A Note on Financial Reporting Standard (14 Questions & Answers) 1.

What is the distinction between Standard setting bodies and regulatory authorities? There is a distinction between the standard setting bodies and regulatory authorities. Standard Setting bodies such as International Accounting Standards Board (ISAB), USA, Financial Accounting Standards Board (FASB), USA, Institute of chartered Accountants of India (ICAI) are typically professional bodies governed by the principle of self regulation. Whereas, Securities Board of India (SEBI), India and Companies Act/Income Tax act (India) are government authorities and have legal authority to enforce financial reporting requirements. 2. What is IFRS? IFRS is International Financial Reporting Standards and it is attempt to have one global standard for financial reporting. At the center of financial IFRS framework is (a) fair representation of financial position; (b)

financial performance and; (c) cash flows of a company. 3. What are the qualitative characteristics of Financial Statements under IFRS framework? (a) Understandability (information should be readily understandable; (b) Relevance (Information should be timely rather than dated (c) Reliability (Reliable information is free from bias and materiality). Materiality means that omission & misstatement of information. 4. What elements provide information on financial position and Financial performance? Financial position is measured by relative composition of Assets, Liabilities and Equity in the balance sheet. The financial performance is measured by Revenue, Expenses and Capital account adjustments such as depreciation. 5. What are the underlying assumptions under IFRS framework? Accrual basis of accounting and going concern are the two key underlying assumptions of IFRS.

6. What is GAAP? GAAP is Generally Accepted Accounting Practice and it is a standard prescribed primarily in USA. GAAP is the standards and prescriptions prescribed by various bodies but primarily issued by American Institute of Certified Public Accountants (AICPA). There are hierarchy in GAAP. The top level hierarchy is standards issued by Financial Accounting Standards board (FASB). Prescriptions from other bodies come into play only when there is no relevant explicit prescription by FASB. 7. What are main difference between GAAP and IFRS? The principle difference between GAP and IFRS lies in that GAAP provides separate objectives for business and non-business entities where as IFRS makes no such distinction. 3What are disclosures and where they are presented in the annual report? Under both GAAP and IFRS, companies can choose alternative accounting policies such as that in depreciation accounting and inventory accounting. These policies have to be disclosed either as footnotes to the financial statements

or discuss their accounting policies in Managerial discussion & analysis (MD&A) 8. What are the Accounting Standards (AS) in India? Some of the important accounting standards in India are AS#1 (Deals with discloser requirements); As#2 (deals with valuation of inventories); AS#3 (Cash Flow statement); AS#5 (Net profit or loss for current period and previous period & significant changes in accounting polices thereof); AS#9 (Revenue Recognition); AS#17 (Segment Reporting); AS#22 (taxes on income). 9. What is AS#1? AS#1 deals with disclosure polices of the company. It facilitates better understanding of financial statements as well as meaningful comparison between financial statements of different enterprises. Accounting policies are specific accounting principles and their application in preparation of financial statements. These policies pertain to the following: Treatment of Goodwill

Valuation of Inventories Valuation of Investments Valuation of Fixed Assets Methods of Depreciation Treatment of retirement benefits Treatment of Contingent Liabilities PRIMARY CONSIDERATION of the accounting policy is to provide the financial statements that represent a true and fair view of the state of affairs of the enterprise. The SECONDARY CONSIDERATIONs are Prudence, Substance & Materiality. The fundamental assumptions in accounting are (a) going concern; (b) Consistency and; (c) accrual. These are not explicitly stated in the annual report but are assumed. The disclosure follows: requirements are as

All significant accounting policies adopted should be disclosed. The disclosure should form part of the financial statements.

Any change in the accounting policies which has a material effect in the current period should be disclosed along with amount of effect. If the fundamental accounting assumptions are not followed, the fact should be disclosed. 10. What is AS#2? Scope: Specifies the principals for valuing the inventory & Disclosure of the specific policies adopted by the management for the valuation of inventory. This statement should be applied in accounting for inventories other than: a. Work in progress arising under construction contracts, including directly related service contracts. b.Work in progress arising in the ordinary course of business of service providers. c. Shares, debentures and other financial instruments held as stock-in-trade; And. d.Producers inventories of livestock, agricultural and forest products, and mineral oils, ores and gases to that extent

that they are measured at net realisable value in accordance with well established practices in those industries. Definition of Inventories: they are assets, held for sale in the ordinary course of business in the process of production for such sale and in the form of materials or supplies to be consumed in the production process or in the rendering of services. Definition of Net Realizable Value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated cost necessary to make the sale. Inventories are written down to net realizable value on an item-by-item basis except where it is appropriate to group similar or related items;An assessment of net realizable value is made as at each balance sheet date.The valuation takes into consideration cost and selling price fluctuations directly relating to events occurring after the balance sheet date to the extent that such events confirm the conditions existing at the balance sheet date.

