CU-MCOM-SEM-IV-Company Accounts & Audit

101 CU IDOL SELF LEARNING MATERIAL (SLM)

3.9 SUMMARY  Final accounts of a company consist of balance sheet as at the end of the accounting period and profit and loss account for that period.  Section 129 of the Companies Act, 2013 prescribes the form and contents of balance sheet and profit and loss account of a company.  Balance sheet of a company shall be prepared according to Schedule III of the Companies Act, 2013.  The term managerial remuneration includes remuneration payable to managing director, whole-time directors, part-time directors and manager.  The total managerial remuneration payable by a public company or a private company which is a subsidiary of a public company to its directors including any managing or whole-time director or manager is limited to 11% of the net profits.  Dividend refers to that part of the profits of a company which is distributed by the company among its shareholders by way of return on investments made by the shareholders in the shares, of the company.  Companies declaring distributing or paying dividends are liable to pay tax on the same at prescribed rate which is known tax on distributed profit. o Interim dividend means a dividend paid to the shareholders of a company in anticipation of profits of a period before the accounts of the company for that period have been prepared. 102 CU IDOL SELF LEARNING MATERIAL (SLM)

 When a company accumulates huge reserves out of its profits which are much in excess of the needs of the company, the excess amount can be distributed among the existing shareholders of the company by way of bonus shares. 3.10 KEYWORDS  Preoperative expenses: Preoperative expenses are those expenses incurred by a company before commencement of commercial operations; or before starting to earn income. These are distinct from preliminary expenses or formation expenses.  Preliminary expenses: Preliminary expenses are expenses which the promoters of a company incur at the time of incorporating the company. Generally, preliminary expenses are disallowable on the ground that they are of a capital nature or incurred prior to the setting up of a business.  Bookkeeping: Bookkeeping is the process of recording financial transactions in the books of a business (= accounting records). It is also a term used as an abbreviation for double-entry bookkeeping, a particular form of bookkeeping.  Reporting:Reporting is the communication aspect of accounting. It involves providing information about a business to interested parties, such as owners and managers, and is usually achieved by the production of management information in the form of management accounts or financial statements (income statement, balance sheet and cash flow statement).  Posting:A term used to mean recording transactions/events in T-accounts. 3.11 LEARNING ACTIVITY 1. What is Schedule VI? ___________________________________________________________________________ _______________________________________________________________________ 2.Explain Preliminary expenses? ___________________________________________________________________________ _______________________________________________________________________ 3.12 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. State how you will treat the following while preparing the final accounts of the company concerned for the year ending 31.3.2014. (i) Land and Buildings (Cost ` 5, 00,000 depreciation provided ` 80,000) sold for ` 103 CU IDOL SELF LEARNING MATERIAL (SLM)

7, 50,000. (ii) It was discovered in September 2013 that the purchase invoice of ` 50,000 dated 11.2.2012 was not entered in the book at all; accounts for 2011-12 were passed at the AGM in August, 2013. (iii) While preparing the accounts for 2012-2013 closing stock was valued at market price ` 6, 20,000 instead of cost which was ` 6, 50,000. (iv) *In June, 2012 post manufacturing excise duty totalling ` 6, 00,000 was paid in respect of 2011-12 and 2012-2013. (v) The market value of the quoted investments is ` 2, 25,000 as against the cost of ` 2, 50,000. (vi) Interest received 13,500 after tax being deducted at 10%. (vii) Railway claim for goods lost in transit in 2011-12 costing ` 40,000 settled in 2012-13 for ` 30,000. No entry was passed in 2011-12. (viii) Sales tax, collected from customers ` 1, 50,000 against which amount paid is ` 1, 20,000. (ix) Subsidy, ` 1, 00,000 received from Government for installation of generating set. (x) Balance held in the Bank of Iraq, Baghdad, ` 25,000. 2.For the year ended 31 December 2019, the profit of Kerbs Ltd. before changing depreciation on fixed assets and managerial commission amounted to $300,000. Depreciation for the year amounted to $60,000 and a commission of 10% of the profits (before charging such commission) was payable to the manager. The paid-up capital of the company consisted of $1,000,000 divided into 5,000 6% preference shares of $100 each, along with 50,000 equity shares of $10 each. Interim dividend @ $0.50 per share was paid during the year. Brought from the previous year, the credit balance in the profit and loss account was $35,000. Also, the following appropriations were proposed by the board of directors and subsequently passed at the company's annual general meeting: To pay the year's dividend on preference shares To pay a final dividend on equity shares at $0.50 per share to make a total dividend of $1 per share for the year To provide for taxation @ 50% on the net profit To transfer $25,000 to the general reserve To carry forward the balance 104 CU IDOL SELF LEARNING MATERIAL (SLM)

Required: Show the profit and loss appropriation account. 3) The profit and loss account of X Ltd. is shown for the year ended 31 December 2019 before providing for the following: Director’s commission of 1% on net profit Managerial commission of 10% on net profit. Required: Redraft the profit and loss account after providing for the amount of managerial commission on net profit due in accordance with the provisions of the Companies Act, and show the calculation for the amount of commission. 4. A limited company has an authorized capital of $1,000,000 divided into 60,000 equity shares of $10 each and 4,000 10% preference shares of $100 each. Out of this, 50,000 equity shares and 3,000 preference shares were issued and fully paid up. The profit for 2019, the first year of operation, amounted to $180,000 after income tax. The directors decided to declare a dividend of 22% on the equity share capital after: Statutory minimum requirement transfer to general reserve Provision of dividends on preference shares Required: Prepare profit and loss appropriation account and show the liabilities side of the balance sheet. 5. A company was registered with a nominal capital of $500,000, divided into shares of $10 each, of which 20,000 shares had been issued and fully paid. The following is the trial balance extracted on 31 December 2019. Required: Prepare a trading and profit and loss account for the year ended 31 December 2019. Also prepare a balance sheet for the same date, taking into consideration the following adjustments: Write off one-third of preliminary expenses Depreciation on plant and machinery at 20%; on office furniture at 10% Manufacturing wages $945 and office salaries $600 had accrued due Provide for interest on bank loan for 6 months Stock was valued at $62,240 and loose tools at $5,000 105 CU IDOL SELF LEARNING MATERIAL (SLM)

Reserve $4,250 on debtors for doubtful debts Reserve further $1,560 for discounts on debtors The directors recommend a dividend at 5% for the year ending 31 December 2019, after providing for taxes amounting to $11,500 Long Questions 1. Explain the main reasons for incorporated firms preparing and publishing financial accounts. 2. Identify the owner of funds used by a plc within its business. 3. Define the term 'company year'. 4. What is schedule VI 5. Explain conceptual framework B. Multiple Choice Questions 1. Business is said to be in a profit when a. Expenditure exceeds income b. Income exceeds expenditure c. Income exceeds liability d. Assets exceed expenditure 1. As per the accounting double-entry system, when expense increases, it is ___________. a. No need to show as an accounting record. b. Credited. c. Debited. d. Both (B) and (C). 2. What does the term “credit” mean in business? a. agreement between a lender and a borrower b. revenue a business earns from selling its goods c. cost of operations that a company incurs to generate revenue d. own with the expectation to provide a future benefit 106 CU IDOL SELF LEARNING MATERIAL (SLM)

3. When a Liability is decreased or reduced, it is registered on the a. Debit side or left side of the account b. Credit side or right side of the account c. Debit side or right side of the account d. Credit side or left side of the account 4. When there is an increase in capital by an amount, it is registered on the a. Credit or right side of the account b. Debit or left side of the account c. Credit or left side of the account d. Debit or right side of the account Answers 1-b, 2-c, 3-a, 4-a, 5-a. 3.13 REFERENCES Reference books  M.C. Shukla, T.S. Grewal : & S.C. Gupta Advanced Accounts Vol. II; S. Chand & Company Ltd., 7361, Ram Nagar, New Delhi-110 055.  R.L. Gupta & :M. Radhaswamy Company Accounts; Sultan Chand & Sons,23, Daryaganj, New Delhi- 110 002.  S.P. Jain & K. L. Narang: Advanced Accountancy-Vol.II; Kalyani Publishers, 23, Daryaganj, New Delhi - 110 002.  S. N. Maheshwari &S.K. Maheshwari Advance Accounting Vol. II; Vikas Publishing House (Pvt.) Ltd., A-22, Sector 4, Noida – 201 301.  Ashok Sehgal & : Deepak Sehgal Textbook  Advanced Accounting Vol. 2; Taxmann’s,59/32, New Rohtak Road, New Delhi- 110 005.  J. R. Monga : Fundamentals of Corporate Accounting; Mayoor Paperbacks, A-95, Sector 5, Noida-201 301.  Goel, Maheshwari Gupta : Corporate Accounting, International Publishers, 107 CU IDOL SELF LEARNING MATERIAL (SLM)

Daryaganj New Delhi  Kamal Gupta, Ashok Arora : Fundamentals of Auditing: Tata McGraw Hill Education Limited  Kamal Gupta: Contemporary Auditing: Tata McGraw Hill Education Limited  International Financial Reporting Standards (IFRS) Taxmann Publication (P) Limited, 59/32, New Rohtak Road, New Delhi- 110 005  Dolphy D’Souza : Indian Accounting Standards & GAAPP; Snow White Publications Pvt. Ltd., Her Mahal, 532, Kalbadevi Road, Mumbai – 400 002.  N S Zad : Company Accounts and Auditing Practices : Taxmann Publications (P) Ltd., 59/32, Rohtak Road, New Delhi - 110005 Website  https://icmai.in/upload/Students/Syllabus2016/Inter/Paper-12_070219.pdf  https://www.mca.gov.in/MinistryV2/accounts+and+audit.html 108 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT – 4 : CONSOLIDATION OF ACCOUNT STRUCTURE 4.0 Learning Objectives 4.1 Introduction 4.2 Holding and Subsidiary Companies 4.3 Accounting Treatment, Disclosures and Consolidation of Accounts 4.4 Summary 4.5 Keywords 4.6 Learning Activity 4.7 Unit End Questions 4.8 References 4.0 LEARNING OBJECTIVES A holding company is one which acquires all or a majority of the equity shares of any other company called subsidiary company in order to have control over the subsidiary company. In order to understand the financial position of holding company, consolidations of accounts become very vital. After studying this lesson, you will be able to:  Understand the concept of holding company and subsidiary company.  Familiarize the legal requirements for preparation of final accounts of holding company.  Prepare consolidated balance sheet and statement of profit and loss.  Make appropriate accounting adjustments required for the preparation of consolidated balance sheet.  Understand the concept of minority interest in consolidation of accounts.  Appreciate the treatment of pre-acquisition profits and losses of the subsidiary company. Make adjustment regarding profit and loss on revaluation of assets of subsidiary company.  Understand the calculation of goodwill or cost of control.  Make adjustment for inter-company unrealized profits and inter-company transactions.  Understand the treatment of bonus issue on consolidation of accounts. Make adjustment on dividend received from subsidiary company. 109 CU IDOL SELF LEARNING MATERIAL (SLM)

