MCM604_Advanced Financial Accounting

MASTER OF COMMERCE ADVANCED FINANCIAL ACCOUNTING MCM604 Dr. Jayaram Kanzal Dr. Usha N.

CHANDIGARH UNIVERSITY Institute of Distance and Online Learning Course Development Committee Chairman Prof. (Dr.) R.S. Bawa Vice Chancellor, Chandigarh University, Punjab Advisors Prof. (Dr.) Bharat Bhushan, Director, IGNOU Prof. (Dr.) Majulika Srivastava, Director, CIQA, IGNOU Programme Coordinators & Editing Team Master of Business Administration (MBA) Bachelor of Business Administration (BBA) Co-ordinator - Prof. Pragya Sharma Co-ordinator - Dr. Rupali Arora Master of Computer Applications (MCA) Bachelor of Computer Applications (BCA) Co-ordinator - Dr. Deepti Rani Sindhu Co-ordinator - Dr. Raju Kumar Master of Commerce (M.Com.) Bachelor of Commerce (B.Com.) Co-ordinator - Dr. Shashi Singhal Co-ordinator - Dr. Minakshi Garg Master of Arts (Psychology) Bachelor of Science (Travel & TourismManagement) Co-ordinator - Dr. Samerjeet Kaur Co-ordinator - Dr. Shikha Sharma Master of Arts (English) Bachelor of Arts (General) Co-ordinator - Dr. Ashita Chadha Co-ordinator - Ms. Neeraj Gohlan Master of Arts (Mass Communication and Bachelor of Arts (Mass Communication and Journalism) Journalism) Co-ordinator - Dr. Chanchal Sachdeva Suri Co-ordinator - Dr. Kamaljit Kaur Academic and Administrative Management Prof. (Dr.) Pranveer Singh Satvat Prof. (Dr.) S.S. Sehgal Pro VC (Academic) Registrar Prof. (Dr.) H. Nagaraja Udupa Prof. (Dr.) Shiv Kumar Tripathi Director – (IDOL) Executive Director – USB © No part of this publication should be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording and/or otherwise without the prior written permission of the author and the publisher. SLM SPECIALLY PREPARED FOR CU IDOL STUDENTS Printed and Published by: Himalaya Publishing House Pvt. Ltd., E-mail: [email protected], Website: www.himpub.com For: CHANDIGARH UNIVERSITY Institute of Distance and Online Learning CU IDOL SELF LEARNING MATERIAL (SLM)

Advanced Financial Accounting Course Code: MCM604 Credits: 4 Course Objectives:  To impart understanding of the application of accounting fundamentals to the students.  To Identify the relevant information from published financial statements for decision- making.  To appraise the students about budgetary control, responsibility accounting and responsibility centers. Syllabus Unit 1 - Introduction to IAS, USGAAP Unit 2 - Indian Accounting Standard: Introduction, Meaning, Objectives and functions of accounting fundamental accounting assumptions, Limitations of accounting. Unit 3 - Accounting Standards: Applicability, Interpretation, Scope and Compliance. Unit 4 - US GAAPS: Components of US GAAP, International Accounting Standards, A Comparison IGAAP - US GAAP - IFRS Unit 5 - Preparation of Company Accounts under Various Circumstances: Introduction to Merger, Varieties of Mergers, Acquisitions, Types of Acquisitions Distinction between Mergers and Acquisitions Accounting for Mergers and Acquisitions Methods of Accounting Unit 6 - External Reconstruction: Pooling of Interest Method Purchase Method How to Value an Acquisition, Sources of Gains from Acquisitions Valuation Procedures Unit 7 - Group Financial Statements: Holding Company, Methods of Combination Accounting, Treatment, Preparation of Group Cash Flow Statement, Statement of Cash Flows Unit 8 - Segmental Reporting: Introduction, Need for Segmental Reporting ,Arguments against Segmental Reporting. Unit 9 - International Scenario, The Indian Scenario: Definitions, Disclosure Requirements CU IDOL SELF LEARNING MATERIAL (SLM)

Unit 10 - Accounting and Auditing Issues: Segmental Reporting Problems & Difficulties, Specific Issues Relating to Management Accountants, Segmental Disclosure Unit 11 - Joint Venture: Concept and Objectives of Joint Venture; Accounting Treatment, Difference between Joint Venture & Partnership. Unit 12 - Consignment Accounts: Meaning, features, Consignee distinction between joint venture & consignment, Accounting treatment in the books of consignor & consignee. Unit 13 - Voyage Accounts: Meaning, Accounting treatment in case of complete voyage & incomplete voyage Unit 14 - Departmental Accounts: Meaning, Objects, Advantages, Accounting procedure, Apportionment of Expenses and incomes, Interdepartmental transfers, Provision for unrealized profit. Unit 15 - Branch Accounts: Features, Objects, Types of branches, Dependent and Independent Branches (Excluding Foreign Branches). Text Books: 1. Hanif and Mukherjee, (2012), “Modern Accountancy”, New Delhi,TataMcGraw Hill. 2. Maheshwari S.N. (2009), “Accounting for Management”, New Delhi, Vikas Publishing House. 3. Tulsian, P.C.(2002)., “Financial Accounting”, New Delhi, Tata McGraw Hill. Reference Books: 1. Horngren, C.T., Gary L. Sundem. (1986), “Introduction to Management Accounting”, New Delhi, Prentice hall India. 2. Shukla, Grewal and S.C.Gupta, (2009), “Advanced Accounts”, NewDelhi: Sultan Chand and Sons. CU IDOL SELF LEARNING MATERIAL (SLM)

CONTENTS 1 - 12 13 - 22 Unit 1: Introduction to IAS and US GAAP 23 - 35 Unit 2: Indian Accounting Standard 36 - 45 Unit 3: Accounting Standards 46 - 84 Unit 4: US GAAPS 85 - 102 Unit 5: Preparation of Company Accounts under Various Circumstances 103 - 146 Unit 6: External Reconstruction 147 - 156 Unit 7: Group Financial Statements 157 - 162 Unit 8: Segmental Reporting 163 - 172 Unit 9: International Scenario 173 - 194 Unit 10: Accounting and Auditing Issues 195 - 219 Unit 11: Joint Venture 220 - 228 Unit 12: Consignment Accounts 229 - 239 Unit 13: Voyage Accounts 240 - 281 Unit 14: Departmental Accounts Unit 15: Branch Accounts CU IDOL SELF LEARNING MATERIAL (SLM)

CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 1 INTRODUCTION TO IAS AND US GAAP Structure: 1.0 Learning Objectives 1.1 Introduction 1.2 IndianAccounting Standards (IAS) 1.3 List of IndianAccounting Standard 1.4 US GAAP 1.5 Summary 1.6 Key Words/Abbreviations 1.7 LearningActivity 1.8 Unit End Questions (MCQs and Descriptive) 1.9 References 1.0 Learning Objectives After studying this unit, you will be able to: z Explain the introduction of IAS z Explain the introduction of US GAAP 1.1 Introduction Generally accepted accounting principles, or GAAP, are a set of rules that encompass the details, complexities, and legalities of business and corporate accounting. The Financial Accounting Standards Board (FASB) uses GAAP as the foundation for its comprehensive set of approved accounting methods and practices.

