Indian Accounting Standards

Indian Accounting Standards, (abbreviated as india AS) are a set of accounting standards notified by the Ministry of Corporate Affairs which are converged with International Financial Reporting Standards (IFRS). These accounting standards are formulated by Accounting Standards Board of Institute of Chartered Accountants of India. Now India will have two sets of accounting standards viz. existing accounting standards under Companies (Accounting Standard) Rules, 2006 and IFRS converged Indian Accounting Standards(Ind AS). The Ind AS are named and numbered in the same way as the corresponding IFRS. NACAS recommend these standards to the Ministry of Corporate Affairs. The Ministry of Corporate Affairs has to spell out the accounting standards applicable for companies in India. As on date the Ministry of Corporate Affairs notified 35 Indian Accounting Standards(Ind AS). But it has not notified the date of implementation of the same.

List of Indian Accounting Standards

The following are the mandatory Accounting Standards (AS) as on July 1, 2012 as listed on the site of The Institute of Chartered Accountants of India (ICAI) *1. Valuation of Inventories *2. Cash Flow Statement *3.Depreciation Accounting *4. Revenue Recognition *5. Accounting for Fixed Assets *6. Accounting for Investments *7. Borrowing Costs *8. Accounting for Investments *AS 24 Discontinuing Operations

*AS 25 Interim Financial Reporting *AS 26 Intangible Assets *AS 27 Financial Reporting of Interests in Joint Ventures '*AS 28 Impairment of Assets *AS 29 Provisions,Contingent` Liabilities and Contingent Assets *AS 30 Financial Instruments: Recognition and Measurement and Limited Revisions to AS 2, AS 11 revised 2003), AS 21, AS 23, AS 26, AS 27, AS 28 and AS 29 *AS 31, Financial Instruments: Presentation *AS 32, Financial Instruments: Disclosures, and limited revision to Accounting Standard

Cash flow statement

XYZ co. Ltd. (all numbers in millions of Rs.) Period ending Cash Flow Statement 31 Mar 2008 17,046 2,747 2,910 -37,856 -(62,963) (2,404)

31 Mar 31 Mar 2010 2009 Net income 21,538 24,589 Operating activities, cash flows provided by or used in: Depreciation and amortization 2,790 2,592 Adjustments to net income 4,617 621 Decrease (increase) in accounts 12,503 17,236 receivable Increase (decrease) in liabilities (A/P, 131,622 19,822 taxes payable) Decrease (increase) in inventories --Increase (decrease) in other operating (173,057) (33,061) activities Net cash flow from operating 13 31,799 activities Investing activities, cash flows provided by or used in: Capital expenditures (4,035) (3,724)

(3,011)

Investments (201,777) (71,710) Other cash flows from investing activities 1,606 17,009 Net cash flows from investing (204,206) (58,425) activities Financing activities, cash flows provided by or used in: Dividends paid (9,826) (9,188) Sale (repurchase) of stock (5,327) (12,090) Increase (decrease) in debt 101,122 26,651 Other cash flows from financing activities 120,461 27,910 Net cash flows from financing 206,430 33,283 activities Effect of exchange rate changes 645 (1,840) 4,817 Net increase (decrease) in cash and 2,882 cash equivalents

(75,649) (571) (79,231)

(8,375) 133 21,204 70,349 83,311 731 2,407

Indirect method
The indirect method uses net-income as a starting point, makes adjustments for all transactions for non-cash items, then adjusts from all cash-based transactions. An increase in an asset account is subtracted from net income, and an increase in a liability account is added back to net income. This method converts accrual-basis net income (or loss) into cash flow by using a series of additions and deductions. Rules (operating activities) To Find Cash Flows from Operating Activities using the Balance Sheet and Net Income For Increases in Net Inc Adj Current Assets (Non-Cash) Decrease Current Liabilities Increase For All Non-Cash... *Expenses (Decreases in Fixed Assets) Increase *Non-cash expenses must be added back to NI. Such expenses may be represented on the balance sheet as decreases in long term asset accounts. Thus decreases in fixed assets increase NI. The following rules can be followed to calculate Cash Flows from Operating Activities when given only a two-year comparative balance sheet and the Net Income figure. Cash Flows from Operating Activities can be found by adjusting

Net Income relative to the change in beginning and ending balances of Current Assets, Current Liabilities, and sometimes Long Term Assets. When comparing the change in long term assets over a year, the accountant must be certain that these changes were caused entirely by their devaluation rather than purchases or sales (i.e. they must be operating items not providing or using cash) or if they are nonoperating items.[16]