4.1 INTRODUCTION According to section 2(46) of the Companies Act, 2013, “holding company”, in relation to one or more other companies, means a company of which such companies are subsidiary companies. According to section 2(87) of the Companies Act, 2013, “subsidiary company” or “subsidiary”, in relation to any other company (that is to say the holding company), means a company in which the holding company— (i) controls the composition of the Board of Directors; or (ii) exercises or controls more than one-half of the total share capital either at its own or together with one or more of its subsidiary companies: Provided that such class or classes of holding companies as may be prescribed shall not have layers of subsidiaries beyond such numbers as may be prescribed. For the purposes of this clause, — (a) a company shall be deemed to be a subsidiary company of the holding company even if the control referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of the holding company; (b) the composition of a company’s Board of Directors shall be deemed to be controlled by another company if that other company by exercise of some power exercisable by it at its discretion can appoint or remove all or a majority of the directors; (c) the expression “company” includes anybody corporate; (d) “Layer” in relation to a holding company means its subsidiary or subsidiaries. The definition of a subsidiary as per the 2013 Act includes associates and joint ventures. Explanation with Example Suppose, His holding company of S because 51 % shares are of H in S. S is also of holding Company of R because S have power to appoint the board of directors of R Company and then H is also holding Company of R The Companies Act 1956 Act does not require preparation of consolidated financial statements (‘CFS’). However, listed entities are required to prepare CFS (as per SEBI regulations). The Companies Act 2013 has made preparation of consolidated accounts mandatory for companies having one or more subsidiaries or associates or joint ventures. According to sub section 3 of the section 129 of the Companies Act, 2013, where a company has one or more subsidiaries or associates or joint ventures, it shall, in addition to its financial statements for the financial year, prepare a consolidated financial statement of the company and of all the subsidiaries or associates or joint ventures in the same form and manner as that 110 CU IDOL SELF LEARNING MATERIAL (SLM)

of its own which shall also be laid before the annual general meeting of the company along with the laying of its financial statement. The requirement to prepare CFS is largely consistent with internationally accepted practices. However, internationally, such requirements apply only to listed companies; and unlisted intermediate entities are generally exempted. The existing Indian and international accounting practices do not require preparation of CFS when the Company has investments only in associates and joint ventures (no subsidiaries). According to the rules, the company shall also attach along with its financial statement, a separate statement containing the salient features of the financial statement of its subsidiary or subsidiaries or associates or joint venture in the Form 9.1. The Consolidation of financial statements of the company shall be made in accordance with the Accounting Standards, subject however, to the requirement that if under such Accounting Standards, consolidation is not required for the reason that the company has its immediate parent outside India, then such companies will also be required to prepare Consolidated Financial Statements in the manner and format as specified under Schedule III to the Act. 4.2 HOLDING AND SUBSIDIARY COMPANIES According to section 2(46) of the Companies Act, 2013, “holding company”, in relation to one or more other companies, means a company of which such companies are subsidiary companies. According to section 2(87) of the Companies Act, 2013, “subsidiary company” or “subsidiary”, in relation to any other company (that is to say the holding company), means a company in which the holding company— (i) controls the composition of the Board of Directors; or (ii) exercises or controls more than one-half of the total share capital either at its own or together with one or more of its subsidiary companies: Provided that such class or classes of holding companies as may be prescribed shall not have layers of subsidiaries beyond such numbers as may be prescribed. For the purposes of this clause, — (a) a company shall be deemed to be a subsidiary company of the holding company even if the control referred to in sub-clause (I) or sub-clause (ii) is of another subsidiary company of the holding company; (b) the composition of a company’s Board of Directors shall be deemed to be controlled by another company if that other company by exercise of some power exercisable by it at its discretion can appoint or remove all or a majority of the directors; 111 CU IDOL SELF LEARNING MATERIAL (SLM)

(c) the expression “company” includes anybody corporate; (d) “Layer” in relation to a holding company means its subsidiary or subsidiaries. The definition of a subsidiary as per the 2013 Act includes associates and joint ventures. Explanation with Example Suppose, His holding company of S because 51 % shares are of H in S. S is also of holding Company of R because S have power to appoint the board of directors of R Company and then H is also holding Company of R. 4.3 ACCOUNTING TREATMENT, DISCLOSURES AND CONSOLIDATION OF ACCOUNTS What is Accounting Treatment? An asset that is completely depreciated and continues to be used in the business concern will be reported on the balance sheet (B/S) at its cost along with its accrued depreciation. There will be no depreciation expense maintained after the asset is completely depreciated. No entry is needed until the asset is disposed of via sale, salvage, retirement, etc. When the firm is dissolved:  Its books of a/c are to be closed, and the profit or loss (P/L) emerging on the realisation of its assets and dismissal of liabilities is to be calculated  For this purpose, a Realisation a/c is outlined to determine the net effect (profit/loss) of realisation of assets and payment of liabilities which might be is transferred to the partner’s capital a/c in their profit sharing ratio (PSR)  Therefore, all assets and external liabilities are transferred to this a/c  It records the sale of assets and payment of liabilities and realisation expenditures  The balance in this account is known as profit/loss on realisation which is transferred to partners’ capital a/c in their profit sharing ratio (PSR) What Is Disclosure? In the financial world, disclosure refers to the timely release of all information about a company that may influence an investor's decision. It reveals both positive and negative news, data, and operational details that impact its business. Similar to disclosure in the law, the concept is that all parties should have equal access to the same set of facts in the interest of fairness. The Securities and Exchange Commission (SEC) develops and enforces disclosure requirements for all firms incorporated in the U.S. Companies that are listed on the major U.S. stock exchanges must follow the SEC's regulations. Key Takeaways 112 CU IDOL SELF LEARNING MATERIAL (SLM)

Federal regulations require the disclosure of all relevant financial information by publicly- listed companies. In addition to financial data, companies are required to reveal their analysis of their strengths, weaknesses, opportunities, and threats. Substantive changes to their financial outlooks must be released in a timely fashion. Understanding Disclosure Federal government-mandated disclosure came into being in the U.S. with the passage of the Securities Act of 1933 and the Securities Exchange Act of 1934. Both laws were responses to the stock market crash of 1929 and the Great Depression that followed. The public and politicians alike blamed a lack of transparency in corporate operations for intensifying if not outright causing the financial crisis. Sarbanes-Oxley Since then, additional legislation such as the Sarbanes-Oxley Act of 2002 extended public- company disclosure requirements and government oversight of them. As mandated by the SEC, disclosures include those related to a company's financial condition, operating results, and management compensation. Insider Information The SEC requires specific disclosures because the selective release of information places individual shareholders at a disadvantage. For example, insiders can use material nonpublic information for personal gain at the expense of the general investing public. Clearly outlined disclosure requirements ensure companies adequately disseminate information so that all investors are on an even playing field. Companies are not the only entities subject to strict disclosure regulations. Brokerage firms, investment managers, and analysts must also disclose any information that might influence and affect investors. To limit conflict-of-interest issues, analysts and money managers must disclose any equities they personally own. SEC-Required Disclosure Documents The SEC requires all publicly-traded companies to prepare and issue two disclosure-related annual reports, one for the SEC itself and one for the company's shareholders. These reports are filed as documents called 10-Ks and must be updated by the company as events change substantially. Any company seeking to go public must disclose information as part of a two-part registration that includes a prospectus and a second document that contains other material information. That information includes the company's own strengths, weaknesses, 113 CU IDOL SELF LEARNING MATERIAL (SLM)

opportunities, and threats (SWOT) analysis of the competitive environment it operates within. The SEC imposes stricter disclosure requirements for firms in the securities industry. For example, company officers of investment banks must make personal disclosures regarding the investments they own and investments owned by their family members. Real-World Example of Disclosure On March 4, 2020, the global spread of the coronavirus led the SEC to advise all public companies to make appropriate disclosures to their shareholders of the likely impact of the crisis on their future operations and financial results. Early Warnings Many companies had already done just that. In mid-February, Apple warned that the pandemic was a threat to its revenue numbers, as it was jeopardizing its supply chain from China and slowing retail sales. The company invalidated its previous projections without immediately offering new estimates. Airline and other travel-related companies also warned of the impact on their businesses, along with consumer goods manufacturers that depend on China for manufacturing or consumer sales, or both. What Does It Mean to Consolidate? To consolidate (consolidation) is to combine assets, liabilities, and other financial items of two or more entities into one. In the context of financial accounting, the term consolidate often refers to the consolidation of financial statements wherein all subsidiaries report under the umbrella of a parent company. Consolidation also refers to the union of smaller companies into larger companies through mergers and acquisitions (M&A). Key Takeaways  To consolidate (consolidation) is to combine assets, liabilities, and other financial items of two or more entities into one.  In financial accounting, the term consolidate often refers to the consolidation of financial statements wherein all subsidiaries report under the umbrella of a parent company.  Consolidation also refers to the union of smaller companies into larger companies through mergers and acquisitions. Consolidation: Word on the Street How Consolidation Works The term consolidate comes from the Latin consolidates, which means \"to combine into one body.\" Whatever the context, to consolidate involves bringing together some larger amount 114 CU IDOL SELF LEARNING MATERIAL (SLM)