2 Advanced Financial Accounting GAAP compliance makes the financial reporting process transparent and standardizes assumptions, terminology, definitions, and methods. External parties can easily compare financial statements issued by GAAP-compliant entities and safely assume consistency, which allows for quick and accurate cross-company comparisons. Because GAAP standards deliver transparency and continuity, they enable investors and stakeholders to make sound, evidence-based decisions. The consistency of GAAP compliance also allows companies to more easily evaluate strategic business options. 1.2 Indian Accounting standards (IAS) Indian Accounting Standard (abbreviated as Ind AS) is the accounting standard adopted by companies in India and issued under the supervision of Accounting Standards Board (ASB) which was constituted as a body in the year 1977. MCA has to spell out the accounting standards applicable for companies in India. The Indian Accounting Standards (Ind AS), as notified under section 133 of the Companies Act 2013, have been formulated keeping the Indian economic and legal environment in view and with a view to converge with IFRS Standards, as issued by and copyright of which is held by the IFRS Foundation. Objective of Indian Accounting Standards Before the introduction of Ind AS, financial statements were prepared on the basis of Accounting Standards (AS) which were not in line with the standards and principles applicable globally (IFRS). 1. Due to this investors were not able to assess and compare the financial position of Indian companies with other global companies. 2. In order to make the financial statements uniform, Ind AS were introduced which are converged form of IFRS (global standards). 3. Moreover, introduction of Ind AS will bring consistency in the accounting practices 4. The principles followed by companies in India and other companies across world. 5. To leading to enhanced accessibility and acceptability of financial statements by global investors. CU IDOL SELF LEARNING MATERIAL (SLM)

Introduction to IAS and US GAAP 3 Benefits of Indian Accounting Standards Ind AS have many benefits, some of which are discussed below: 1. Wider acceptability: Since Ind AS are converged form of IFRS which are widely acceptable and will give confidence to the user of financial statements. 2. Comparability of financials: Financial statements prepared using Ind AS are easily comparable with the financial statements prepared by companies of other countries. 3. Changes in standards as per economic situations: Principles of Ind AS are revised/ modified in case there is any major change in economy. Ind AS 29 is ‘Financial Reporting in Hyperinflationary Economies’ which deals with situations related to inflation. 4. Attracts foreign investment: Adopting Ind AS may attract foreign investors to invest in Indian Companies as that will ensure better comparability with similar companies across the globe. 5. Saves financial statement preparation cost: For multinational companies, it will be beneficial as it will be able to use the same accounting standards in all the markets in which they operate. This will save preparation costs of aligning financial statements of Indian company with other operations. 1.3 List of INDIAN ACCOUNTING STANDARD INDIAN NAME OF INDIAN ACCOUNTING STANDARD ACCOUNTING STANDARD NO. (IAS NO.) Ind AS 101 First-time Adoption of Indian Accounting Standards Ind AS 102 Share-based Payment Ind AS 103 Business Combinations Ind AS 104 Insurance Contracts Ind AS 105 US Assets Held for Sale and Discontinued Operations CU IDOL SELF LEARNING MATERIAL (SLM)

4 Advanced Financial Accounting Ind AS 106 Exploration for and Evaluation of Mineral Resources Ind AS 107 Financial Instruments: Disclosures Ind AS 108 Operating Segments Ind AS 109 Financial Instruments Ind AS 110 Consolidated Financial Statements Ind AS 111 Joint Arrangements Ind AS 112 Disclosure of Interests in Other Entities Ind AS 113 Fair Value Measurement Ind AS 114 Regulatory Deferral Accounts Ind AS 115 Revenue from Contracts with Customers Ind AS 1 Presentation of Financial Statements Ind AS 2 Inventories Ind AS 7 Statement of Cash Flows Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors Ind AS 10 Events after the Reporting Period Ind AS 12 Income Taxes Ind AS 16 Property, Plant, and Equipment Ind AS 17 Leases Ind AS 19 Employee Benefits Ind AS 20 Accounting for Government Grants and Disclosure of Government Assistance Ind AS 21 The Effects of Changes in Foreign Exchange Rates Ind AS 23 Borrowing Costs CU IDOL SELF LEARNING MATERIAL (SLM)

Introduction to IAS and US GAAP 5 Ind AS 24 Related Party Disclosures Ind AS 27 Separate Financial Statements Ind AS 28 Investments in Associates and Joint Ventures Ind AS 29 Financial Reporting in Hyperinflationary Economies Ind AS 32 Financial Instruments: Presentation Ind AS 33 Earnings per Share Ind AS 34 Interim Financial Reporting Ind AS 36 Impairment of Assets Ind AS 37 Provisions, Contingent Liabilities and Contingent Assets Ind AS 38 Intangible Assets Ind AS 40 Investment Property Ind AS 41 Agriculture 1.4 US GAAP Concepts of US GAAP Generally Accepted Accounting Principles (GAAP or US GAAP) are a collection of commonly- followed accounting rules and standards for financial reporting. The specifications of GAAP, which is the standard adopted by the US Securities and Exchange Commission (SEC), include definitions of concepts and principles, as well as industry-specific rules. The purpose of GAAP is to ensure that financial reporting is transparent and consistent from one organization to another. GAAP is merely a set of standards. Although its principles work to improve the transparency in financial statements, they do not provide any guarantee that a company’s financial statements are free from errors or omissions that are intended to mislead investors. The SEC has stated that it intends to move from GAAP to the International Financial Reporting Standards (IFRS). But the latter differ considerably from GAAP and progress toward adoption or convergence has been slow. CU IDOL SELF LEARNING MATERIAL (SLM)

6 Advanced Financial Accounting While GAAP itself is not government-regulated, it exists because of the combined efforts of government and business. The use of GAAP is not mandatory for all businesses, but SEC requires publicly traded and regulated companies to follow GAAP for the purpose of financial reporting. Companies that issue stock are held to this standard by SEC, which requires yearly external audits by independent accountants, but companies without external investors are not obliged to follow this standard. Despite the mandate, the SEC is not responsible for the standards associated with GAAP. Instead, the Financial Accounting Standards Board (FASB) actively influences any changes in financial reporting standards used at the corporate level. The FASB Advisory Council (FASAC) advises the FASB on all matters that may influence GAAP rules. Government entities, on the other hand, are influenced by a set of standards that are slightly different from GAAP. The Government Accounting Standards Board (GASB) manages those standards. Other countries have their own GAAP rules, which differ from those in the United States. Each country’s own version of the FASB, such as the Canadian Institute of Chartered Accountants (CICA), creates these rules. In 2008, the Securities and Exchange Commission issued a preliminary “roadmap” that may lead the United States to abandon GAAP in the future, and to join more than 100 countries around the world in using the London-based International Financial Reporting Standards (IFRS). As of 2010, the convergence was underway with the FASB meeting routinely with the International Accounting Standards Board (IASB), which administers IFRS. The SEC expressed at that time its desire to fully adopt IFRS in the US by 2014. With the convergence of the US GAAP and the IFRS accounting systems, as the highest authority, the IASB is becoming more important in the United States. HISTORY OF GAAP Without regulatory standards, companies would be free to present financial information in whichever format best suits their needs. With carte blanche to portray a company’s fiscal standing in the most ideal light, investors could be easily misled. The Great Depression in 1929, a financial CU IDOL SELF LEARNING MATERIAL (SLM)

