate sectors and between units in the same
sector.
7. Even among the few enterprises that presently include in their annual
reports a separate statement of accounting policies, considerable variation
exists. The statement of accounting policies forms part of accounts in some
cases while in others it is given as supplementary information.
8. The purpose of this Standard is to promote better understanding of
financial statements by establishing through an accounting standard the
disclosure of significant accounting policies and the manner in which
accounting policies are disclosed in the financial statements. Such disclosure
would also facilitate a more meaningful comparison between financial
statements of different enterprises.
Summary Accounting Policy Disclosure :
- If necessary
- Required by Law
- Recommended by ICAI
- Reports to shareholders a separate statement of accounting policies
- Accounting Policy not Presented Regularly
- Considerable Variation Exists
- For more Better Understanding
Explanation
Fundamental Accounting Assumptions
Certain fundamental accounting assumptions underlie the preparation
and presentation of financial statements. They are usually not specifically
stated because their acceptance and use are assumed. Disclosure is necessary
if they are not followed.
(Disclosure not require if not change)
10. The following have been generally accepted as fundamental accounting
assumptions:—
a. Going Concern
The enterprise is normally viewed as a going concern, that is, as continuing
in operation for the foreseeable future. It is assumed that the enterprise has
neither the intention nor the necessity of liquidation or of curtailing materially
the scale of the operations.
b. Consistency
It is assumed that accounting policies are consistent from one period to
another.
c. Accrual
Revenues and costs are accrued, that is, recognised as they are earned or
incurred (and not as money is received or paid) and recorded in the financial
statements of the periods to which they relate. (The considerations affecting
the process of matching costs with revenues under the accrual assumption
are not dealt with in this standard.)
Considerations in the Selection of Accounting Policies
16. The primary consideration in the selection of accounting policies by
an enterprise is that the financial statements prepared and presented on the
basis of such accounting policies should represent a true and fair view of
the state of affairs of the enterprise as at the balance sheet date and of the
profit or loss for the period ended on that date.
Primary Consideration
(The financial statements prepared & presented on the
basis of such accounting policies
should represent a true and fair view of the state of affairs of the enterprise.)
17. For this purpose, the major considerations governing the selection and
application of accounting policies are :—
a. Prudence
In view of the uncertainty attached to future events, profits are not anticipated
but recognised only when realised though not necessarily in cash. Provision
is made for all known liabilities and losses even though the amount cannot
be determined with certainty and represents only a best estimate in the light
of available information.
Secondary Consideration
(E.g. Valuing inventory at
lower of cost and net realizable value.
E.g. Suppose a company is facing a damage suit. No provision for damages
should be recognized by a charge against profit, unless the probability of
losing the suit is more than the probability of not losing it.)
b. Substance over Form
The accounting treatment and presentation in financial statements of
transactions and events should be governed by their substance and not merely
by the legal form.
E.g. If the assets are purchased on hire purchase by the hire purchaser, the
assets are shown
in the books
of hire purchaser in spite of the fact that the hire purchaser is not the legal owner of
the assets purchased. Therefore, the
legal form of the transaction is ignored and the transaction is accounted as per its substance.
c. Materiality
Financial statements should disclose all “material” items, i.e. items the
knowledge of which might influence the decisions of the user of the financial
statements.
E.g. Any item under
which the expenses exceed 1 per
cent of total revenue of the company
or Rs. 100,000, whichever is higher, are shown as a separate and distinct
item against appropriate account head in the Profit
& Loss Account
and are not combined
with any other item shown under ‘Miscellaneous Expenses’.
Disclosure of Accounting Policies
18. To ensure proper understanding of financial statements, it is necessary
that all significant accounting policies adopted in the preparation and
presentation of financial statements should be disclosed.
19. Such disclosure should form part of the financial statements.
20. It would be helpful to the reader of financial statements if they are all
disclosed as such in one place instead of being scattered over several
statements, schedules and notes.
21. Examples of matters in respect of which disclosure of accounting
policies adopted will be required are contained in paragraph 14. This list of
examples is not, however, intended to be exhaustive.
22. Any change in an accounting policy which has a material effect should
be disclosed. The amount by which any item in the financial statements is
affected by such change should also be disclosed to the extent ascertainable.