of items into a single, smaller number. For instance, a traveler may consolidate their entire luggage into a single, larger bag. In finance and accounting, consolidation has more specific nuance. Consolidation in Finance Consolidation involves taking multiple accounts or businesses and combining the information into a single point. In financial accounting, consolidated financial statements provide a comprehensive view of the financial position of both the parent company and its subsidiaries, rather than one company's stand-alone position. In consolidated accounting, the information from a parent company and its subsidiaries are treated as though it comes from a single entity. The cumulative assets from the business, as well as any revenue or expenses, are recorded on the balance sheet of the parent company. This information is also reported on the income statement of the parent company. Consolidated financial statements are used when the parent company holds a majority stake by controlling more than 50% of the subsidiary business. Parent companies that hold more than 20% qualify to use consolidated accounting. If a parent company holds less than a 20% stake, it must use equity method accounting. The Consolidation of Businesses In business, consolidation occurs when two or more businesses combine to form one new entity, with the expectation of increasing market share and profitability and the benefit of combining talent, industry expertise, or technology. Also referred to as amalgamation, consolidation can result in the creation of an entirely new business entity or a subsidiary of a larger firm. This approach may combine competing firms into one cooperative business. For example, in 2015, Target Corp. moved to sell the pharmacy portion of its business to CVS Health, a major drugstore chain. As part of the agreement, CVS Health intended to rebrand the pharmacies operating within Target stores, changing the name to the Minute Clinic. The consolidation was friendly in nature and lessened overall competition in the pharmacy marketplace. A consolidation differs in practical terms from a merger in that the consolidated companies may also result in a new entity, whereas in a merger, one company absorbs the other and remains in existence while the other is dissolved. Consumer Debt Consolidation Within the consumer market, consolidation includes using a single loan to pay off all of the debts that are part of the consolidation. This transfer the debt owed from multiple creditors, allowing the consumer to have a single point of payment to pay down the total. 115 CU IDOL SELF LEARNING MATERIAL (SLM)

Often, debt consolidation achieves more manageable monthly payments and may result in a lower overall interest rate. For instance, it may wrap a high-interest credit card payment into a more reasonable home equity line of credit. Consolidation in Technical Analysis and Trading Consolidation is also a technical analysis term referring to security prices oscillating within a corridor and is generally interpreted as market indecisiveness. Put another way, consolidation is used in technical analysis to describe the movement of a stock's price within a well-defined pattern of trading levels. Consolidation is generally regarded as a period of indecision, which ends when the price of the asset moves above or below the prices in the trading pattern. The consolidation pattern in price movements is broken upon a major news release that materially affects a security's performance or the triggering of a succession of limit orders. Consolidation is also defined as a set of financial statements that presents a parent and a subsidiary company as one company. 4.4 SUMMARY  A holding company is one which acquires all or a majority of the equity shares of any other company called subsidiary company in order to have control over the subsidiary company.  Consolidation of balance sheet and profit and loss account implies preparation of a single balance sheet and profit and loss account of the holding company and its subsidiaries by aggregating all itemsof assets, liabilities, incomes, expenses, etc., of the holding company and its subsidiaries.  Investment in shares of subsidiary company represents the ownership of the holding company in the equity or net assets of the subsidiary company.  Minority interest is equal to the paid-up value of shares held by minority shareholders plus proportionate share of the company’s profits and reserves plus proportionate shares of profits on revaluation of assets of the company minus proportionate share of company’s losses minus proportionate share of loss on revaluation of assets of the company.  Accumulated profits and reserves which appear in the balance sheet of the subsidiary company up to the date of acquisition of its shares by the holding company are called pre-acquisition profits and reserves.  Accumulated losses of the subsidiary company up to the date of acquisition of shares by the holding company are called pre-acquisition losses.  If the price paid by the holding company for the shares acquired in the subsidiary company is more than the intrinsic value of the shares acquired, the difference is treated as cost of control or goodwill. 116 CU IDOL SELF LEARNING MATERIAL (SLM)

 If the price paid by the holding company for the shares acquired in the subsidiary company is less than the intrinsic value of the shares acquired, the difference is treated as capital profits and credited to capital reserve.  Profits earned or losses incurred by the subsidiary company after the date of acquisition of its shares by the holding company are called post-acquisition profits or losses.  When goods are sold by one company to the other at a profit and a part of it remains unsold at the end of the year, there arises the unrealized profit on such goods remaining unsold.  The holding company and the subsidiary company may have a number of inter- company transactions which may be eliminated while preparing the consolidated balance sheet.  Contingent liabilities relate to the outsiders must be shown by way of a footnote in the consolidated balance sheet. But a contingent liability in respect of a transaction between holding and subsidiary companies will disappear from the foot note.  Issue of bonus shares by the subsidiary company will increase the number of shares held by the holding company as well as the minority shareholders. Issue of bonus shares may or may not affect the cost of control depending upon whether such shares are issued out of capital profits or revenue profits. 4.5 KEYWORDS  Holding company: A holding company is a parent business entity—usually a corporation or LLC—that doesn't manufacture anything, sell any products or services, or conduct any other business operations. Its purpose, as the name implies, is to hold the controlling stock or membership interests in other companies.  Subsidiary Company:A subsidiary company is a business that is owned, either partially or completely, by another company. This company is referred to as a parent company (if it has other business operations) or a holding company (if the sole purpose of the company is to own its subsidiaries).  Consolidation of accounts:To consolidate (consolidation) is to combine assets, liabilities, and other financial items of two or more entities into one. In the context of financial accounting, the term consolidate often refers to the consolidation of financial statements wherein all subsidiaries report under the umbrella of a parent company.  Consolidation of Businesses: In business, consolidation occurs when two or more businesses combine to form one new entity, with the expectation of increasing market share and profitability and the benefit of combining talent, industry expertise, or technology. 117 CU IDOL SELF LEARNING MATERIAL (SLM)

 Disclosure: In the financial world, disclosure refers to the timely release of all information about a company that may influence an investor's decision. It reveals both positive and negative news, data, and operational details that impact its business. 4.6 LEARNING ACTIVITY 1. What is consolidation of accounts? ___________________________________________________________________________ _______________________________________________________________________ 2. What is disclosure? ___________________________________________________________________________ _______________________________________________________________________ 4.7 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. How does consolidation of account work? 2. What is accounting treatment? 3. Define disclosures. 4. Define holding companies. 5. What is consumer debt consolidation? Long Questions 1. Alpha Co purchased 1,450,000 ordinary shares in Beta Co in 20X0, when the general reserve of Beta stood at$400,000 and there were no retained earnings. The statements of financial position of the two companies as at 31 December 20X4 are set out below. 118 CU IDOL SELF LEARNING MATERIAL (SLM)

At the end of the reporting period the current account of Alpha with Beta was agreed at $23,000 owed by Beta. This account is included in the appropriate receivable and trade payable balances shown above. There has been no impairment of goodwill since the date of acquisition. It is the group's policy to value the non-controlling interest at its proportionate share of the fair value of the subsidiary's net assets. Required (a) Prepare a consolidated statement of financial position for the Alpha Beta Group. (b) Show the alterations necessary to the group statement of financial position if the intragroup balance owed by Beta to Alpha represented an invoice for goods sold by Alpha to Beta at a mark-up of 15% on cost, and still unsold by Beta at 31 December 20X4. Guidance notes 1 lay out the pro-forma statement of financial position, leaving plenty of space. 2 Lay out workings for: goodwill calculation; general reserve; retained earnings; and non-controlling interest. 3 Fill in the easy numbers given in the question. 4 Work out the more complicated numbers using the workings and then add up the statement of 119 CU IDOL SELF LEARNING MATERIAL (SLM)

financial position. 5 Keep all your work very neat and tidy to make it easy to follow. Cross reference all your workings. 2. The Statements of financial position of J Co and its investee companies, P Co and S Co, at 31 December 20X5 are shown below. STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20X5. (a) Prepare a consolidated statement of financial position for the Alpha Beta Group. (b) Show the alterations necessary to the group statement of financial position if the intragroup balance owed by Beta to Alpha represented an invoice for goods sold by Alpha to Beta at a mark-up of 15% on cost, and still unsold by Beta at 31 December 20X4. Guidance notes 1 lay out the pro-forma statement of financial position, leaving plenty of space. 2 Lay out workings for: goodwill calculation; general reserve; retained earnings; and non-controlling interest. 3 Fill in the easy numbers given in the question. 4 Work out the more complicated numbers using the workings and then add up the statement of financial position. 5 Keep all your work very neat and tidy to make it easy to follow. Cross reference all your workings. Q-2 The 120 CU IDOL SELF LEARNING MATERIAL (SLM)

statements of financial position of J Co and its investee companies, P Co and S Co, at 31 December 20X5 are shown below. STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20X5 J CO. P CO. S CO. $000 $000 $000 Assets Non-current assets Freehold property 1,950 1,250 500 Plant and equipment 795 375 285 Investments 1,500 – – 4,245 1,625 785 Current assets Inventories 575 300 265 Trade receivables 330 290 370 Cash 50 120 2 955 710 65 5,200 2,335 1,440 Equity and liabilities Equity Share capital ($1 ordinary shares) 2,000 1,000 750 Retained earnings 1,460 885 39 3,460 1,885 1,140 Non-current liabilities 12% debentures 500 100 Current liabilities Bank overdraft 560 300 Trade payables 680 350 300 1240 350 300 5200 2335 1440 Additional information (a) J Co acquired 600,000 ordinary shares in P Co on 1 January 20X0 for $1,000,000 when the accumulated retained earnings of P Co were $200,000. (b) At the dateof acquisition of P Co, the fairvalue of its freehold property was considered to be $400,000 greater than its value in P Co's statement of financial position. P Co had acquired the property in January 20W0 and the buildings element (comprising 50% of the total value) is depreciated on cost over 50 years. (c) J Co acquired 225,000 ordinary shares in S Co on 1 January 20X4 for $500,000 when the retained profits of S Co Were $150,000. d) P Co manufactures a component used by J Co only. Transfers are made by P Co at cost plus 25%. J Co held $100,000 of these components in inventories at 31 December 20X5. (e) It is the policy of J Co to review goodwill for impairment annually. The goodwill in P Co was written off in full some years ago. An impairment test conducted at the yearend revealed impairment losses on the investment in S Co of $92,000. (f) It is the group's policy to value the non-controlling interest at acquisition at fair value. The market price of the shares of the non-controlling shareholders just before the acquisition was $1.65. Required Prepare, in a format suitable for inclusion in the annual report of the J Group, the consolidated statement of financial position at 31 December 20X5. 3. a) IAS 28 Investments in associates and IAS 31 Interests in joint ventures deal with associates and joint ventures respectively. The method of accounting for interests in joint ventures depends on whether they are interests in jointly controlled operations, jointly controlled assets or jointly controlled entities. Required (i) explain the criteria which distinguish an associate from an ordinary non-current asset investment. (5 marks) (ii) Explain the principal differences between a jointly controlled operation, a jointly controlled asset and a jointly controlled entity. (5 marks) (B) Income Statement for Year Ended 31 December 20x8 121 CU IDOL SELF LEARNING MATERIAL (SLM)