Introduction to IAS and US GAAP 7 catastrophe which caused years of hardship for millions of Americans, was primarily attributed to faulty and manipulative reporting practices among businesses. In response, the federal government, along with professional accounting groups, set out to create standards for the ethical and accurate reporting of financial information. According to Stephen Zeff in The CPA Journal, GAAP terminology was first used in 1936 by the American Institute of Accountants (AIA). Federal endorsement of GAAP began with legislation like the Securities Act of 1933 and the Securities Exchange Act of 1934, laws enforced by the US Securities and Exchange Commission (SEC) that target public companies. Today, the Financial Accounting Standards Board (FASB), an independent authority, continually monitors and updates GAAP. Today, all 50 state governments prepare their financial reports according to GAAP. While a little less than half of US states officially require local governments to adhere to GAAP, the Governmental Accounting Standards Board (GASB) estimates that approximately 70% of county and local financial offices do anyway. Meaning and Definition of US GAAP The Generally Accepted Accounting Principles in the US (US GAAP) refer to the accounting rules used in United States to organize, present, and report financial statements for an assortment of entities which include privately held and publicly traded companies, non-profit organizations, and governments. The term is confined to the US and is, therefore, generally abbreviated as US GAAP. But theoretically, the term “GAAP” covers the entire accounting industry, rather than only the US. Basic Objectives of US GAAP As a part of US GAAP, the financial reporting should provide information as following: 1. The provided info should be apt to be presented to creditors and potential investors in addition to other users for making cogent decisions concerning investment, credit and similar financial activities. 2. The provided info should be helpful to the creditors and potential investors in evaluating the amounts, timing, and uncertainty of expected cash receipts. CU IDOL SELF LEARNING MATERIAL (SLM)

8 Advanced Financial Accounting 3. The info should be related to economic resources, the claims to those resources, as well as the changes occurring in them. 4. The provided info should be helpful in making financial and long-term decisions. 5. The information should be helpful in perking up the business performance. 6. The information should be helpful in maintaining records. Basic Assumptions of US GAAP The US GAAP features four basic assumptions to meet its objectives. These are: 1. Accounting Entity. 2. This assumes the business to be a separate entity from its owners as well as other businesses. Moreover, it also stresses on keeping revenue and expense separate from personal expenses. 3. Going Concern. 4. This assumption presumes that the business will be indefinitely in operation. This assumption authenticates the methods of amortization, depreciation, and asset capitalization. However, this assumption is not applicable in the event of liquidation. 5. Monetary Unit Principle. 6. This assumption presumes an unwavering currency to continue to be the unit of record. 7. Time-period Principle. 8. This assumption states that a business enterprise’s economic activities can be divided into simulated time periods. Principles of US GAAP US law requires businesses that release financial statements to the public and companies that are publicly traded on stock exchanges and indices to follow GAAP guidelines, which incorporate 10 key concepts: CU IDOL SELF LEARNING MATERIAL (SLM)

Introduction to IAS and US GAAP 9 z Principle of regularity: GAAP-compliant accountants strictly adhere to established rules and regulations. z Principle of consistency: Consistent standards are applied throughout the financial reporting process. z Principle of sincerity: GAAP-compliant accountants are committed to accuracy and impartiality. z Principle of permanence of methods: Consistent procedures are used in the preparation of all financial reports. z Principle of non-compensation: All aspects of an organization’s performance, whether positive or negative, are fully reported with no prospect of debt compensation. z Principle of prudence: Speculation does not influence the reporting of financial data. z Principle of continuity: Asset valuations assume the organization’s operations will continue. z Principle of periodicity: Reporting of revenues is divided by standard accounting time periods, such as fiscal quarters or fiscal years. z Principle of materiality: Financial reports fully disclose the organization’s monetary situation. z Principle of utmost good faith: All involved parties are assumed to be acting honestly. 1.5 Summary GAAP compliance makes the financial reporting process transparent and standardizes assumptions, terminology, definitions, and methods. External parties can easily compare financial statements issued by GAAP-compliant entities and safely assume consistency, which allows for quick and accurate cross-company comparisons. CU IDOL SELF LEARNING MATERIAL (SLM)

10 Advanced Financial Accounting The Indian Accounting Standards (Ind AS), as notified under section 133 of the Companies Act 2013, have been formulated keeping the Indian economic and legal environment in view and with a view to converge with IFRS Standards, as issued by and copyright of which is held by the IFRS Foundation. Generally Accepted Accounting Principles (GAAP or US GAAP) are a collection of commonly- followed accounting rules and standards for financial reporting. The specifications of GAAP, which is the standard adopted by the US Securities and Exchange Commission (SEC), include definitions of concepts and principles, as well as industry-specific rules. The Great Depression in 1929, a financial catastrophe which caused years of hardship for millions of Americans, was primarily attributed to faulty and manipulative reporting practices among businesses. In response, the federal government, along with professional accounting groups, set out to create standards for the ethical and accurate reporting of financial information. The Generally Accepted Accounting Principles in the US (US GAAP) refer to the accounting rules used in United States to organize, present, and report financial statements for an assortment of entities which include privately held and publicly traded companies, non-profit organizations, and governments. 1.6 Key Words/Abbreviations z Indian Accounting Standards (IAS): The Indian Accounting Standards (Ind AS), as notified under section 133 of the Companies Act 2013. z Insurance Contracts: Ind AS 104 z US GAAP: GAAP is merely a set of standards. z Intangible Assets: Ind AS 38 z Investment Property: Ind AS 40 CU IDOL SELF LEARNING MATERIAL (SLM)

Introduction to IAS and US GAAP 11 1.7 Learning Activity 1. Explain Indian Accounting Standards. _________________________________________________________________ _________________________________________________________________ 2. Explain the concepts of US GAAP. _________________________________________________________________ _________________________________________________________________ 1.8 Unit End Questions (MCQs and Descriptive) A. Descriptive Type Questions 1. What is the meaning of US GAAP? Give its objectives. 2. Explain the basic assumptions of US GAAP. 3. Explain the objectives and benefits of IAS. B. Multiple Choice/Objective Type Questions 1. The Indian Accounting Standards (Ind AS) is notified under section ____ [a] 133 [b] 134 [c] 135 [d] 136 2. Ind AS 104 – Insurance Contracts [a] Insurance Contracts [b] Financial Instruments [c] Statement of Cash Flows [d] None 3. Related Party Disclosures [a] Ind AS 25 [b] Ind AS 27 [c] Ind AS 24 [d] None Answers 1. [a], 2. [b], 3. [c] CU IDOL SELF LEARNING MATERIAL (SLM)

12 Advanced Financial Accounting 1.9 References 1. Arulanandam and Raman, Advanced Accountancy, Himalaya Publication House Pvt. Ltd., Edition 2018. 2. Dr. Vishwanathan Reddy and Jayaram Kanzal, Corporate Accounting, Himalaya Publication House Pvt. Ltd., Edition 2019 3. Dr. S.N. Maheswari, Financial Accounting, Vikas Publication, Edition 2017. 4. S.P. Jain and K.L. Narang, Financial Accounting, Kalyani Publication, Edition 2018. 5. Reddy, K.R. (2000), “Accounting Standards and Gaps in Practices in India”, Management Accountant, ICWAI, April. 6. http://www.mca.gov.in/MinistryV2/accountingstandards1.html 7. https://www.icaew.com/technical/by-country/north-america/us/accounting-in-us/us-gaap 8. https://www.ifrs.org/issued-standards/list-of-standards/ 9. http://www.accountingnotes.net/final-accounts/final-accounts-of-the-companies-with- solutions-accounting ˆˆˆ CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 2 INDIANACCOUNTING STANDARD Structure: 2.0 Learning Objectives 2.1 Introduction 2.2 Meaning and Definitions ofAccounting 2.3 Objectives ofAccounting 2.4 Functions ofAccounting 2.5 FundamentalAccountingAssumptions 2.6 Limitations ofAccounting 2.7 Summary 2.8 Key Words/Abbreviations 2.9 LearningActivity 2.10 Unit End Questions (MCQs and Descriptive) 2.11 References 2.0 Learning Objectives After studying this unit, you will be able to: z Understand the concept of Indian Accounting Standards z Learn the introduction and meaning of IAS z Discuss the objectives and functions of accounting z Explain the Fundamental Accounting Assumptions z Explain the limitations of Accounting