Decrease in non-cash current assets are added to net income Increase in non-cash current asset are subtracted from net income Increase in current liabilities are added to net income Decrease in current liabilities are subtracted from net income Expenses with no cash outflows are added back to net income (depreciation and/or amortization expense are the only operating items that have no effect on cash flows in the period) Revenues with no cash inflows are subtracted from net income Non operating losses are added back to net income Non operating gains are subtracted from net income

The intricacies of this procedure might be seen as,

For example, consider a company that has a net income of $100 this year, and its A/R increased by $25 since the beginning of the year. If the balances of all other current assets, long term assets and current liabilities did not change over the year, the cash flows could be determined by the rules above as $100 $25 = Cash Flows from Operating Activities = $75. The logic is that, if the company made $100 that year (net income), and they are using the accrual accounting system (not cash based) then any income they generated that year which has not yet been paid for in cash should be subtracted from the net income figure in order to find cash flows from operating activities. And the increase in A/R meant that $25 of sales occurred on credit and have not yet been paid for in cash. In the case of finding Cash Flows when there is a change in a fixed asset account, say the Buildings and Equipment account decreases, the change is added back to Net Income. The reasoning behind this is that because Net Income is calculated by, Net Income = Rev - Cogs - Depreciation Exp - Other Exp then the Net Income figure will be decreased by the building's depreciation that year. This depreciation is not associated with an exchange of cash, therefore the depreciation is added back into net income to remove the non-cash activity.

Rules (financing activities)

Finding the Cash Flows from Financing Activities is much more intuitive and needs little explanation. Generally, the things to account for are financing activities:

Include as outflows, reductions of long term notes payable (as would represent the cash repayment of debt on the balance sheet) Or as inflows, the issuance of new notes payable Include as outflows, all dividends paid by the entity to outside parties Or as inflows, dividend payments received from outside parties Include as outflows, the purchase of notes stocks or bonds Or as inflows, the receipt of payments on such financing vehicles.[citation needed]

In the case of more advanced accounting situations, such as when dealing with subsidiaries, the accountant must

Exclude intra-company dividend payments. Exclude intra-company bond interest.[citation needed]

Direct method
The direct method for creating a cash flow statement reports major classes of gross cash receipts and payments. Under IAS 7, dividends received may be reported under operating activities or under investing activities. If taxes paid are directly linked to operating activities, they are reported under operating activities; if the taxes are directly linked to investing activities or financing activities, they are reported under investing or financing activities. Generally Accepted Accounting Principles (GAAP) vary from International Financial Reporting Standards in that under GAAP rules, dividends received from a company's investing activities is reported as an "operating activity," not an "investing activity."[13]

Sample cash flow statement using the direct method[14]

Cash flows from (used in) operating activities Cash receipts from customers 9,500 Cash paid to suppliers and employees (2,000) Cash generated from operations (sum) 7,500 Interest paid (2,000) Income taxes paid (3,000) Net cash flows from operating activities Cash flows from (used in) investing activities Proceeds from the sale of equipment 7,500 Dividends received 3,000 Net cash flows from investing activities Cash flows from (used in) financing activities Dividends paid (2,500) Net cash flows used in financing activities . Net increase in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year

2,500

10,500

(2,500) 10,500 1,000 $11,500

Purpose
Statement of Cash Flow - Simple Example for the period 1 Jan 2006 to 31 Dec 2006 Cash flow from operations $4,000 Cash flow from investing ($1,000) Cash flow from financing ($2,000) Net cash flow $1,000 Parentheses indicate negative values The cash flow statement was previously known as the flow of Cash statement.[2] The cash flow statement reflects a firm's liquidity. The balance sheet is a snapshot of a firm's financial resources and obligations at a single point in time, and the income statement summarizes a firm's financial transactions over an interval of time. These two financial statements reflect the accrual basis accounting used by firms to match revenues with the expenses associated with generating those revenues. The cash flow statement includes only inflows and outflows of cash and cash equivalents; it excludes transactions that do not directly affect cash receipts and payments. These non-cash transactions include depreciation or write-offs on bad debts or credit losses to name a few.[3] The cash flow statement is a cash basis report on three types of financial activities: operating activities, investing activities, and financing activities. Non-cash activities are usually reported in footnotes.

Inventory valuation
An inventory valuation allows a company to provide a monetary value for items that make up their inventory. Inventories are usually the largest current asset of a business, and proper measurement of them is necessary to assure accurate financial statements. If inventory is not properly measured, expenses and revenues cannot be properly matched and a company could make poor business decisions.