(i) Cable, a public limited company, acquired 30% of the ordinary share capital of Baden at a cost of $14 million on 1 January 20X7. The share capital of Baden has not changed since acquisition when the retained earnings of Baden were $9 million. (ii) At 1 January 20X7 the following fair values were attributed to the net assets of Baden but not incorporated in its accounting records. Fair values are to be taken into account when assessing any goodwill arising on acquisition. Property, plant and equipment 30 (carrying value $20m) Current assets 31 Current liabilities 20 Non-current liabilities 8 (iii) Guy, an associate of Cable, also holds a 25% interest in the ordinary share capital of Baden. This was acquired on 1 January 20X8. (iv) During the year to 31 December 20X8, Baden sold goods to Cable to the value of $35 million. The inventory of Cable at 31December 20X8 included goods purchased from Badenon which the company made aprofit of $10 million. (v) The policy of all companies in the Cable Group is to depreciate property, plant and equipment at 20% per annum on the straight line basis. Required (i) Show how the investment in Baden would be stated in the consolidated statement of financial position and income statement of the Cable Group under IAS 28 Investments in associates, for the year ended 31 December 20X8 on the assumption that Baden is an associate.(8 marks) (ii) Show and explain how the treatment of Baden would change if Baden was classified as an investment in a joint venture and it utilized the proportionate consolidation method in IAS 31 Interests in joint ventures. 122 CU IDOL SELF LEARNING MATERIAL (SLM)

4. Below are the statements of financial position of three companies as at 31 December 20X9. (b) The retained earnings balances of Jewel Co and Gem Co were: (c) No impairment loss adjustments have been necessary to date. (d) It is the group's policy to value the non-controlling interest at acquisition at its proportionate share of the fair value of the subsidiary's identifiable net assets. Required (a) Prepare the consolidated statement of financial position for Bauble Co and its subsidiaries as at 31 December 20X9. (b) Calculate the total goodwill arising on acquisition if Bauble Co had acquired its investments in Jewel and Gem on 1 January 20X3 at a cost of $142,000 and $43,000 respectively and Jewel Co had acquired its investment in Gem Co on 1 January 20X2. 5. X, a public limited company, acquired 100 million ordinary shares of $1 in Y, a public limited company on 1 April 20X6 when the retained earnings were $120 million. Y acquired 45 million ordinary shares of $1 in Z, a public limited company, on 1 April 20X4 when the retained earnings were $10 million. On 1 April 20X4 there were no material differences between the book values and the fair values of Z. On 1 April 20X6, the retained earnings of Z were $20 million. Y acquired 30% of the ordinary shares of W, a limited company, on 1 April 20X6 for $50 million when the retained earnings of W were $7 million. Y is in a position to exercise significant influence over W and there were no material differences between the 123 CU IDOL SELF LEARNING MATERIAL (SLM)

book values and the fair values of W at that date. There had been no share issues since 1 April 20X4 by any of the group companies. The following statementsof financial position relate to the group companies as at 31 March 20X9. Use tables to work out total values for X and Z at acquisition and at the end of the reporting period. (i) The following fair value table sets out the book values of certain assets and liabilities of the group companies together with any accounting policy adjustments to ensure consistent group policies at 1 April 20X6. These values had not been incorporated into the financial records. The group companies have consistent accounting policies at 31 March 20X9, apart from the non-current intangible assets in Y's books. (ii) During the year ended 31 March 20X9, Z had sold goods to X and Y. At 31 March 20X9, there were $44 million of these goods in the inventory of X and $16 million in the inventory of Y. Z had made a profit of 25% on selling price on the goods. (iii) On 1 June 20X7, an amount of $36 million was received by Y from an arbitration award against Q. This receipt was secured as a result of an action against Q prior to Y's acquisition 124 CU IDOL SELF LEARNING MATERIAL (SLM)

by X but was not included in the assets of Y at 1 April 20X6. (iv) The group writes goodwill off immediately to reserves. However it has decided to bring its accounting policies into line with IFRSs and not local accounting policies. Thus goodwill will be capitalized under IFRS 3 Business combinations. At 31 March 20X6, property, plant and equipment had a remaining useful life of 10 years. (v) It is the group's policy to value the non-controlling interest at its proportionate share of the fair value of the subsidiary's identifiable net assets. Required (a) Prepare a consolidated statement of financial position as at 31 March 20X9 for the X group (b) Explain how the change in accounting policy as regards goodwill should be dealt with in the financial statements of the X group under International Financial Reporting Standards All calculations should be rounded to the nearest million dollars. B. Multiple Choice Questions 1. Which of the following is the element of financial statements? a. Balance Sheet b. Profit & Loss A/c c. Both (a) and (b) d. None of these 2. Which of the following is not required to be prepared under the Companies Act? a. Statement of Profit & Loss b. Balance Sheet c. Anditor’s Report d. Fund Flow Statement 3. Equity ₹ 90,000 Liabilities ₹ 60,000 Profit of the year ₹ 20,000. Then total assets will be: a. ₹ 1.70,000 b. ₹ 1,50,000 c. ₹1,10,000 d. ₹ 80,000 4. The reserve which is created for a particular (specific) purpose and which is a charge against revenue is called: a. Capital Reserve b. General Reserve 125 CU IDOL SELF LEARNING MATERIAL (SLM)

c. Secret Reserve d. Specific Reserve 5. An Annual Report is issued by a company to its: a. Directors b. Authors c. Shareholders d. Management Answers 1-c,2-c, 3-a, 4-d, 5-c. 4.8 REFERENCES Reference books  M.C. Shukla, T.S. Grewal : & S.C. Gupta Advanced Accounts Vol. II; S. Chand & Company Ltd., 7361, Ram Nagar, New Delhi-110 055.  R.L. Gupta & :M. Radhaswamy Company Accounts; Sultan Chand & Sons,23, Daryaganj, New Delhi- 110 002.  S.P. Jain & K. L. Narang: Advanced Accountancy-Vol.II; Kalyani Publishers, 23, Daryaganj, New Delhi - 110 002.  S. N. Maheshwari &S.K. Maheshwari Advance Accounting Vol. II; Vikas Publishing House (Pvt.) Ltd., A-22, Sector 4, Noida – 201 301.  Ashok Sehgal & : Deepak Sehgal Textbook  Advanced Accounting Vol. 2; Taxmann’s,59/32, New Rohtak Road, New Delhi- 110 005.  J. R. Monga : Fundamentals of Corporate Accounting; Mayoor Paperbacks, A-95, Sector 5, Noida-201 301.  Goel, Maheshwari Gupta : Corporate Accounting, International Publishers, Daryaganj New Delhi  Kamal Gupta, Ashok Arora : Fundamentals of Auditing: Tata McGraw Hill Education Limited 126 CU IDOL SELF LEARNING MATERIAL (SLM)

 Kamal Gupta: Contemporary Auditing: Tata McGraw Hill Education Limited  International Financial Reporting Standards (IFRS) Taxmann Publication (P) Limited, 59/32, New Rohtak Road, New Delhi- 110 005  Dolphy D’Souza : Indian Accounting Standards & GAAPP; Snow White Publications Pvt. Ltd., Her Mahal, 532, Kalbadevi Road, Mumbai – 400 002.  N S Zad : Company Accounts and Auditing Practices : Taxmann Publications (P) Ltd., 59/32, Rohtak Road, New Delhi - 110005 Website  https://icmai.in/upload/Students/Syllabus2016/Inter/Paper-12_070219.pdf  https://www.mca.gov.in/MinistryV2/accounts+and+audit.html 127 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT – 5 : ACCOUNTING STANDARDS STRUCTURE 5.0 Learning Objectives 5.1 Introduction 5.2 Relevance and Significance 5.3 National and International Accounting Standards and Authorities 5.4 Adoption, Convergence and Interpretation of International Financial Reporting Standards (IFRS) and Accounting Standards in India 5.5 Summary 5.6 Keywords 5.7 Learning Activity 5.8 Unit End Questions 5.9 References 5.0 LEARNING OBJECTIVES Accounting is the language of any business. The Accounting is looked upon to provide analysis of assets, financial stability, financial performance, record-keeping and more. To provide accurate and reliable information financial statements must be clearly understandable and comparable so that stakeholders may compare the performance of one business with another similar business. Thus, all general-purpose financial statements should be prepared in accordance with the same uniform guidelines. That is the purpose of accounting standards. The objectives of this lesson are to make student learn about basics of accounting standards. After studying this lesson, one will able to:  Understand the meaning and significance of accounting standards.  Appreciate the need for accounting standards.  Explain the scope of accounting standards.  Understand the procedure of issuing accounting standards.  Familiarize with the Accounting Standards (AS)  Understand the various International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS). 128 CU IDOL SELF LEARNING MATERIAL (SLM)