14 Advanced Financial Accounting 2.1 Introduction Accounting is as old as money itself. Accounting is a footprint as far back as the ancient civilizations of Sumeria, Egypt and Babilonia. The modern accounting owes its origin to Luco De Bargo Pacioli who lived in Italy in the 15th century. In those days, the business transactions are not so complex because in that period business were small so the business man was himself avail to records and check all the transactions. In the 20th century, first improvement took place in accounting particularly in Europe and USA. Today, accounting is highly developed all over the world. In the book of ‘Arthashastra’ written by Kautilya, the Minister of Chandra Gupta Mourya, around 4th century B.C., there was separate chapter, “The business of keeping up Accounts in the office of Accountants.’’ Accounting has been developing day after day and today it has grown as an important discipline in itself. The modern system of accounting based on the principles of double entry that origin to “Luco Pacioli’’ who first published in Italian Language ‘Principle of Double Entry System’ in 1494 at Vanise in Italy, and published in English by ‘Hugh old castle’ in 1543. Later James Paul improved the system of accounting for the purpose of accounts of debtors and creditors thereafter the double entry system laid down by Pacioli was applied in 1563 in Europe, which was modified by the professor of Mathematician at Cambridge University in England. The most important thing of accounting like introduce two columns for Journal entries published in 1795 by ‘Edword Johns’. Business concerns can be broadly classified as either for profit or non-profit. As the name suggest, a dominant purpose of business concerns in the first category is to make profit, whereas business concerns in the second category have their objectives, such as providing social services, governing, etc. Despite of these two different objectives of the business concerns, accounting is basically similar in both types of business concerns. But all the business does not result in profit. Some times they result in loss. The owners/promoters would like to know whether the business is earning profit or incurring loss. Profit results in increase in capital/investment and loss results in decrease in capital/investment. Business results play a very vital role when taking decisions. However, in big business, information is required for planning, control, evaluation of performance and decision- making. This information can be provided only when business transactions are recorded, classified and summarized properly. Moreover, owners/promoters will be anxious at the end of the year to find out whether the undertaking business is generating profit or not. CU IDOL SELF LEARNING MATERIAL (SLM)

Indian Accounting Standard 15 2.2 Meaning and Definitions of Accounting Meaning and Definitions of Accounting Accounting is an art and science of providing meaningful information about financial activities of the company’s as a tool for management. This is used by a business for maintaining financial records on cash basis or accrual basis. It is an important part of information system. It is an important profession. Study of accounting is must for all the people concerned with business, trade and commerce. According to Encyclopedia Britannica, “Generally, accountancy may be described as being the science by means of which all operations, as far as they are capable of being shown in figures, are accurately recorded and their results ascertained and stated. It is a science by means of which all mercantile and financial transactions, whether in money or money’s worth, including operations completed to engagements undertaken to be fulfilled at once or in future, however remote, may be recorded; and this science comprises a knowledge of the methods of preparing statistics, whether relating to finance or to any transactions or circumstances which can be stated by numeration, and of ascertaining and estimating on correct basis, is the cost of any operation whether in money, in commodities, in time, in life or in any wasting property”. In order to achieve the above purposes, it is necessary to record business transactions according to a specified system. In a practical manner, we call this system as “Accounting”. The process of identifying, recording, classifying and presenting the information relating to the business is called accounting. Definitions The American Institute of Certified Public Accounts (AICPA) has defined accounting as, “the art of recording, classifying and summarizing, in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character and interpreting the results thereof”. According to the American Accounting Association (AAA), “Accounting is the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information”. CU IDOL SELF LEARNING MATERIAL (SLM)

16 Advanced Financial Accounting Smith and Ashburne defined accounting as, “the science of recording and classifying business transactions and events, primarily of financial character, and the art of making significant summaries, analysis and interpretations of those transactions and events and communicating the results to persons who must make decisions or form judgements”. According to R.N. Anthony, “Nearly every business enterprise has accounting system. It is a means of collection, summarizing, analyzing and reporting in monetary terms, informations about business”. 2.3 Objectives of Accounting The main objectives of accounting are: z To give the meaningful and accurate information about the financial activities of a business. z To keep the records in a systematic manner. z To measure the profit or loss for knowing performance of the business. z To ascertain the financial position of the business (i.e., show the assets, liabilities and capital). z To provide the financial information to internal users (office manager, staff, etc.) and external users (owners, creditors, etc.) 2.4 Functions of Accounting In 1941, the American Institute of Certified Public Accountant (AICPA) defined accounting as follows: “Accounting is the art of recording, classifying and summarizing in significant manner and in terms of money, transactions and events which are, in part, at least of a financial character and interpreting the results there of”. The above definition brings out the following functions of Accounting: (i) Recording: Recording is the basic function of financial accounting. It is essentially concerned with not only ensuring that all but also business transactions of financial character. It may be further subdivided into cash journal, purchases journal and sales journal. CU IDOL SELF LEARNING MATERIAL (SLM)

Indian Accounting Standard 17 (ii) Classifying: It is concerned with the systematic analysis of the recorded data. Classification is done in the book of “Ledger”. This book contains on different pages individual account heads under which all financial transactions of similar nature are collected. It may have separate account heads for traveling expenses, printing and stationary, advertising etc. (iii) Summarising: Summarising involves presenting the classified data in a manner which is understandable and useful to the internal as well as external end users of accounting statements. Trial Balance, Income statement and Balance Sheet are prepared with the help of this process. (iv) Analysing: All the recorded financial data are analysed for making a meaningful judgment about the financial condition and profitability of the business operations. Its purpose is to identify the financial weakness and strengths. It is also concerned with the establishment of relationship between the various items taken from income statement. (v) Interpreting: After analysis is concerned with significance of the relationship and establishment, the accountant interpret the statement in a useful way to the users. He is also explained what has happened? Why it is happened? What is likely to happen under present conditions? (vi) Communicating: This is final function of accounting. It includes the usual income statement and the balance sheet, additional information in the form of accounting ratios, graphs, diagrams, funds flow statement etc. . In this step, the accountant gets the help of innovation, imagination and initiative for future. 2.5 Fundamental Accounting Assumptions Accounting assumptions are the three very basic accounting concepts or principles that are assumed to have been followed in the accounting transactions of an entity. So there is a need for a specific notation saying such concepts have been adhered to, it is understood. 1. Accrual assumption: Transactions are recorded using the accrual basis of accounting, where the recognition of revenues and expenses arises when earned or used, respectively. If this assumption is not true, a business should instead use the cash basis of accounting to develop financial statements that are based on cash flows. The latter approach will not result in financial statements that can be audited. CU IDOL SELF LEARNING MATERIAL (SLM)

18 Advanced Financial Accounting 2. Conservatism assumption: Revenues and expenses should be recognized when earned, but there is a bias toward earlier recognition of expenses. If this assumption is not true, a business may be issuing overly optimistic financial results. 3. Consistency assumption: The same method of accounting will be used from period to period, unless it can be replaced by a more relevant method. If this assumption is not true, the financial statements produced over multiple periods are probably not comparable. 4. Economic entity assumption: The transactions of a business and those of its owners are not intermingled. If this assumption is not true, it is impossible to develop accurate financial statements. This assumption is a particular problem for small and family-owned businesses. 5. Going concern assumption: A business will continue to operate for the foreseeable future. If this assumption is not true (such as when bankruptcy appears probable), deferred expenses should be recognized at once. 6. Reliability assumption: Only those transactions that can be adequately proven should be recorded. If this assumption is not true, a business is probably artificially accelerating the recognition of revenue to bolster its short-term results. 7. Time period assumption: The financial results reported by a business should cover a uniform and consistent period of time. If this is not the case, financial statements will not be comparable across reporting periods. 2.6 Limitations of accounting 1. Recording only monetary items: As per accounting principles, only the events measurable in terms of money are recorded in the books of accounts. 2. Time value of money: The value of money always changes due to inflation. Under existing accounting systems, accounts are maintained considering historical cost ignoring current changed value. 3. Recommendation of alternative methods: There exists an application of alternative methods in determining depreciation of assets and valuation of stock, etc. CU IDOL SELF LEARNING MATERIAL (SLM)