1 Inventory accounting systems 2 Inventory valuation methods - perpetual 3 Periodic versus perpetual systems 4 Using non-cost methods to value inventory 5 Methods used to estimate inventory cost 6 External links

Inventory accounting systems

The two most widely used inventory accounting systems are the periodic and the perpetual.

Perpetual: The perpetual inventory system requires accounting records to show the amount of inventory on hand at all times. It maintains a separate account in the subsidiary ledger for each good in stock, and the account is updated each time a quantity is added or taken out. Periodic: In the periodic inventory system, sales are recorded as they occur but the inventory is not updated. A physical inventory must be taken at the end of the year to determine the cost of goods

Regardless of what inventory accounting system is used, it is good practice to perform a physical inventory at least once a year.

Inventory valuation methods - perpetual

The perpetual system records revenue each time a sale is made. Determining the cost of goods sold requires taking inventory. The most commonly used inventory valuation methods under a periodic system are: 1. first-in first-out (FIFO) 2. last-in first-out (LIFO) 3. average cost or weighted average cost These methods produce different results because their flow of costs are based upon different assumptions. The FIFO method bases its cost flow on the chronological order purchases are made, while the LIFO method bases it cost flow in a reverse chronological order. The average cost method produces a cost flow based on a weighted average of

Depreciation
In accountancy, depreciation refers to two aspects of the same concept: 1. the decrease in value of assets (fair value depreciation), and 2. the allocation of the cost of assets to periods in which the assets are used (depreciation with the matching principle). The former affects the balance sheet of a business or entity, and the latter affects the net income that they report. Generally the cost is allocated, as depreciation expense, among the periods in which the asset is expected to be used. This expense is recognized by businesses for financial reporting and tax purposes. Methods of computing depreciation, and the periods over which assets are depreciated, may vary between asset types within the same business and may vary for tax purposes. These may be specified by law or accounting standards, which may vary by country. There are several standard methods of computing depreciation expense, including fixed percentage, straight line, and declining balance methods. Depreciation expense generally begins when the asset is placed in service. For example, a depreciation expense of 100 per year for 5 years may be recognized for an asset costing 500.

Accounting concept
In determining the profits (net income) from an activity, the receipts from the activity must be reduced by appropriate costs. One such cost is the cost of assets used but not immediately consumed in the activity.[1] Such cost so allocated in a given period is equal to the reduction in the value placed on the asset, which is initially equal to the amount paid for the asset and subsequently may or may not be related to the amount expected to be received upon its disposal. Depreciation is any method of allocating such net cost to those periods in which the organisation is expected to benefit from use of the asset. The asset is referred to as a depreciable asset. Depreciation is technically a method of allocation, not valuation,[2] even though it determines the value placed on the asset in the balance sheet. Any business or income producing activity[3] using tangible assets may incur costs related to those assets. If an asset is expected to produce a benefit in future periods, some of these costs must be deferred rather than treated as a current expense. The business then records depreciation expense in its financial reporting as the current period's allocation of such costs. This is usually done in a rational and systematic manner. Generally this involves four criteria:

cost of the asset, expected salvage value, also known as residual value of the asset, estimated useful life of the asset, and a method of apportioning the cost over such life.[4]

Construction Contract
A construction contract is an agreement between contractor and client that spells out the rights and obligations of both parties in relation to work that will be performed by the contractor. While all services providers should have a contract for clients to sign before they perform any work, it is especially important for construction contractors, as most states require a written contract when providing construction or home improvement services. To write a construction contract, just follow the steps below. Check your state law for required inclusions. Many states require certain notices and disclosures be provided to consumers, some in the contract itself. Check your states code for any clauses you need to include your construction contract. You can locate your states code using the Internal Revenue Services (IRS) State Government Websites page. Required clauses in construction contracts may include:

Warranties. Many states require construction contracts to contain various warranties regarding the labor and/or materials to be used. Minnesota law, for example, currently requires a specific warranty be included in every construction contract. Resolution of disputes. Contracts for construction in some states must contain a clause spelling out the available methods of dispute resolution, should the parties to the contract disagree on some matter. Maine, for example, requires a very specific dispute resolution clause that states three methods of dispute resolution which are available under Maine law [2]. Notice of right to cancel. Twenty-seven (27) states require construction contracts to notify homeowners of their right to cancel the contract within a certain period of time, usually three (3) days. This notice may be included in the contract or provided to the consumer along with it.