5.1 INTRODUCTION Accounting Standards have assumed great significance in today’s environment, which is constantly evolving and changing. Accounting Standards act as pillars of sound financial reporting system of a country, which is an integral and important part of good corporate governance and provides the shareholders and other stakeholders’ useful information about the entity to make their economic and financial decisions. To strengthen the financial reporting system existing in the country, Accounting Standards are formulated or revised from time to time. Accounting Standards (ASs) are written policy documents issued by expert accounting body or by government or any other regulatory body. Accounting Standards covers the aspects of recognition, measurements, treatment, presentation and disclosure of accounting transactions in the financial statements. Thus, accounting standards are guidelines for financial accounting, as how firms prepare and present its business income and expense, assets and liabilities. According to section 2(2) of the Companies Act 2013 “accounting standards” means the standards of accounting or any addendum thereto for companies or class of companies referred to in section 133. The Central Government may prescribe the standards of accounting or any addendum thereto, as recommended by the Institute of Chartered Accountants of India, constituted under section 3 of the Chartered Accountants Act, 1949, in consultation with and after examination of the recommendations made by the National Financial Reporting Authority. Objective of Accounting Standards  To harmonise different accounting policies and used in a country.  To reduce the accounting alternatives in the preparation of financial statements  To ensure comparability of financial statements of different enterprises  To call for disclosures beyond that required by the law. Formation of the Accounting Standards Board The Institute of Chartered Accountants of India (ICAI) constituted the Accounting Standards Board (ASB) on 21st April, 1977) to harmonize the diverse accounting policies and practices in use in India. ASB of the ICAI has been issuing accounting standards since then. It has issued 32 Accounting Standards and 29 Accounting Standards Interpretations so far. “AS 8- Accounting for Research and Development” has been withdrawn, therefore there are 31 Accounting Standards in effect currently. ASB takes into consideration the applicable laws, customs, usages and business environment prevailing in the country. It also gives due consideration to International Accounting Standards (IASs) and tries to integrate them, to the extent possible, in the light of conditions and practices prevailing in India. 129 CU IDOL SELF LEARNING MATERIAL (SLM)

Composition of the Accounting Standards Board The composition of the ASB is fairly broad-based and ensures participation of all interest- groups in the standard- setting process. Apart from the elected members of the Council of the ICAI nominated on the ASB, the following are represented on the ASB: (i) Nominee of the Central Government representing the Department of Company Affairs on the Council of the ICAI (ii) Nominee of the Central Government representing the Office of the Comptroller and Auditor General of India on the Council of the ICAI (iii) Nominee of the Central Government representing the Central Board of Direct Taxes on the Council of the ICAI (iv) Representative of the Institute of Cost and Works Accountants of India (v) Representative of the Institute of Company Secretaries of India (vi) Representatives of Industry Associations (1 from Associated Preface to the Statements of Accounting Standards 3 Chambers of Commerce and Industry (ASSOCHAM), 1 from Confederation of Indian Industry (CII) and 1 from Federation of Indian Chambers of Commerce and Industry (FICCI) (vii) Representative of Reserve Bank of India (viii) Representative of Securities and Exchange Board of India (ix) Representative of Controller General of Accounts (x) Representative of Central Board of Excise and Customs (xi) Representatives of Academic Institutions (1 from universities and 1 from Indian Institutes of Management) (xii) Representative of Financial Institutions (xiii)Eminent professionals co-opted by the ICAI (they may be in practice or in industry, government, education, etc.) (xiv) Chairman of the Research Committee and the Chairman of the Expert Advisory Committee of the ICAI, if they are not otherwise members of the Accounting Standards Board (xv) Representative(s) of any other body, as considered appropriate by the ICAI Objectives and Functions of the Accounting Standards Board The following are the objectives of the Accounting Standards Board: (i) To conceive of and suggest areas in which Accounting Standards need to be 130 CU IDOL SELF LEARNING MATERIAL (SLM)

developed. (ii) To formulate Accounting Standards with a view to assisting the Council of the ICAI in evolving and establishing Accounting Standards in India. (iii) To examine how far the relevant International Accounting Standard/International Financial Reporting Standard can be adapted while formulating the Accounting Standard and to adapt the same. (iv) To review, at regular intervals, the Accounting Standards from the point of view of acceptance or changed conditions, and, if necessary, revise the same. (v) To provide, from time to time, interpretations and guidance on Accounting Standards. (vi) To carry out such other functions relating to Accounting Standards. The main function of the ASB is to formulate Accounting Standards so that such standards may be established by the ICAI in India. While formulating the Accounting Standards, the ASB will take into consideration the applicable laws, customs, usages and business environment prevailing in India. The ICAI, being a full-fledged member of the International Federation of Accountants (IFAC), is expected, inter alia, to actively promote the International Accounting Standards Board’s (IASB) pronouncements in the country with a view to facilitate global harmonization of accounting standards. Accordingly, while formulating the Accounting Standards, the ASB will give due consideration to International Accounting Standards (IASs) issued by the International Accounting Standards Committee (predecessor body to IASB) or International Financial Reporting Standards (IFRSs) issued by the IASB, as the case may be, and try to integrate them, to the extent possible, in the light of the conditions and practices prevailing in India. The Accounting Standards are issued under the authority of the Council of the ICAI. The 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. The ASB will provide interpretations and guidance on issues arising from Accounting Standards. The ASB also reviews the Accounting Standards at periodical intervals and, if necessary, revise the same. 5.2 RELEVANCE AND SIGNIFICANCE Accounting Standards have assumed great significance in today’s environment, which is constantly evolving and changing. Accounting Standards act as pillars of sound financial reporting system of a country, which is an integral and important part of good corporate governance and provides the shareholders and other stakeholders’ useful information about the entity to make their economic and financial decisions. To strengthen the financial 131 CU IDOL SELF LEARNING MATERIAL (SLM)

reporting system existing in the country, Accounting Standards are formulated or revised from time to time. Accounting Standards (ASs) are written policy documents issued by expert accounting body or by government or any other regulatory body. Accounting Standards covers the aspects of recognition, measurements, treatment, presentation and disclosure of accounting transactions in the financial statements. Thus, accounting standards are guidelines for financial accounting, as how firms prepare and present its business income and expense, assets and liabilities. According to section 2(2) of the Companies Act 2013 “accounting standards” means the standards of accounting or any addendum thereto for companies or class of companies referred to in section 133. The Central Government may prescribe the standards of accounting or any addendum thereto, as recommended by the Institute of Chartered Accountants of India, constituted under section 3 of the Chartered Accountants Act, 1949, in consultation with and after examination of the recommendations made by the National Financial Reporting Authority. Objective of Accounting Standards  To harmonise different accounting policies and used in a country.  To reduce the accounting alternatives in the preparation of financial statements  To ensure comparability of financial statements of different enterprises  To call for disclosures beyond that required by the law. Formation of the Accounting Standards Board The Institute of Chartered Accountants of India (ICAI) constituted the Accounting Standards Board (ASB) on 21st April, 1977) to harmonies the diverse accounting policies and practices in use in India. ASB of the ICAI has been issuing accounting standards since then. It has issued 32 Accounting Standards and 29 Accounting Standards Interpretations so far. “AS 8- Accounting for Research and Development” has been withdrawn, therefore there are 31 Accounting Standards in effect currently. ASB takes into consideration the applicable laws, customs, usages and business environment prevailing in the country. It also gives due consideration to International Accounting Standards (IASs) and tries to integrate them, to the extent possible, in the light of conditions and practices prevailing in India. Composition of the Accounting Standards Board The composition of the ASB is fairly broad-based and ensures participation of all interest- groups in the standard- setting process. Apart from the elected members of the Council of the ICAI nominated on the ASB, the following are represented on the ASB: (i) Nominee of the Central Government representing the Department of Company 132 CU IDOL SELF LEARNING MATERIAL (SLM)

Affairs on the Council of the ICAI (ii) Nominee of the Central Government representing the Office of the Comptroller and Auditor General of India on the Council of the ICAI (iii) Nominee of the Central Government representing the Central Board of Direct Taxes on the Council of the ICAI (iv) Representative of the Institute of Cost and Works Accountants of India (v) Representative of the Institute of Company Secretaries of India (vi) Representatives of Industry Associations (1 from Associated Preface to the Statements of Accounting Standards 3 Chambers of Commerce and Industry (ASSOCHAM), 1 from Confederation of Indian Industry (CII) and 1 from Federation of Indian Chambers of Commerce and Industry (FICCI) (vii) Representative of Reserve Bank of India (viii) Representative of Securities and Exchange Board of India (ix) Representative of Controller General of Accounts (x) Representative of Central Board of Excise and Customs (xi) Representatives of Academic Institutions (1 from universities and 1 from Indian Institutes of Management) (xii) Representative of Financial Institutions (xiii)Eminent professionals co-opted by the ICAI (they may be in practice or in industry, government, education, etc.) (xiv) Chairman of the Research Committee and the Chairman of the Expert Advisory Committee of the ICAI, if they are not otherwise members of the Accounting Standards Board (xv) Representative(s) of any other body, as considered appropriate by the ICAI Objectives and Functions of the Accounting Standards Board The following are the objectives of the Accounting Standards Board: (i) To conceive of and suggest areas in which Accounting Standards need to be developed. (ii) To formulate Accounting Standards with a view to assisting the Council of the ICAI in evolving and establishing Accounting Standards in India. (iii) To examine how far the relevant International Accounting Standard/International Financial Reporting Standard can be adapted while formulating the Accounting 133 CU IDOL SELF LEARNING MATERIAL (SLM)