Indian Accounting Standard 19 4. Control of accounting principles: Exhibited accounting information cannot always exhibit a true and fair picture of a business concern owing to limitations of the accounting principles used. 5. Recording of past events: Accounting past events are accounted for. Sometimes, there is no system of recording events that may occur in the future. 6. Allocation of problem: The allocation process is an important problem in the accounting system. The value of fixed assets is exhausted charging depreciation for the allocated period. 7. Maintaining confidentiality: Privacy cannot be ensured for the involvement of many employees in accounting work although maintaining secrecy is very important. 2.7 Summary Accounting is as old as money itself. Accounting is a footprint as far back as the ancient civilizations of Sumeria, Egypt and Babilonia. The modern accounting owes its origin to Luco De Bargo Pacioli who lived in Italy in the 15th century. In those days, the business transactions are not so complex because in that period business were small. So, the businessman was himself avail to records and check all the transactions. In the 20th century, first improvement in accounting particularly in Europe and USA. Today, accounting is highly developed all over the world. Accounting is an art and science of providing meaningful information about financial activities of the company as a tool for management. This is used by a business for maintaining financial records on cash basis or accrual basis. “Accounting is the art of recording, classifying and summarizing in significant manner and in terms of money, transactions and events which are, in part, at least of a financial character and interpreting the results there of”. CU IDOL SELF LEARNING MATERIAL (SLM)

20 Advanced Financial Accounting The American Institute of Certified Public Accounts (AICPA) has defined accounting as “the art of recording, classifying and summarizing, in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character and interpreting the results thereof”. “Accounting is the art of recording, classifying and summarizing in significant manner and in terms of money, transactions and events which are, in part, at least of a financial character and interpreting the results.” Accounting assumptions are the three very basic accounting concepts or principles that are assumed to have been followed in the accounting transactions of an entity. 2.8 Key Words/Abbreviations z Recording: Recording is the basic function of financial accounting. z Classifying: Classification is done in the book of “Ledger”. z Interpreting: The accountant interpret the statement in a useful way to the users. 2.9 Learning Activity 1. Give the meaning of Accounting and explain the objectives of Accounting. _________________________________________________________________ _________________________________________________________________ 2. Explain the functions of accounting. _________________________________________________________________ _________________________________________________________________ 3. Explain the fundamental accounting assumptions. _________________________________________________________________ _________________________________________________________________ CU IDOL SELF LEARNING MATERIAL (SLM)

Indian Accounting Standard 21 2.10 Unit End Questions (MCQs and Descriptive) A. Descriptive Type Questions 1. Explain the limitations of Accounting. 2. Explain the meaning and definitions of Accounting. B. Multiple Choice/Objective Type Questions 1. In the _______, first improvement took place in accounting particularly in Europe and USA. [a] 21st century [b] 20th century [c] 19th century [d] None 2. The book of ‘Arthashastra’ was written by Kautilya, the Minister of Chandra Gupta Mourya, around ___ [a] 5th century B.C. [b] 6th century B.C. [c] 4th century B.C. [d] None Answers 1. [b], 2. [c]. 2.11 References 1. Arulanandam and Raman, Advanced Accountancy, Himalaya Publication House Pvt. Ltd., Edition 2018. 2. Dr. Vishwanathan Reddy and Jayaram Kanzal, Corporate Accounting, Himalaya Publication House Pvt. Ltd., Edition 2019. 3. Dr. S.N. Maheswari, Financial Accounting, Vikas Publication, Edition 2017. 4. S.P. Jain and K.L. Narang, Financial Accounting, Kalyani Publication, Edition 2018. 5. Reddy, K.R. (2000), “Accounting Standards and Gaps in Practices in India”, Management Accountant, ICWAI, April. CU IDOL SELF LEARNING MATERIAL (SLM)

22 Advanced Financial Accounting 6. http://www.mca.gov.in/MinistryV2/accountingstandards1.html 7. https://www.icaew.com/technical/by-country/north-america/us/accounting-in-us/us-gaap 8. https://www.ifrs.org/issued-standards/list-of-standards/ 9. http://www.accountingnotes.net/final-accounts/final-accounts-of-the-companies-with- solutions-accounting 10. http://www.accountingnotes.net/amalgamation/external-reconstruction-and-amalgamation 11. http://www.yourarticlelibrary.com/accounting/problems-accounting/amalgamation-and- external-reconstruction ˆˆˆ CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 3 ACCOUNTINGSTANDARDS Structure: 3.0 Learning Objectives 3.1 Introduction 3.2 Objectives ofAccounting Standards 3.3 Advantages and Disadvantages ofAccounting Standards 3.4 Accounting Standards Board 3.5 List ofAccounting Standards Issued by ICAI 3.6 Interpretation, Scope and Compliance ofAccounting Standards 3.7 Summary 3.8 Key Words/Abbreviations 3.9 LearningActivity 3.10 Unit End Questions (MCQs and Descriptive) 3.11 References 3.0 Learning Objectives After studying this unit, you will be able to: z Understand the concept of Accounting Standards z Apply the concept of Applicability z Apply the concept of Interpretation z Discuss the scope and compliance

24 Advanced Financial Accounting 3.1 Introduction Financial statements are summarized the end result of all the business activities by an enterprise during an accounting period in monetary terms. These business activities vary from one enterprise to other. They face difficulties in comparing the financial statements of various reporting enterprises because of the divergence in the methods and principles adopted by these enterprises in preparing the financial statement. In order to ensure the transparency, consistency, comparability, and adequacy and reliability of financial reporting, it is essential to standardized accounting policies and principles. Accounting standards provide framework and standard accounting policies so that financial statements different enterprises become comparable. Definitions According to ICAI (Institute of Chartered Accountants of India), accounting standards “written documents, policies, procedures issued by expert accounting body or government or other regulatory body covering the aspects of recognition, measurement, treatment, presentation and disclosure of accounting transactions in the financial statement”. Accounting standards are issued by the “Institute of Chartered Accountants of India” (ICAI). Accounts are the language of business and accounting standards – the grammar of the language. 3.2 Objectives of Accounting Standards 1. To standardize the diverse accounting policies. 2. To eliminate to the extent possible the non-comparability of financial statements. 3. It adds the reliability to the financial statements. 4. It increases the arithmetic accuracy of financial statements. 5. Accounting standards helps to understand accounting treatment in financial statement. CU IDOL SELF LEARNING MATERIAL (SLM)

Accounting Standards 25 3.3 Advantages and Disadvantages of Accounting Standards Advantages 1. Accounting standards reduces or eliminates confusing variation in the accounting treatments used to prepare the financial statements. 2. It may call for disclosure beyond that required by law. 3. It facilitates comparison of financial statements of different companies. Disadvantages 1. There may be a trend towards rigidity. 2. It is away from flexibility in applying accounting standards. 3. It cannot override the law. 4. Differences in accounting standards are bound to be because of differences in the legal system and traditions from one country to another. Applicability of Accounting Standards w.e.f. 1-4-2004: 1. Level-I Enterprises 2. Level-II Enterprises 3. Level-III Enterprises 1. Level-I Enterprises: (a) Listed company (b) Companies in process of listing (c) Banks including co-operative banks (d) Financial institutions (e) Insurance business CU IDOL SELF LEARNING MATERIAL (SLM)