Where such amount is not ascertainable, wholly or in part, the fact should
be indicated. If a change is made in the accounting policies which has no
material effect on the financial statements for the current period but which
is reasonably expected to have a material effect in later periods, the fact of
such change should be appropriately disclosed in the period in which the
change is adopted.
23. Disclosure of accounting policies or of changes therein cannot remedy
a wrong or inappropriate treatment of the item in the accounts.
(1. Any change in the accounting policies which has a material effect in the current
period should be disclosed
along with amount of effect.
2. If the amount is not ascertainable (whether wholly or in part), the fact should be disclosed.
3. If there is any material effect in later period, the fact
should be disclosed.)
AS-2 VALUATION OF INVENTORIES
Objective
A primary issue in accounting for inventories is the determination of the value at which inventories are carried in the financial statements until the related revenues are recognised. This Standard deals with the determination of such value, including the ascertainment of cost of inventories and any write-down thereof to net realisable value.(AS-2 not applicable)
1. This Standard should be applied in accounting for inventories other than:
(a) work in progress arising under construction contracts, including directly related service contracts (see Accounting Standard (AS) 7, Construction Contracts);
(b) work in progress arising in the ordinary course of business of service providers;
(c) shares, debentures and other financial instruments held as stock-in-trade; and
(d) producers’ inventories of livestock, agricultural and forest products, and mineral oils, ores and gases to the extent that they are measured at net realisable value in accordance with well established practices in those industries.
2. The inventories referred to in paragraph 1 (d) are measured at net realisable value at certain stages of production.
(Live stock, agriculture, and Forest Product.) - Valued at NRV
This occurs, for example, when agricultural crops have been harvested or mineral oils, ores and gases have been extracted and sale is assured under a forward contract or a government guarantee, or when a homogenous market exists and there is a negligible risk of failure to sell. These inventories are excluded from the scope of this Standard.
Definitions
3.1. Inventories are assets:(a) held for sale in the ordinary course of business;
(b) in the process of production for such sale; or
(c) in the form of materials or supplies to be consumed in the production process or in the rendering of services.
3.2. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale
Measurement of Inventories
5. Inventories should be valued at the lower of cost and net realisable value.Cost of Inventories
6. The cost of inventories should comprise all costs of purchase, costs
of conversion and other costs incurred in bringing the inventories to
their present location and condition.
Exclusions from the Cost of Inventories
13. In determining the cost of inventories in accordance with paragraph 6, it is appropriate to exclude certain costs and recognise them as expenses in the period in which they are incurred. Examples of such costs are:(Revenue Nature Expenses)
(a) abnormal amounts of wasted materials, labour, or other production costs;
(b) storage costs, unless those costs are necessary in the production process prior to a further production stage;
(c) administrative overheads that do not contribute to bringing the inventories to their present location and condition; and
(d) selling and distribution costs.
Cost Formulas
(FIFO vs LIFO vs Weighted Average)
14. The cost of inventories of items that are not ordinarily
interchangeable and goods or services produced and segregated for specific
projects should be assigned by specific identification of their
individual costs. - FIFO or Weighted Average.
15. Specific identification of cost means that specific costs are attributed
to identified items of inventory. This is an appropriate treatment for items
that are segregated for a specific project, regardless of whether they have
been purchased or produced. However, when there are large numbers of items
of inventory which are ordinarily interchangeable, specific identification of
costs is inappropriate since, in such circumstances, an enterprise could obtain
predetermined effects on the net profit or loss for the period by selecting a
particular method of ascertaining the items that remain in inventories.
16. The cost of inventories, other than those dealt with in paragraph 14,
should be assigned by using the first-in, first-out (FIFO), or weighted
average cost formula. The formula used should reflect the fairest possible
approximation to the cost incurred in bringing the items of inventory to
their present location and condition
Disclosure
26. The financial statements should disclose: (a) the accounting policies adopted in measuring inventories, including the cost formula used; and
(b) the total carrying amount of inventories and its classification appropriate to the enterprise.
(Closing stock value = Carrying Cost)
27 Information about the carrying amounts held in different classifications of inventories and the extent of the changes in these assets is useful to financial statement users. Common classifications of inventories are:
(a) Raw materials and components
(b) Work-in-progress
(c) Finished goods
(d) Stock-in-trade (in respect of goods acquired for trading)
(e) Stores and spares
(f) Loose tools
(g) Others (specify nature)