Standard and to adapt the same. (iv) To review, at regular intervals, the Accounting Standards from the point of view of acceptance or changed conditions, and, if necessary, revise the same. (v) To provide, from time to time, interpretations and guidance on Accounting Standards. (vi) To carry out such other functions relating to Accounting Standards. The main function of the ASB is to formulate Accounting Standards so that such standards may be established by the ICAI in India. While formulating the Accounting Standards, the ASB will take into consideration the applicable laws, customs, usages and business environment prevailing in India. The ICAI, being a full-fledged member of the International Federation of Accountants (IFAC), is expected, inter alia, to actively promote the International Accounting Standards Board’s (IASB) pronouncements in the country with a view to facilitate global harmonization of accounting standards. Accordingly, while formulating the Accounting Standards, the ASB will give due consideration to International Accounting Standards (IASs) issued by the International Accounting Standards Committee (predecessor body to IASB) or International Financial Reporting Standards (IFRSs) issued by the IASB, as the case may be, and try to integrate them, to the extent possible, in the light of the conditions and practices prevailing in India. The Accounting Standards are issued under the authority of the Council of the ICAI. The 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. The ASB will provide interpretations and guidance on issues arising from Accounting Standards. The ASB also reviews the Accounting Standards at periodical intervals and, if necessary, revise the same. Scope of Accounting Standards (i) The Accounting Standards which are issued are in conformity with the provisions of the applicable laws, customs, usages and business environment in India. However, if a particular Accounting Standard is found to be not in conformity with law, the provisions of the said law will prevail and the financial statements should be prepared in conformity with such law. (ii)The Accounting Standards by their very nature cannot and do not override the local regulations which govern the preparation and presentation of financial statements in the country. However, the ICAI will determine the extent of disclosure to be made in financial statements and the auditor’s report thereon. Such disclosure may be by way of appropriate notes explaining the treatment of particular items. Such explanatory notes will be only in the nature of clarification 134 CU IDOL SELF LEARNING MATERIAL (SLM)

and therefore need not be treated as adverse comments on the related financial statements. (iii) The Accounting Standards are intended to apply only to items which are material. Any limitations with regard to the applicability of a specific Accounting Standard will be made clear by the ICAI from time to time. The date from which a particular Standard will come into effect, as well as the class of enterprises to which it will apply, will also be specified by the ICAI. However, no standard will have retroactive application, unless otherwise stated. (iv)In formulation of Accounting Standards, the emphasis would be on laying down accounting principles and not detailed rules for application and implementation thereof. Procedure for Issuing an Accounting Standard Broadly, the following procedure is adopted for formulating Accounting Standards: (i) The ASB determines the broad areas in which Accounting Standards need to be formulated and the priority in regard to the selection thereof. (ii) In the preparation of Accounting Standards, the ASB will be assisted by Study Groups constituted to consider specific subjects. (iii) The draft of the proposed standard will normally include the following:  Objective of the Standard,  Scope of the Standard,  Definitions of the terms used in the Standard,  Recognition and measurement principles, wherever applicable,  Presentation and disclosure requirements. (iv) The ASB will consider the preliminary draft prepared by the Study Group and if any revision of the draft is required on the basis of deliberations, the ASB will make the same. (v) The Exposure Draft of the proposed Standard will be issued for comments by the members of the Institute and the public. The Exposure Draft will specifically be sent to specified bodies (as listed above), stock exchanges, and other interest groups, as appropriate. (vi) After taking into consideration the comments received, the draft of the proposed Standard will be finalised by the ASB and submitted to the Council of the ICAI. (vii) The Council of the ICAI will consider the final draft of the proposed Standard, and if found necessary, modify the same in consultation with the ASB. The 135 CU IDOL SELF LEARNING MATERIAL (SLM)

Accounting Standard on the relevant subject will then be issued by the ICAI. (viii)For a substantive revision of an Accounting Standard, the procedure followed for formulation of a new Accounting Standard, as detailed above, will be followed. (ix) Subsequent to issuance of an Accounting Standard, some aspect(s) may require revisions which are not substantive in nature. For this purpose, the ICAI may make limited revision to an Accounting Standard. The procedure followed for the limited revision will substantially be the same as that to be followed for formulation of an Accounting Standard, ensuring that sufficient opportunity is given to various interest groups and general public to react to the proposal for limited revision. 5.3 NATIONAL AND INTERNATIONAL ACCOUNTING STANDARDS AND AUTHORITIES International Accounting Standards: International Accounting Standards (IAS) is older accounting standards issued by the International Accounting Standards Board (IASB); an independent international standard- setting body based in London. The IAS was replaced in 2001 by International Financial Reporting Standards (IFRS). International accounting is a subset of accounting that considers international accounting standards when balancing books. Understanding International Accounting Standards (IAS) International Accounting Standards (IAS) was the first international accounting standards that were issued by the International Accounting Standards Committee (IASC), formed in 1973. The goal then, as it remains today, was to make it easier to compare businesses around the world, increase transparency and trust in financial reporting, and foster global trade and investment. Globally comparable accounting standards promote transparency, accountability, and efficiency in financial markets around the world. This enables investors and other market participants to make informed economic decisions about investment opportunities and risks and improves capital allocation. Universal standards also significantly reduce reporting and regulatory costs, especially for companies with international operations and subsidiaries in multiple countries. Moving Toward New Global Accounting Standards There has been significant progress towards developing a single set of high-quality global accounting standards since the IASC was replaced by the IASB. IFRS have been adopted by the European Union, leaving the United States, Japan (where voluntary adoption is allowed), 136 CU IDOL SELF LEARNING MATERIAL (SLM)

and China (which says it is working towards IFRS) as the only major capital markets without an IFRS mandate. As of 2018, 144 jurisdictions required the use of IFRS for all or most publicly listed companies, and a further 12 jurisdictions permit its use. National Accounting Standards 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. ASB is a committee under Institute of Chartered Accountants of India (ICAI) which consists of representatives from government department, academicians, other professional bodies’ viz. ICAI, representatives from ASSOCHAM, CII, FICCI, etc. ICAI is an independent body formed under an act of parliament. The Ind AS are named and numbered in the same way as the International Financial Reporting Standards (IFRS). National Financial Reporting Authority (NFRA) recommends these standards to the Ministry of Corporate Affairs (MCA). MCA has to spell out the accounting standards applicable for companies in India. As on date MCA has notified 41 Ind AS. This shall be applied to the companies of financial year 2015-16 voluntarily and from 2016-17 on a mandatory basis. Based on the international consensus, the regulators will separately notify the date of implementation of Ind-AS for the banks, insurance companies etc. Standards for the computation of Tax has been notified as ICDS in February 2015 National Financial Reporting Authority (NFRA) recommends these standards to the Ministry of Corporate Affairs (MCA). MCA has to spell out the accounting standards applicable for companies in India. ... This shall be applied to the companies of financial year 2015-16 voluntarily and from 2016-17 on a mandatory basis. 5.4 ADOPTION, CONVERGENCE AND INTERPRETATION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) AND ACCOUNTING STANDARDS IN INDIA IFRS are now becoming the global financial reporting language. The importance of IFRS has grown significantly in the recent times. However, the concept of IFRS is not new. Back in the year 1973, the professional accountancy bodies of developed economies such as USA, London, Germany, Japan, France etc. recognized the need to harmonize the accounting principles and standards followed by different countries and formed International Accounting Standards Committee (IASC). IASC is a not-for-profit corporation incorporated in USA and operates from London. It took the responsibility of harmonizing accounting practices followed worldwide by issuing International Accounting Standards (IAS). These IAS were adopted by many multinational companies and endorsed by many countries as their own standards. Most of the nations adopted these international standards but modified them 137 CU IDOL SELF LEARNING MATERIAL (SLM)

according to their situations and environment prevailing in their own country. With the passage of time several country level accounting principles emerged and there were many gaps between these local generally accepted accounting principles and the IAS. So, in the year 2001, international fraternity of accountants decided to revise the whole framework. In 2001, IASC was renamed as International Accounting Standards board (IASB). The accounting standards issued by IASB are known as International Financial Reporting Standards (IFRS). IFRS is a set of international accounting standards stating how particular types of transactions and other events should be reported in financial statements. IFRS are nothing but principles-based standards, interpretations and the framework adopted by the International Accounting Standards Board (IASB). International Financial Reporting Standards comprise of:  9-International Financial Reporting Standards (IFRS)—standards issued after 2001 by IASB.  29-International Accounting Standards (IAS)—standards issued before 2001by IASC which are still valid.  16-Interpretations issued by International Financial Reporting Interpretations Committee (IFRIC) after 2001.  11–interpretations issued by Standing Interpretations Committee (SIC) before 2001. However, in practice IFRS is interchangeably used to denote individual accounting standards issued by IASB as well as international accounting principles collectively. Following are some of the advantages of IFRS:  Facilitate increased comparability of financial information between companies operating in different countries.  The financial reporting process would become more transparent.  The standardization of accounting methodology provides creditors and investors with the ability to analyse businesses around the world using the same financial methods.  It would also permit international capital to flow more freely.  It would give investors a better understanding to the financial statements and assess the investment opportunities in other countries.  It would also benefit the accounting professionals as they will be able to sell their services in the different parts of the world. All these benefits of IFRS have prompted many countries to pursue convergence of national accounting standards with IFRS. India has also decided to facilitate the convergence of the Indian accounting standards with IFRS and in this direction all existing accounting standards are being revised and converged with corresponding IAS/ IFRS. Convergence of entire world towards IFRS would benefit the corporate sector, investors, and regulators and facilitate economic growth as a whole. 138 CU IDOL SELF LEARNING MATERIAL (SLM)

The following International Accounting Standards (IAS)/International Financial Reporting Standards (IFRS) issued by the IASB which are in force: IAS-1 Presentation of Financial Statements IAS-2 Inventories IAS-7 Cash Flow Statements IAS-8 Accounting Policies, Changes in Accounting Estimates and Errors IAS-10 Events after the Balance Sheet Date IAS-11Construction Contracts IAS-12 Income Taxes IAS-14Segment Reporting IAS-16Property, Plant and Equipment IAS-17 Leases IAS-18Revenue IAS-19Employee Benefits IAS-20Accounting for Government Grants and Disclosure of Government Assistance IAS-21 the Effects of Changes in Foreign Exchange Rates IAS-23Borrowing Costs IAS-24Related Party Disclosures IAS-26Accounting and Reporting by Retirement Benefit Plans IAS-27 Consolidated and Separate Financial Statements IAS-28Investments in Associates IAS-29Financial Reporting in Hyperinflationary Economies IAS-31 Interests in Joint Ventures IAS-33Earnings per Share IAS-34Interim Financial Reporting IAS-36 Impairment of Assets IAS-37Provisions, Contingent Liabilities and Contingent Assets IAS-38 Intangible Assets IAS-39Financial Instruments: Recognition and Measurement IAS-40 Investment Property IAS-41Agriculture IFRS-1First-time Adoption of International Financial Reporting Standards IFRS-2 Share-based Payment IFRS-3Business Combinations IFRS-4 Insurance Contracts IFRS-5Non-current Assets Held for Sale and Discounted Operations IFRS-6 Exploration for and Evaluation of Mineral Resources IFRS-7Financial Instrument: Disclosures IFRS-8 Operating Segments 139 CU IDOL SELF LEARNING MATERIAL (SLM)