Determine what, if any, standard clauses you may need. Standard clauses one might wish to include in a construction contract include:

Choice of law. A choice of law clause sets forth the state laws that will be used, should a contract dispute arise. When I contract is entered into by parties living in the same state, the work is to performed in that state, and the parties are physically present in that state when signing the contract, a choice of law clause is not necessary. Successors and assigns. A successors and assigns clause allows one or both parties to assign the contract to another, for example, a company turning over the work to another company and/or makes the contracts binding upon one or both parties successors, or heirs. Severability. A severability clause states that should one clause of the contract be found unenforceable by a Court, all other clauses shall remain in effect and enforceable as is, or be changed as little as possible.

Revenue recognition
The revenue recognition principle is a cornerstone of accrual accounting together with matching principle. They both determine the accounting period, in which revenues and expenses are recognized. According to the principle, revenues are recognized when they are realised or realisable, and are earned (usually when goods are transferred or services rendered), no matter when cash is received. In cash accounting in contrast revenues are recognized when cash is received no matter when goods or services are sold. Cash can be received in an earlier or later period than obligations are met (when goods or services are delivered) and related revenues are recognized that results in the following two types of accounts:

Accrued revenue: Revenue is recognized before cash is received. Deferred revenue: Revenue is recognized after cash is received.

General rule Received advances are not recognized as revenues, but as liabilities (deferred income), until the conditions (1.) and (2.) are met. 1. Revenues are realized when cash or claims to cash (receivable) are received in exchange for goods or services. Revenues are realizable when assets received in such exchange are readily convertible to cash or claim to cash. 2. Revenues are earned when such goods/services are transferred/rendered. Both such payment assurance and final delivery completion (with a

provision for returns, warranty claims, etc.), are required for revenue recognition. Recognition of revenue from four types of transactions: 1. Revenues from selling inventory are recognized at the date of sale often interpreted as the date of delivery. 2. Revenues from rendering services are recognized when services are completed and billed. 3. Revenue from permission to use company's assets (e.g. interests for using money, rent for using fixed assets, and royalties for using intangible assets) is recognized as time passes or as assets are used. 4. Revenue from selling an asset other than inventory is recognized at the point of sale, when it takes place. In practice, this means that revenue is recognized when an invoice has been sent.

Account for Fixed Assets

Fixed asset is a property of a business that is used for production of goods and services. It is classified as intangible, tangible, and investment. Intangible fixed assets are non-physical properties such as a patent, copyright, and goodwill. Tangible assets include plant, equipment, land and building. Accounting for fixed assets involves costs, useful life, residual value, depreciation and amortization.

duty. or architect's fees Find out the useful life of fixed asset. Fixed asset has a physical life and an economic life.

Physical life is determined by how long the asset will last. After time, a fixed asset will deteriorate or wear out. However, maintenance can extend its physical life. Economic life refers to the period in which the asset is expected to be used that may include maintenance or repairs. It is usually less than the physical life. It is sometimes called useful life, average life, or effective life.

Estimate the residual value of fixed asset.

Residual value is the worth or recoverable value of fixed asset at the end of its useful life. When estimated value is not of a significant amount, its value is assumed to be 0.

Allocate the costs of fixed assets over the estimated useful life by using depreciation or amortization methods.

Depreciation is the loss or decrease in value of tangible assets while amortization measures the decline in value of intangible assets over a period. The most common method used for depreciation is the straight-line method. It is calculated by subtracting the estimated residual value from the purchase price of fixed asset and dividing it by its useful life. Amortization is measured by dividing the cost of fixed asset by its useful life

Accounting for Investments

As per the modifications made to the comprehensive guidelines on derivatives issued by the Reserve Bank of India in early August 2011, banks cannot sell derivatives to corporates without getting approval from the board of directors of such corporates. It is significant to note that banks would be allow to deal with derivatives with any corporate only if the company has a risk management policy approved by its Board in place among several other conditions. As per the modifications the Banks are required to obtain Board resolution from the corporate that states the following: 1. The corporate has in place a Risk Management Policy approved by its Board which contains the following:

Guidelines on risk identification, measurement and control Guidelines and procedures to be followed with respect to revaluation and monitoring of positions Names and designation of officials authorized to undertake transactions and limits assigned to them A requirement that the assignment of limits to an official would be specific and in case the limits assigned are not quantified, then the bank should offer derivative products to that client only after getting appropriate documents certifying assignment of specific limits Accounting policy and disclosure norms to be followed in respect of derivative transactions A requirement to disclose the MTM valuations appropriately A requirement to ensure separation of duties between front, middle and back office Mechanism regarding reporting of data to the Board including financial position of transaction etc