Prescription on valuation: Inventories should be valued at the lower of Cost and Net Realizable Value. The Practice of writing down inventories below cost to Net Realizable Value is consistent with the view that assets should not be carried in excess of amounts expected to be realized from their sale or use. The cost of inventories should comprise: (a) Cost of purchase ( including Duties and taxes (other than those subsequently recoverable by the enterprise from the taxing authorities like MODVAT); Freight inwards and other expenditure directly attributable to the acquisition; (b) Cost of conversion: (Labor Costs directly related to the production of finished goods; Fixed and variable production overheads that are incurred in converting materials into finished goods and; Other costs: included only to the extent they are incurred in bringing the inventories to their present location and condition. The cost should exclude (a) Abnormal wastages of materials, labour or other production costs; (b0 Storage costs, unless they are necessary in the production process; (c) Administrative

overheads which do not contribute to bringing the inventories to their present location and condition and; (d) Selling and distribution overheads. Methods of Valuation of Inventory: FIFO, LIFO, Weighted average. Disclosure Requirements: Accounting policies adopted in measuring inventories, Cost formula used, Total carrying amount of inventories, methods of Classification of the inventory into raw materials and components, work in progress, finished goods, stores and spares, and loose tools.

11. What is AS#5? AS#5 deals with NET PROFIT OR LOSS FOR THE PERIOD, PRIOR PERIOD ITEMS AND CHANGES IN ACCOUNTING POLICIES. Some relevant definitions under AS#5 are: Ordinary activities are any activities and other incidental activities which are undertaken by an enterprise as part of its business.

Extraordinary items are income or expenses that arise from non recurring events and transactions. Prior period items are income or expenses, which arise, in the current period as a result of errors or omissions in the preparation of the financial statements of one or more prior periods. Accounting policies are the specific accounting principles and the methods of applying those principles in the preparation and presentation of financial statements. Disclosure follows: requirements under AS#5 are as

Extraordinary items: The nature and the amount of each extraordinary item should be separately disclosed in the statement of profit and loss in a manner that its impact on current profit or loss can be perceived. Ordinary items: When items of income and expense from ordinary activities are of such size, nature or incidence that their disclosure is relevant to explain the

performance of the enterprise for the period, the nature and amount of such items should be disclosed separately. Prior period items: The nature and amount of prior period items should be separately disclosed in the profit and loss statement in such a way that their impact on the current profit or loss can be perceived. Accounting estimates: The nature and amount of a change in an accounting estimate which has a material effect in the current period or which is expected to have a material effect in subsequent periods, should be disclosed. If the effect cannot be quantified, this fact should be disclosed. Accounting policies: The effect of any change in an accounting policy, if material, should be disclosed in the financial statements of the period quantifying the impact. Where the effect cannot be quantified, wholly or in part, the fact should be disclosed. 12. What is AS#9?  AS#9 deals with recognizing revenue arising in the course of the ordinary activities of the

enterprise. It includes sale of goods, rendering of services and use by others of enterprise resources yielding interest, royalties and dividends. This statement does not deal with the Revenue arising from construction contracts; Revenue arising from hire-purchase, lease agreements, Revenue arising from government grants and other similar subsidies and the Revenue of insurance companies arising from insurance contracts.  Revenue Recognition under of sale of goods should be based on the following CONDITIONS: a. The property in goods in transferred for a price. b.All significant risks and rewards have been transferred and no effective control is retained. c. No significant uncertainty exists regarding the amount of consideration. d.It is reasonable to expect ultimate collection of consideration.

 REVENUE RECOGNITION under RENDERING service should be based on the following conditions: a. Service is recognised either on completed service or proportionate completion method. b.No, 1significant uncertainty exists regarding amount of consideration. c. It is reasonable to expect ultimate collection of consideration d.Completed service method recognises revenue only when service complete or substantially complete. In such cases there are more than one act involved and revenue is recognised on' execution of all those acts. e. Proportionate completed method recognises revenue proportionate with the degree of completion of services. In such cases there are more than one act involved and revenue is recognised on execution of certain acts.  REVENUE RECOGNITION IN USE OF ENTERPRISE RESOURCESBY OTHERS under the following conditions:

a. Interest: Revenue is recognized on the time basis determined by the amount outstanding and the rate applicable. Revenue is recognized in b.Royalty: accordance with the terms of the relevant agreement. c. Dividends: Revenue is recognized only when a right to receive payment is established.  DISCLOSURE REQUIREMENTS under AS#9 When recognition of revenue is postponed due to the effect of uncertainties, an enterprise should disclose the circumstances in which revenue recognition has been postponed. 13. What is AS#17? AS#17 deals with reporting financial information about different types of products and services an enterprise produces, and the different geographical areas in which it operates. Segment reporting benefits users in terms of (a) Better understanding of the performance of the enterprise; (b) Assess the risks and returns of the enterprise and; (c)