IFRS-9Financial Instruments A brief description of the above International Accounting Standards and International Financial Reporting Standards is given below: IAS-1 – Presentation of Financial Statements The standard prescribes the minimum structure and content, including certain information required on the face of the financial statements. There are four basic financial statements: (i) Balance sheet (ii) Income statement (iii) Cash flow statement (iv) Statement showing changes in equity. The statement shows (a) each item of income and expense, gain or loss, which, as required by other IASC Standards, is recognized directly in equity, and the total of these items, certain foreign currency translation gains and losses and changes in fair values of financial instruments and (b) net profit or loss for the period. Owners’ investments and withdrawals of capital and other movements in retained earnings and equity capital are shown in the notes. IAS-2 – Inventories Inventories should be valued at the lower of cost and net realizable value. Net realizable value is selling price less cost to complete the inventory and sell it. Cost includes all costs to bring the inventories to their present condition and location. If specific cost is not determinable, the benchmark treatment is to use FIFO or weighted average. An allowed alternative is LIFO, but then there should be disclosure of the lower of (i) net realizable value and (ii) FIFO, weighted average or current cost. The cost of inventory is recognized as an expense in the period in which the related revenue is recognized. If inventory is written down to net realizable value, the write- down is charged to expense. Any reversal of such a write- down in a later period is credited to income by reducing that period’s cost of goods sold. IAS-7- Cash flow statement The cash flow statement is a required basic financial statement. It explains changes in cash and cash equivalents during a period. Cash equivalents are short-term, highly liquid investments subject to insignificant risk of changes in value. Cash flow statement should classify changes in cash and cash equivalents into operating, investing, and financial activities. IAS-8 – Accounting Policies, Changes in Accounting Estimates and Errors An entity shall select and apply its accounting policies consistently for similar transactions, other events and conditions, unless a Standard or an Interpretation specifically requires or permits categorization of items for which different policies may be appropriate. An entity 140 CU IDOL SELF LEARNING MATERIAL (SLM)

shall change an accounting policy only if the change (a) is required by a Standard or an Interpretation; or (b) results in the financial statements providing reliable and more relevant information about the effects of transactions, other events or conditions on the entity’s financial position, financial performance or cash flows. IAS-10 – Events after the Balance Sheet Date An entity shall adjust the amounts recognized in its financial statements to reflect adjusting events after the balance sheet date. Further an entity shall not adjust the amounts recognized in its financial statements to reflect non-adjusting events after the balance sheet. If an entity declares dividends to holders of equity instruments after the balance sheet date, the entity shall not recognize those dividends as a liability at the balance sheet date. An entity shall not prepare its financial statements on a going concern basis if management determines after the balance sheet date either that it intends to liquidate the entity or to cease trading, or it has no realistic alternative but to do so. IAS-11 – Construction Contracts If the total revenue, past and future costs, and the stage of completion of a contract can be measured or estimated reliably, revenues and costs should be recognized by stage of completion (the “percentage-of- completion method”). The expected losses should be recognized immediately. If the outcome cannot be measured reliably, costs should be expensed, and revenues should be recognized to the extent that costs are recoverable (“cost recovery method”). IAS-12 – Income Taxes It provides, among other things: (i) Accrue deferred tax liability for nearly all taxable temporary differences. (ii) Accrue deferred tax asset for nearly all deductible temporary differences if it is probable a tax benefit will be realised. (iii) Accrue unused tax losses and tax credits if it is probable that they will be realised. (iv) Use tax rates expected at settlement. (v) Current and deferred tax assets and liabilities are measured using the tax rate applicable to undistributed profits. (vi) Non-deductible goodwill: no deferred tax. (vii) Unremitted earnings of subsidiaries, associates, and joint ventures: Do not accrue tax. (viii) Capital gains: Accrue tax at expected rate. (ix) Do not “gross up” government grants or other assets or liabilities whose initial 141 CU IDOL SELF LEARNING MATERIAL (SLM)

recognition differs from initial tax base. IAS-14 – Segment Reporting Basis of Segment Reporting: (i) Public companies must report information along product and service lines and along geographical lines. (ii) One basis of segmentation is primary, the other is secondary. (iii) Segment accounting policies the same as consolidated. IAS-16 – Property, Plant and Equipment The cost of an item of property, plant and equipment should be recognized as an asset if, and only if, (a) it is probable that future economic benefits associated with the item will flow to the entity; and (b) the cost of the item can be measured reliably. An item of property, plant and equipment that qualifies for recognition, as an asset should shall be measured at its cost. An entity shall choose either the cost model or the revaluation model as its accounting policy and shall apply that policy to an entire class of property, plant and equipment. If an item of property, plant and equipment is revalued, the entire class of property, plant and equipment to which that asset belongs shall be revalued. If an asset’s carrying amount is increased as a result of revaluation, the increase shall be credited directly to equity under the heading of revaluation surplus. If an asset’s carrying amount is decreased as a result of revaluation, the decrease shall be recognized in profit or loss. However, the decrease shall be debited directly to equity under the heading revaluation surplus in respect of that asset. IAS-17- Leases A lease is classified as finance lease if it transfers substantially all risks and rewards incidental to ownership. A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership. At the commencement of the lease term, lessees shall recognize finance leases as assets and liabilities in their balance sheets at amounts equal to the fair value of the leased property or, if lower, the present value of the minimum lease payments, each determined at the inception of the lease. Any initial direct costs of the lessee are added to the amount recognized as an asset. Finance lease gives rise to depreciation expense for depreciable assets as well as finance expense for each accounting period. Lease payments under operating lease shall be recognized as an expense on a straight-line basis over the lease term unless another systematic basis is more representative of the time pattern of the user’s benefit. IAS-18 – Revenue Revenue should be measured at fair value of consideration received or receivable. Usually this is the inflow of cash. Discounting is needed if the inflow of cash is significantly deferred without interest. If dissimilar goods or services are exchanged (as in barter transactions), 142 CU IDOL SELF LEARNING MATERIAL (SLM)

revenue is the fair value of the goods or services received or, if this is not reliably measurable, the fair value of the goods or services given up. Revenue should be recognized when: (i) significant risks and rewards of ownership are transferred to the buyer; (ii) managerial involvement and control have passed; (iii) the amount of revenue can be measured reliably; (iv) it is probable that economic benefits will flow to the enterprise; and (v) The costs of the transaction (including future costs) can be measured reliably. IAS-19 – Employee Benefits Post-employment Benefits including Pensions Defined Contribution Plans: Contribution of a period should be recognized as expenses. Defined Benefits Plans: Current service cost should be recognized as an expense. Other Employee Benefits: Including vacations, holidays, accumulating sick pay, retiree medical and life insurance, etc. IAS-20 – Accounting for Government Grants and Disclosure of Government Assistance Grants should not be credited directly to equity. They should be recognized as income in a way matched with the related costs. Grants related to assets should be deducted from the cost or treated as deferred income. IAS-21 – The Effects of Changes in Foreign Exchange Rates A foreign currency transaction shall be recorded, on initial recognition in the functional currency, by applying to the foreign currency amount the spot exchange rate between the functional currency and the foreign currency at the date of the transaction. Reporting at subsequent balance sheet date should be: (a) foreign currency monetary items shall be translated using the closing rate; (b) non-monetary items that are measured in terms of historical cost in a foreign currency shall be translated using the exchange rate at the date of the transaction; and (c) non-monetary items that are measured at fair value in a foreign currency shall be translated using the exchange rates at the date when the fair value was determined. Exchange differences arising on the settlement of monetary items or on translating monetary items at rates different from those at which they were translated on initial recognition during the period or in previous financial statements shall be recognized in profit and loss in the period in which they arise. When a gain or loss on a non-monetary item is recognized directly in equity, any exchange component of that gain or loss shall be recognized directly in equity. Conversely, when a gain or loss on a monetary item is 143 CU IDOL SELF LEARNING MATERIAL (SLM)

recognized in profit or loss, any exchange component of that gain or loss shall be recognized in profit or loss. IAS-23 – Borrowing Costs The benchmark treatment is to treat borrowing costs as expenses. The allowed alternative is to capitalize those directly attributable to construction. If capitalized and funds are specifically borrowed, the borrowing costs should be calculated after any investment income on temporary investment of the borrowings. If funds are borrowed generally, then a capitalization rate should be used based on the weighted average of borrowing costs for general borrowings outstanding during the period. Borrowing costs capitalized should not exceed those actually incurred. Capitalization begins when expenditures and borrowing costs are being incurred and construction of the asset is in progress. Capitalization suspends if construction is suspended for an extended period, and ends when substantially all activities are complete. IAS-24 – Related Party Disclosures This standard requires disclosure of related party transactions and outstanding balances in the separate financial statements of a parent, venture or investor. A party is related to an entity if: (a) directly or indirectly through one or more intermediaries, the party: (i) controls, is controlled by, or is under common control with, the entity which includes parents, subsidiaries and fellow subsidiaries: (ii) has an interest in the entity that gives it significant influence over the entity; or (iii) has joint control over the entity; (b) the party is an associate; (c) the party is a joint venture in which the entity is a venture; (d) the party is a member of the key management personnel; (e) the party is close member of the family; (f) the party is controlled, jointly controlled or significantly influenced; (g) the party is a post –employment benefit plan for the benefit of employees of the entity. IAS-26 – Accounting and Reporting by Retirement Benefit Plans The standard applies to accounting and reporting by retirement benefit plans. It establishes separate standards for reporting by defined benefit plans and by defined contribution plans. IAS-27 – Consolidated and Separate Financial Statements Consolidated financial statements are the financial statements of a group presented as those of a single economic activity. Consolidated financial statements shall include all subsidiaries of the parent. Intra-group balances, transactions, income and expenses shall be eliminated in full. The financial statements of the parent and its subsidiaries used in the preparation of the consolidated financial statements shall be prepared as on the same reporting date. When the reporting dates are different, the subsidiary prepares additional financial statements as on the same date. Consolidated financial statements shall be prepared using uniform accounting policies for like transactions. Minority interests shall be presented in the consolidated balance sheet within equity, separately from the parent shareholders’ equity. 144 CU IDOL SELF LEARNING MATERIAL (SLM)