2. The corporate has laid down clear guidelines for conducting the transactions and institutionalised the arrangements for a periodical review of operations and annual audit of transactions to verify compliance with the regulations. 3. Market-makers should not undertake derivative transaction with users till they provide a Board or equivalent forum resolution stating that they have in place a Board approved Risk Management Policy which contains the details as mentioned above

Borrowing Costs
Understanding Borrowing Costs Borrowing cost can be defined as interest and other costs incurred by an enterprise in relation to the borrowing of funds. Explaining in a more technical way, borrowing costs refer to the expense of taking out loan expenses like interest payments incurred from a loan or any other kind of borrowing. Interest also counts amortization of premium/discount on debt. Other costs include amortization of debt issue costs and some foreign exchange differences which are treated as an adjustment of internal cost. Besides, borrowing costs do not include imputed or actual cost of equity capital, counting any preferred capital which is not cataloged as a liability pursuant to. Borrowing costs are, generally, attributable to the acquisition, production or construction of a qualifying asset should be capitalized as a part of the assets cost. Accounting treatment for borrowing costs The standard accounting treatment for borrowing costs is that each borrowing cost should be expensed in the specific period in which they were incurred. The allowable alternative treatment is that the borrowing costs related to the acquisition, production, and construction of a qualifying asset should be treated as part of the relevant assets cost. In cases where the allowed alternative is adopted, it should be applied consistently to all borrowing cost, as an accounting treatment, incurred for the acquisition, production, or construction of qualifying asset. In cases where funds are borrowed specifically, eligible costs for capitalization are actual costs incurred minus any income earned on the temporary investment of such borrowings. In case of funds being a part of the general pool, the eligible amount is calculated by applying a capitalization rate to the expenses on that asset. The capitalization rate is the weighted average of the borrowing cost which is applicable to the general pool. As per IAS, capitalization should be suspended during periods which involve interruption in active development. Also, capitalization should close down when all the substantial activities, essential for preparing the asset for its intended use or

sale, have been accomplished. If only small modifications are pending, this signifies that substantially all activities have been accomplished.

Segment Reporting
You use segment reporting to portray the items in the financial statements by segment. The detailed results are then presented by segment. Annual financial statements supplemented by the segment information from segment reporting provide deeper insights into the financial position, asset position, and profit situation of a company. Integration On the basis of the documents in new General Ledger Accounting, the system determines the segments that are relevant for the individual balance sheet items. The documents only contain segment information when document splitting is activated with the Segment characteristic.

Lease
A lease is an agreement between a lessor and a lessee by which the lessor will rent an asset to the lessee for a specified period of time, with regular payments due to the lessor for use of the asset. Leases are common in the business environment for large pieces of equipment and buildings. There are 2 types of leases: operating leases and capital leases. The accounting treatments employed depend on the type of lease at hand, and knowing how to account for a lease depends on being able to determine which type of lease you are working with. Familiarize yourself with the differences between capital leases and operating leases Most of the risks and rewards associated with ownership of the leased asset remain with the lessor, and the lessee does not have any way to purchase the asset. An operating lease represents an expense to the lessee and revenue to the lessor. capital lease represents a material transfer of ownership. This means that the lessee has essentially purchased the asset from the lessor, and the rent payments are more accurately classified as a financing plan. A lease must be accounted for as a capital lease if any 1 of the following 4 conditions are true: the lessee will gain

title of the asset at the end of the lease; the lessee will be able to purchase the asset for a price below market value at the end of the lease; the term (length of time) of the lease accounts for 75 percent or more of the useful life of the asset; and the net present value of all the rent payments equals 90 percent of more of the asset's market value. Record the journal entries for the operating lease. Operating leases are simple: the lessor records a revenue, while the lessee records an expense. Consider a lease agreement by which ABC Corporation leases a dozen large printers to XYZ Company for 5 years in exchange for yearly rent payments of 1000.

ABC Corporation (the lessor) will record an identical journal entry each year. They will debit Cash for 1000 and credit Rent Revenue for $1000. If the payment is made at the beginning of each year, they must instead debit Cash for $1000 while crediting Unearned Rent for 1000. At the year's end, the Unearned Rent account balance will be moved to Rent Revenue. XYZ Company (the lessee) will record the same journal entry each year. They will debit Rent Expense for 1000 and credit Cash for $1000. If they make payments at the beginning of the year, they will instead debit Prepaid Rent (an asset) for 1000, while crediting Cash for 1000. Prepaid Rent's balance is moved to Rent Expense at the year's end.