26 Advanced Financial Accounting (f) Entities whose turnover more than ` 50 crores (g) Holding and subsidiary entities of any of the above (h) Entities having public deposits more than ` 10 crores 2. Level-II Enterprises: (a) Enterprises whose turnover exceeds ` 40 lakhs but does not exceed ` 50 crores (b) Entities having public borrowing in between ` 1-10 crores (c) Holding and subsidiary entities of any of the above 3. Level-III Enterprises: Entities which are not covered under Level-I and Level-II are considered as Level-III entities. Accounting Title of the Applicability to Applicability to Applicability to Standard No. Accounting Level-I Level-II Level-III Standard Enterprise Enterprise Enterprise AS 1 Disclosure of Applicable Applicable Applicable accounting policies AS 2 (Revised) Valuation of Applicable Applicable Applicable inventory AS 3 (Revised) Cash Flow Applicable Not Applicable Not Applicable AS 4 (Revised) Statement AS 5 (Revised) Contingencies and Applicable Applicable Applicable events occurring after Balance Sheet date Net profit or loss Applicable Applicable Applicable for the period, prior period items and changes in accounting policies CU IDOL SELF LEARNING MATERIAL (SLM)

Accounting Standards 27 AS 6 (Revised) Depreciation Applicable Applicable Applicable Accounting Applicable Not Applicable AS 7 (Revised) Construction Applicable Applicable (See Note 2 also) Contracts Applicable Applicable AS 8 Accounting for Not Applicable Not Applicable Applicable (Withdrawn Research and Applicable Applicable pursuant to AS 26 Development Applicable Applicable (old) AS 26 becoming Applicable Applicable with mandatory) modifications Applicable with AS 9 Revenue Applicable Applicable modifications Recognition AS 10 Accounting for Applicable Applicable Fixed Assets AS 11 The effects of Applicable Applicable (Revised 2003) changes in foreign (See Note 3 also) exchange rates AS 12 Accounting for Applicable Applicable Government Grants AS 13 Accounting for Applicable Applicable Investments AS 14 Accounting for Applicable Applicable Amalgamations AS 15 Employee Benefits Applicable (old) Applicable (old) (Revised 2005) AS 16 Borrowing Cost Applicable Applicable AS 17 Segment Reporting Applicable Applicable with modifications AS 18 Related Party Applicable Applicable with Disclosures modifications CU IDOL SELF LEARNING MATERIAL (SLM)

28 Advanced Financial Accounting AS 19 Leases Applicable Applicable with Applicable with (See Note 5 also) some modifications some modifications and exemptions and exemptions from disclosure from disclosure requirements requirements AS 20 Earnings Per Share Applicable Applicable with Applicable with some modifications some modifications and exemptions and exemptions from disclosure from disclosure requirements requirements AS 21 Consolidated Applicable Applicable with Applicable with Financial Statements some modifications some modifications and exemptions and exemptions from disclosure from disclosure requirements requirements AS 22 Accounting for Applicable Not Applicable Not Applicable Taxes on Income AS 23 Accounting for Applicable except Applicable except Applicable except Investments in for non-corporate for non-corporate for non-corporate associates in enterprises w.e.f. enterprises w.e.f. enterprises w.e.f. consolidated 1-4-2006 as per 1-4-2006 as per 1-4-2006 as per financial statements announcement announcement announcement for AS 22 by ICAI for AS 22 by ICAI for AS 22 by ICAI AS 24 Discontinuing Applicable Not applicable Not applicable operations AS 25 Interim Financial Applicable Not applicable Not applicable Reporting AS 26 Intangible Assets Applicable Applicable Applicable (See Note 10 also) CU IDOL SELF LEARNING MATERIAL (SLM)

Accounting Standards 29 AS 27 Financial Reporting Applicable Not Applicable to Not Applicable to of Interests the extent of the extent of AS 28 in Joint Ventures requirements requirements AS 29 relating to relating to consolidated consolidated financial financial statements statements Impairment of Assets Applicability from Applicability from Applicability from 1-4-2004 onwards 1-4-2006 onwards 1-4-2008 onwards Provisions, Applicable Applicable, Applicable, Contingent Disclosure Disclosure Liabilities and requirements are requirements are Contingent Assets not applicable not applicable 3.4 Accounting Standards Board The Institute of Chartered Accountants of India (ICAI), recognizing the need to harmonize the diverse accounting policies and practices in use in India, constituted the Accounting Standards Board (ASB) on 21st April, 1977. Composition of the ASB Apart from the elected members of the Council of the ICAI nominated on the ASB, the following are represented on the ASB: (a) Nominee of the Central Government representing the Department of Company Affairs on the Council of the ICAI (b) Nominee of the Central Government representing the Auditor General of India on the Council of the ICAI (c) Nominee of the Central Government representing the Central Board of Direct Taxes on the Council of the ICAI (d) Representative of the Institute of Cost and Works Accountants of India CU IDOL SELF LEARNING MATERIAL (SLM)

30 Advanced Financial Accounting (e) Representative of the ICS of India (f) Representatives of Industry Associations (g) Representative of Reserve Bank of India (h) Representative of SEBI (i) Representative of Controller General of Accounts (j) Representative of Central Board of Excise and Customs (k) Representatives of Academic Institutions (1 from Universities and 1 from IIM) (l) Representative of Financial Institutions (m) Eminent Professionals co-opted by the ICAI (n) Representative(s) of any other body, as considered appropriate by the ICAI Objectives of the ASB 1. To suggest areas in which Accounting Standards need to be developed. 2. To formulate Accounting Standards with a view to evolving and establishing AS in India. 3. Formulating the Accounting Standard and to adapt the same. 4. To review, at regular intervals, the assisting the Council of the ICAI Accounting Standards from the point of view of acceptance or changed conditions, and, if necessary, revise the same. 5. To provide, from time to time, interpretations and guidance on AS. 6. To carry out such other functions relating to AS. 3.5 list of Accounting Standards issued by ICAI AS 1: Disclosure of Accounting Policies AS 2: Valuation of Inventories AS 3: Cash Flow Statement CU IDOL SELF LEARNING MATERIAL (SLM)

Accounting Standards 31 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 9: Revenue Recognition AS 10: Accounting for Fixed Assets AS 11: The Effect 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: Earning Per Share AS 21: Consolidated Financial Statements AS 22: Accounting for Taxes on Income AS 23: Accounting for Investment 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 CU IDOL SELF LEARNING MATERIAL (SLM)

32 Advanced Financial Accounting AS 29: Provisions, Contingent Liabilities and Contingent Assets AS 30: Financial Instruments – Recognition and Measurement AS 31: Financial Instruments – Presentation AS 32: Financial Instruments – Disclosures 3.6 Interpretation, Scope and Compliance of Accounting Standards The main function of ASB is to formulate accounting standards so that such standards may be established by the Council of the Institute in India. While formulating the accounting standards, ASB will take into consideration the applicable laws, customs, usages and business environment. The Institute is one of the Members of the International Accounting Standards Committee (IASC) and has agreed to support the objectives of IASC. While formulating the Accounting Standards, ASB will give due consideration to International Accounting Standards, issued by IASC and try to integrate them, to the extent possible, in the light of the conditions and practices prevailing in India. The Accounting Standards will be issued under the authority of the Council. ASB has also been entrusted with the responsibility of propagating the Accounting Standards and of persuading the concerned parties to adopt them in the preparation and presentation of financial statements. ASB will issue guidance notes on the Accounting Standards and give clarifications on issues arising there from. ASB will also review the Accounting Standard at periodical intervals. It is the responsibility of ICAI to give wide publicity among the users and educate the members (auditors) about the utility of the standards and the need for compliance. In the initial years, the accounting standards are recommendatory in character. Once awareness has been created, steps have to be taken to ensure compliance of the accounting standards (both with regards to implementation and disclosure). CU IDOL SELF LEARNING MATERIAL (SLM)