IAS-28 – Investments in Associates An associate is an entity, including an unincorporated entity such as partnership, over which the investor has significant influence and that is neither a subsidiary nor an interest in a joint venture. An investment in an associate shall be accounted for using the equity method with specified exceptions. An investor shall discontinue the use of equity method from the date that it ceases to have significant influence over an associate. The investor in applying equity method uses the most recent available financial statements of the associate. When the reporting dates of the investor and the associate are different, the associates prepare, for the use of the investor, financial statements as of the same date as the financial statements of the investor. The investor’s financial statements shall be prepared using uniform accounting policies for like transactions and events in similar circumstances. IAS-29 – Financial Reporting in Hyperinflationary Economies Hyperinflation is indicated if cumulative inflation over three years is 100 per cent or more (among other factors). In such a circumstance, financial statements should be presented in a measuring unit that is current at the balance sheet date. Comparative amounts for prior periods are also restated into the measuring unit at the current balance sheet date. Any gain or loss on the net monetary position arising from the restatement of amounts into the measuring unit current at the balance sheet date should be included in net income and separately disclosed. IAS-31 – Interests in Joint Ventures A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control. These are of three types: (i) Jointly controlled operations: It should be recognised by the venture by including the assets and liabilities that it controls and the expenses that it incurs and its share of the income that it earns from the sale of goods or services by the venture. (ii) Jointly controlled assets: It should be recognised as follows: (a) its share of the jointly controlled assets, classified according to the nature of the assets; (b) any liability that it has incurred; (c) its share of any liabilities incurred jointly with the other ventures in relation to the joint venture; (d) any income from the sale or use of its share of output of the joint venture; (e) Any expenses that it incurred in respect of its interest in the joint venture. (iii) Jointly controlled entities: It may maintain its own accounting records and prepares and presents financial statements in the same way as other entities in 145 CU IDOL SELF LEARNING MATERIAL (SLM)

conformity with International Financial Reporting Standard. IAS-33 – Earnings per Share It is applicable only to public companies. An entity shall calculate basic earnings per share for profit or loss attributable to ordinary equity holders. Basic earnings per share shall be calculated by dividing profit or loss attributable to ordinary equity holders by the weighted average number of ordinary shares. An entity shall calculate diluted earnings per share amounts for profit or loss attributable to ordinary equity holders of the parent entity and, if presented, profit or loss from continuing operations attributable to those equity holders. For the purpose of calculating diluted earnings per share, an entity shall adjust profit or loss attributable to ordinary equity holders of the parent equity, and the weighted average number of shares outstanding, for the effects of all dilutive potential ordinary shares. Potential ordinary shares shall be treated as dilutive when, and only when, their conversion to ordinary shares would decrease earnings per share or increase loss per share from continuing operations. An entity shall present on the face of the income statement basic and diluted earnings per share profit or loss from continuing operations attributable to the ordinary equity holders of the parent entity and for profit or loss attributable to the ordinary equity holders of the parent entity for the period for each class of ordinary shares that has a different right to share in profit for the period. IAS-34 – Interim Financial Reporting The standard defines the minimum content of an interim financial report as a condensed balance sheet, condensed income statement, condensed cash flow statement, condensed statement showing changes in equity, and selected explanatory notes. Interim financial statements, complete or condensed, must cover the following periods: (i) a balance sheet at the end of the current interim period, and comparative as of the end of the most recent full financial year; (ii) income statements for the current interim period and cumulative for the current financial year to date, with comparative statements for the comparable interim periods of the immediately preceding financial year; (iii) a statement of changes in equity cumulatively for the current financial year to date and comparative for the same year-to-date period of the prior year; and (iv) A cash flow statement cumulatively for the current financial year to date and comparative for the same year-to-date period of the prior financial year. Enterprises are required to apply the same accounting policies in their interim financial reports as in their latest annual financial statements IAS-36–ImpairmentofAssets 146 CU IDOL SELF LEARNING MATERIAL (SLM)

Impairment of assets, deals mainly with accounting for impairment of goodwill, intangible assets and property, plant and equipment. The standard includes requirements for identifying an impaired asset, measuring its recoverable amount, recognizing or reversing any resulting impairment loss, and disclosing information on impairment losses or reversals of impairment losses. An impairment loss should be recognized whenever the recoverable amount of an asset is less than it carrying amount. IAS-37 – Provisions, Contingent Liabilities and Contingent Assets (a) a provision should not be recognised for future operating losses; (b) a provision should be recognised for an onerous; (c) A provision for restructuring costs should be recognised only when an enterprise has a detailed formal plan for the restructuring and has raised a valid expectation in those affected that it will carry out the restructuring by starting to implement that plan or announcing its main features to those affected by it. IAS-38 – Intangible Assets The standard states that: (i) an intangible asset should be recognised, in the financial statements, if, and only if: (a) it is probable that the expected future economic benefits that are attributable to the asset will flow to the enterprise; and (b) The cost of the asset can be measured reliably. (ii) An entity shall assess the probability of expected future economic benefits using reasonable and supportive assumptions that represent management’s best estimate of the set of economic conditions that will exist over the useful life of the asset. (iii) Internally generated goodwill shall not be recognized as an asset. (iv) No intangible asset arising from research shall be recognized. (v) An intangible asset arising from development shall be recognized subject to specified conditions. (vi) Expenditure on an intangible item that was initially recognized as an expense shall not be recognized as part of the cost of an intangible asset at a later date. (vii) The accounting for an intangible asset is based on its useful life. (viii)An intangible asset shall be derecognised on disposal or when no future economic benefits are expected from its use or disposal. IAS-39 – Financial Instruments: Recognition and Measurement 147 CU IDOL SELF LEARNING MATERIAL (SLM)

Under this standard an entity shall recognize a financial asset or financial liability on the balance sheet when and only when, the entity becomes a party to the contractual provisions of the instrument. An entity shall derecognize a financial asset when, the contractual rights to the cash flows from the financial asset expire or it transfers the financial asset. On DE recognition of a financial asset in its entirety, the difference between the carrying amount and the sum of (a) the consideration received and (b) any cumulative gain or loss that had been recognized directly in equity shall be recognized in profit or loss. When a financial asset or liability is recognized initially, an entity shall measure it at its fair value plus, in the case of a financial asset or financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial assets or financial liability. After initial recognition, an entity shall measure all financial liabilities at amortized cost using the effective interest method. 5.5 SUMMARY  Indian Accounting Standards (AS) is prescribed by the Accounting Standard Board (ASB) of the Institute of Chartered Accountants of India which is notified by the Central Government in consultation with the National Advisory Committee on Accounting Standards.  International Accounting Standards (IAS)/International Financial Reporting Standards (IFRS) are issued by International Accounting Standard Board (IASB).  Accounting standards relate to the codification of generally accepted accounting principles and are stated to be the norms of accounting policies and practices.  The objective of setting standards is to bring about uniformity in financial reporting and to ensure consistency and comparability in the data published by enterprises.  Accounting standards facilitate uniform preparation and reporting of general-purpose financial statements published annually for the benefit of shareholders, creditors, employees and the public at large.  The preparation of financial statements with adequate disclosures, as required by the accounting standards is the responsibility of the management of the organization.  The main function of the ASB is to formulate Accounting Standards so that such standards may be established by the ICAI in India.  The Accounting Standards are formulated under the authority of the Council of the ICAI.  To facilitate the convergence of the Indian Accounting Standards with IFRS In this direction all the existing Indian Accounting Standards are being revised and converged with corresponding to International Accounting Standards/International Financial Reporting Standards. These converged Accounting Standards shall be known as Ind AS. 148 CU IDOL SELF LEARNING MATERIAL (SLM)

 The Ministry of Corporate Affairs has notified the Companies (Indian Accounting Standards) Rules, 2015.  As a result of this there shall be two separate sets of Accounting Standards. The first set would comprise the Indian Accounting Standards, which are converged with the IFRS and shall be applicable to the specified class of companies in a phased manner.  The second set would comprise the existing Indian Accounting Standards and would be applicable to other companies, including Small and Medium Companies (SMC). 5.6 KEYWORDS  International Financial Reporting Standards: International Financial Reporting Standards commonly called IFRS are accounting standards issued by the IFRS Foundation and the International Accounting Standards Board (IASB). They constitute a standardized way of describing the company’s financial performance and position so that company financial statements are understandable and comparable across international boundaries. They are particularly relevant for companies with shares or securities listed on a public stock exchange.  Joint venture: A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control  International Accounting Standard 1: Presentation of Financial Statements or IAS 1 is an international financial reporting standard adopted by the International Accounting Standards Board  Cash flow statement: In financial accounting, a cash flow statement, also known as statement of cash flows, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities.  Intangible assets:Intangibles are a special kind of asset, for example intellectual property, that can provide long-term benefit to a business. 5.7 LEARNING ACTIVITY 1. What is National Accounting Standards? ___________________________________________________________________________ _______________________________________________________________________ 2. What is International Accounting Standards? ___________________________________________________________________________ _______________________________________________________________________ 149 CU IDOL SELF LEARNING MATERIAL (SLM)

5.8 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. What do you mean by accounting standards? 2. What is the significance of accounting standards? 3. “Accounting standards can be seen as providing an important mechanism to help in the resolution of potential financial conflicts of interest between the various important groups in society”. Comment. 4. Briefly explain the functioning of the Accounting Standards Board in India. 5. Explain the scope of Accounting Standards issued by ICAI. Long Questions 1. Mention the procedure for issuing accounting standards by the ICAI. 2. Mention the various International Accounting Standards/International Financial Reporting Standards formulated by International Accounting Standard Board. 3. Discuss the approach for convergence of Indian Accounting Standards with IFRS 4. What is the relevance and significance of accounting standards? 5. Explain IFRS and its role. B. Multiple Choice Questions 1.Generally the duration of an accounting period is of- a. 6 months b. 3 months c. 12 months d. 1 month. 2.The sum of Liabilities and Capital is- 150 a. Expense b. Income c. Drawings d. Assets. 3.In India, the accounting standard board was set up in the year- a. 1972 b. 1977 CU IDOL SELF LEARNING MATERIAL (SLM)