INCOME TAX NOTES

IPCC Group 1 Accounting Standard Summary


IPCC Group 1 Accounting Standard Summary



 AS-1     DISCLOSURE OF ACCOUNTING POLICIES

 AS-2     VALUATION OF INVENTORIES

 AS-3     CASH FLOW STATEMENTS

 AS-6     DEPRECIATION

 AS-7     CONSTRUCTION CONTRACTS

 AS-9     REVENUE RECOGNITION

 AS-10   ACCOUNTING FOR FIXED ASSETS

 AS-13   ACCOUNTING FOR INVESTMENTS

 AS-14   ACCOUNTING FOR AMALGAMATIONS






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 :
  1.  If necessary
  2. Required by Law
  3. Recommended by ICAI
  4. Reports to shareholders a separate statement of accounting policies
  5. Accounting Policy not Presented Regularly
  6. Considerable Variation Exists
  7. 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)