Accounting Standards 33 Auditors have to ensure that the accounting standards are implemented in the presentation of financial statements covered by their ‘audit reports’. If there is any deviation, the auditors should disclose the same in their reports, so that the users of such statements are aware of such deviations. 3.7 Summary Financial statements are summarized the end result of all the business activities by an enterprise during an accounting period in monetary terms. These business activities vary from one enterprise to other. They face difficulties in comparing the financial statements of various reporting enterprises because of the divergence in the methods and principles adopted by these enterprises in preparing the financial statement. According to ICAI (Institute of Chartered Accountants of India), accounting standards “written documents, policies, procedures issued by expert accounting body or government or other regulatory body covering the aspects of recognition, measurement, treatment, presentation and disclosure of accounting transactions in the financial statement”. The Institute of Chartered Accountants of India (ICAI), recognizing the need to harmonize the diverse accounting policies and practices in use in India, constituted the Accounting Standards Board (ASB) on 21st April, 1977. The Accounting Standards will be issued under the authority of the Council. ASB has also been entrusted with the responsibility of propagating the Accounting Standards and of persuading the concerned parties to adopt them in the preparation and presentation of financial statements. Auditors have to ensure that the accounting standards are implemented in the presentation of financial statements covered by their ‘audit reports’. If there is any deviation, the auditors should disclose the same in their reports, so that the users of such statements are aware of such deviations. 3.8 Key Words/Abbreviations z Financial Statement: Financial statements are reports prepared by a company’s management to present the financial performance and position at a point in time. A general- purpose set of financial statements usually includes a balance sheet, income statements, statement of owner's equity, and statement of cash flows. CU IDOL SELF LEARNING MATERIAL (SLM)

34 Advanced Financial Accounting z Depreciation: The monetary value of an asset decreases over time due to use, wear and tear or obsolescence. This decrease is measured as depreciation. z Inventories: Inventory, often called merchandise, refers to goods and materials that a business holds for sale to customers in the near future. 3.9 Learning Activity 1. Explain the advantages and disadvantages of accounting standards. _________________________________________________________________ _________________________________________________________________ 2. Discuss about the applicability of accounting standards. _________________________________________________________________ _________________________________________________________________ 3. Explain the list of accounting standards issued by ICAI. _________________________________________________________________ _________________________________________________________________ 3.10 Unit End Questions (MCQs and Descriptive) A. Descriptive Type Questions 1. Discuss about the Accounting Standard Board. 2. Explain briefly about Depreciation Accounting. B. Multiple Choice/Objective Type Questions 1. Level I Enterprise shows __________. [a] Listed company [b] Companies in process of listing CU IDOL SELF LEARNING MATERIAL (SLM)

Accounting Standards 35 [c] Banks including co-operative banks [d] All of the above 2. Tax expenses = [a] Current Tax /Deferred Tax [b] Current Tax + Deferred Tax [c] Current Tax × Deferred Tax [d] None Answers 1. [d], 2. [b] 3.11 References 1. Arulanandam and Raman, Advanced Accountancy, Himalaya Publication House Pvt. Ltd., Edition 2018. 2. Dr. Vishwanathan Reddy and Jayaram Kanzal, Corporate Accounting, Himalaya Publication House Pvt. Ltd., Edition 2019 3. Dr. S.N. Maheswari, Financial Accounting, Vikas Publication, Edition 2017. 4. S.P. Jain and K.L. Narang, Financial Accounting, Kalyani Publication, Edition 2018. 5. Reddy, K.R. (2000), “Accounting Standards and Gaps in Practices in India”, Management Accountant, ICWAI, April. 6. http://www.mca.gov.in/MinistryV2/accountingstandards1.html 7. https://www.icaew.com/technical/by-country/north-america/us/accounting-in-us/us-gaap 8. https://www.ifrs.org/issued-standards/list-of-standards/ 9. http://www.accountingnotes.net/final-accounts/final-accounts-of-the-companies-with- solutions-accounting 10. http://www.accountingnotes.net/amalgamation/external-reconstruction-and-amalgamation 11. http://www.yourarticlelibrary.com/accounting/problems-accounting/amalgamation-and- external-reconstruction ˆˆˆ CU IDOL SELF LEARNING MATERIAL (SLM)

36 Advanced Financial Accounting UNIT 4 US GAAPS Structure: 4.0 Learning Objectives 4.1 Introduction 4.2 EstablishedAccounting Principles in the US 4.3 Components of US GAAP 4.4 Principles of US GAAP 4.5 InternationalAccounting Standards 4.6 Comparison between IGAAP – US GAAP – IFRS 4.7 Summary 4.8 Key Words/Abbreviations 4.9 LearningActivity 4.10 Unit End Questions (MCQs and Descriptive) 4.11 References 4.0 Learning Objectives After studying this unit, you will be able to: z Know about US GAAPS z Discuss the components of US GAAP z Understand the concept of International Accounting Standards z Discuss the comparison of IGAAP – US GAAP – IERS CU IDOL SELF LEARNING MATERIAL (SLM)

US GAAPS 37 4.1 Introduction GAAP refers to accounting policies and procedures that are widely used in practice. Unlike India where accounting has its basis in law, US GAAP has evolved to be a collection of pronouncements issued by a particular accounting organization. US GAAP are the accounting rules used to prepare financial statements for publicly traded companies and many private companies in United States. Generally accepted accounting principles for local and state governments operates under different set of assumptions, principles, and constraints, as determined by the Governmental Accounting Standards Board (GASB). In the United States, as well as in other countries practicing under the English common law system, the government does not set accounting standards, in the belief that the private sector has the better knowledge and resources. The Securities and Exchange Commission (SEC) has the ultimate authority to set US accounting and financial reporting standards for public (listed) companies. The SEC has delegated this responsibility to the private sector led by the Financial Accounting Standards Board (FASB). Other private sector bodies including the American Institute of Certified Public Accountants (AICPA) and the FASB’s Emerging Issues Task Force (EITF) also establish authoritative accounting Standard Board (FIN) also provide implementation and interpretation guidance. The SEC has the statutory authority to establish GAAP for filings made with it. While allowing most of the standard settings to be done in the private sector, the SEC is still very active in both its oversight responsibility as well as establishing guidance and interpretations, as it believes appropriate. US GAAP have the reputation around the world of being more perspective and detailed than accounting standards in other countries. In order to organize and make clear what is meant by US GAAP, a GAAP hierarchy has been established which contains four categories of accounting principles. The sources in the higher category carry more weight and must be followed when conflicts arise. The table given below summaries the current GAAP hierarchy for financial statements of non-governmental entities. 4.2 Established Accounting Principles in the US Category (a) Financial Accounting Standards Board (FASB) statements and Interpretations, American Institute of Certified Public Accountants (AICPA), Accounting Principles Board (APB) Opinions, and AICPA Accounting Research Bulletins (ARB). CU IDOL SELF LEARNING MATERIAL (SLM)

38 Advanced Financial Accounting Category (b) FASB Technical Bulletins, cleared AICPA Industry Audit and Accounting Guides, and cleared AICPA Statement of Position (SOPs). Category (c) Consensus positions of the FASB Emerging Issues Task Force (EITF) and cleared Accounting Standards Executive Committee of AICPA (ACSEC) Practice Bulletins. Category (d) AICPA Accounting Interpretations, FASB Implementation Guides (QSAs), and widely recognized and prevalent industry practices. Other Accounting Literature Other accounting literature, including FASB concepts statements, APB Statements; AICPA Issues Papers; International Accounting Standards Committee Statements; Pronouncements of other professional associations or regulatory agencies; AICPA Technical Practice Aids; and accounting textbooks, handbooks and articles. The US GAAP provisions differ somewhat from International Financial Reporting Standards though efforts are underway to reconcile the differences so that reports created under international standards will be acceptable to the SEC for companies listed on US markets. 1. In the US, Generally Accepted Accounting Principles (GAAP) are accounting rules used to (i) Prepare, (ii) Present and (iii) Report financial statements. 2. It is used for a wide variety of entities, including publicly traded and privately held companies, non-profit organizations and governments. 3. The term Generally Accepted Accounting Principles is usually confined to the United States. Hence, it is commonly abbreviated as US GAAP or simply GAAP. 4. GAAP – the entire industry or accounting, and not only the United States. 5. US GAAP is not written in law, although the US Securities and Exchange Commission (SEC) requires that it be followed in financial reporting by publicly traded companies. CU IDOL SELF LEARNING MATERIAL (SLM)

US GAAPS 39 AICPA The AICPA sets generally accepted professional and technical standards for CPAs in many areas. Until the 1970s, the AICPA held a monopoly in this field. In the 1970s however, it transferred its responsibility for setting generally accepted accounting principles (GAAP) to the newly formed FinancialAccounting Standards Board (FASB). Following this, it retained its standards setting function in areas such as financial statement auditing, professional ethics, attest services, CPA firm quality control, CPA tax practice and financial planning practice. Before passage of the Sarbanes-Oxley law, AICPA standards in these areas were considered “generally accepted” for all CPA practitioners. Accounting Principles Board (APB) Opinions were published by Accounting Principles Board (APB). APB was the main organization setting the US GAAP and its opinions are still an important part of it. Financial Accounting Standards Board (FASB) The Financial Accounting Standards Boards (FASB) is private, not-for-profit organization whose primary purpose is to develop generally accepted accounting principles in the United States (US GAAP). The FASB’s mission for the private sector is similar to that of the Governmental Accounting Standards Board for local and state governments in the United States. The FASB was created in 1973, replacing the Accounting Principles Board of the American Institute of Certified Public Accountants (AICPA). The FASB’s mission is “to establish and improve standards of financial accounting and reporting for the guidance and education of the public, including issuers, auditors, and users of financial information.” The US Securities and Exchange Commission (SEC) has statutory authority to establish financial accounting and reporting standards for publicly held companies under Securities Exchange Act of 1934. The SEC designated the FASB as the organization responsible for setting accounting standards for public companies in the US. CU IDOL SELF LEARNING MATERIAL (SLM)

40 Advanced Financial Accounting FASB has so far issued 158 Statements of Financial Accounting Standards (FAS). z The highest authority in establishing GAAP for public and private companies, as well as non-profit entities. z For local and state governments, GAAP is determined by the Governmental Accounting Standards Board (GASB). 4.3 Components of US GAAP Given below are important components of US GAAP: z FASB Statement of Financial Accounting Standards (FAS) z FASB Interpretations (FIN) z FASB Statements of Financial Accounting Concepts (FAS Conc.) z FASB Technical Bulletins (FTB) z AICPA Accounting Research Bulletins (ARB) z AICPA Accounting Principles Board Opinions (APB Opinions) z AICPA Accounting Interpretations (AIN) Not only there are an extremely large number of different standards under US GAAP, the volume and complexity is also increasing. This complexity of US GAAP makes it critically important that the independent accountants that are assisting a company in filing with SEC are acknowledgeable and experts in US GAAP. 4.4 Principles of US GAAP 1. Principle of Regularity: The accountant adheres to GAAP rules and regulations as a standard on a regular basis. 2. Principle of Consistency: This is one of the main points. Accountants and business professionals commit to using the same standards throughout all reporting, from period to period. This maintains consistency and prevents errors. If accountants use other standards at any point in the reporting process, they are expected to fully disclose the change and explain the reasons why. CU IDOL SELF LEARNING MATERIAL (SLM)

US GAAPS 41 3. Principle of Sincerity: Here is a commitment to do a sincere, objective job. The accountant strives to provide an accurate depiction of a company’s financial situation. 4. Principle of Permanence of Methods: Another one about consistency! The procedures used in financial reporting should be consistent, should provide a coherent picture of the business, and allow for comparison to other businesses. 5. Principle of Non-compensation: The accountant shows full accounting details, both negatives and positives, without trying to compensate one with the other. Debts are left separate from assets, expenses separate from revenue. 6. Principle of Prudence: “Prudence” means wisdom, good judgment, common sense. In this context, GAAP expects fact-based financial data representation that is cautious and grounded, not speculative. Basically, don’t try to make it look more impressive. 7. Principle of Continuity: While valuing assets, it should be assumed the business will continue to operate (and not be sold on the spot, for example). Assets are considered at their historical value, rather than a disposable value. 8. Principle of Periodicity: Each financial entry should accord to one single time period. If the entry covers several time periods in one (like an upfront annual payment of a subscription), then the revenue should be split and recorded across the appropriate periods of time. This practice is called revenue recognition. 9. Principle of Materiality or Full Disclosure: There must be full disclosure in financial reports. No hiding or holding anything back. 10. Principle of Utmost Good Faith: Honesty is the best policy, and GAAP presumes that businesses and accountants are all being honest in their reporting. This principle is similar to the Latin phrase uberrimae fidei, “utmost good faith,” used in the insurance industry. 4.5 International Accounting Standards The following are the Extract of the International Accounting Standards and International Financial Reporting Standards, prepared by IASC Foundation staff (The same has not been approved by the IASB. For the requirements reference must be made to International Financial Reporting Standards.) CU IDOL SELF LEARNING MATERIAL (SLM)

42 Advanced Financial Accounting 4.6 Comparison Between IGAAP – US GAAP – IFRS 1. First-time Adoption of Accounting Frameworks Indian Accounting IFRS/IAS US GAAPs Standards • First-time adoption of • There is no specific • IFRS-1 is a specific statement US GAAP requires guidance on first-time by IASB to apply IFRS for the retrospective application. adoption of Accounting first time. Frameworks. • However, US GAAP does • First-time adoption of IFRS not give specific guidance • Certain AS deal with requires full retrospective on first time adoption of treatment relating to application of IFRS, effective its accounting principles. transitional provisions at the reporting date for IFRS on first application. based Financial Statements of an Entity. • IFRS-1 provides certain relief’s, exemptions and imposes certain requirements and disclosures. 4.7 Summary GAAP refers to accounting policies and procedures that are widely used in practice. Unlike India where accounting has its basis in law, US GAAP has evolved to be a collection of pronouncements issued by a particular accounting organization. Financial Accounting Standards Board (FASB) statements and Interpretations, American Institute of Certified Public Accountants (AICPA), Accounting Principles Board (APB) Opinions, and AICPA Accounting Research Bulletins (ARB). The AICPA sets generally accepted professional and technical standards for CPAs in many areas. Until the 1970s, the AICPA held a monopoly in this field. In the 1970s however, it transferred its responsibility for setting generally accepted accounting principles (GAAP) to the newly formed Financial Accounting Standards Board (FASB). The Financial Accounting Standards Boards (FASB) is private, not-for-profit organization whose primary purpose is to develop generally accepted accounting principles in the United States (US GAAP). CU IDOL SELF LEARNING MATERIAL (SLM)