Make more informed judgments about the enterprise as a whole.  Definitions under AS#17 BUSINESS SEGMENT is a Distinguishable component of an enterprise engaged in providing an individual product or service subject to risks and returns different from other business segments. GEOGRAPHICAL SEGMENT is a Distinguishable component of an enterprise Engaged in providing products or services within a particular economic environment that is subject to risks and returns that are different from those of components operating in other economic environments Identification of Segment for Reporting: A segment should be identified for reporting if Its revenue from sales to external customers is 10 per cent more of the total revenue, or Its segment result, whether profit or loss, is 10 per cent or more of the combined result of all

segments in profit or loss, or Its segment assets are 10 per cent or more of the total assets of all segments. The location of production or service facilities and other assets of an enterprise or the location of its customers. If total revenue attributable to all reportable segment is less than 75% of the total enterprises revenue, additional segments should be identified as reportable segments, even if they do not meet the 10% thresholds, until at least 75% of total enterprises revenue is included in reportable segments. If a segment is identified as a reportable segment in the current period, preceding period segment data is presented for comparative purpose, even if that segment did not satisfy the 10% threshold in the preceding period. A segment identified as a reportable segment in the immediately preceding period should continue to be a reportable segment for the current period even if it does not meet the 10% threshold. A segment should be reported as Business Segment If RISKS AND RETURNS associated with products and services are affected by

Differences in the business segment. A segment is reported as Geographic segment if Operation are different countries or geographical locations. Companies can go for matrix presentation If the risk & return of an enterprise are equally effected by differences in the products and services it produces and by differences in the geographical areas in which it operates, then the enterprise should use BUSINESS SEGMENTS as its PRIMARY SEGMENT reporting format and GEOGRAPHICAL SEGMENTS as its SECONDARY REPORTING format & full segment disclosures is given on each basis  DISCLOSURE REQUIREMENTS under AS#17 a. Segment revenue from sales to external customers b.Segment revenue from transactions with other segments c. Segment result d.Total carrying amount of segment assets; e. Total amount of segment liabilities;

f. Additions to tangible and intangible fixed assets; g.Depreciation and amortization for the period h.Significant other non-cash expenses 14. What is AS#22? AS#22 deals with taxes on income. It deals with ACCOUNTING INCOME (LOSS) which is Net profit or loss for a period as per profit and loss statement and TAXABLE INCOME (TAX LOSS) which is Income (loss) for a period determined in accordance with the tax laws. Accounting income and taxable income for a period are seldom the same. Differences between the two are on account of permanent Differences & Timing Differences Permanent differences are those which arise in one period and do not reverse subsequently. For e.g., an income exempt from tax or an expense that is not allowable as a deduction for tax purposes. Timing differences are those which arise in one period and are capable of reversal in one or more subsequent periods.

For e.g., Depreciation, Sales Tax, Bonus etc., U/s 43B CURRENT TAX is the amount that is expected to be paid to the taxation authorities. DEFERRED TAX ASSETS AND LIABILITIES are the tax amounts at the tax rates and tax laws that have been enacted at the balance sheet date. Excess tax paid as on balance sheet date will be deferred tax assets and taxes paid in short as on balance sheet are deferred tax liabilities.

 DISCLOSURE REQUIREMENTS under AS#22 a. Disclose major components of deferred tax assets and liabilities. b.Deferred tax assets and liabilities should be distinguished from assets and liabilities representing current tax for the period c. Disclose nature of evidence supporting recognition of deferred tax assets in the event of there being unabsorbed depreciation or carried forward losses.

d.On first implementation of the standard, the net deferred tax balance accumulated prior to adoption of the standard should be adjusted against revenue reserves. HUL Annual Report - Instruction for study: 1.You may be asked to give the reported amount of a particular asset or liability, revenue, expenses, gains or losses. You have to thoroughly read the Annual report and familiarise yourself as to where the information is available. For instance the amount of revenue & expense, deferred tax assets, deferred liability, Accounts payable, accounts receivable, cost of goods sold etc 2.You have to familiarise yourself with where you will find significant accounting policies. You may be asked to explain a given accounting policy. 3.You have to familiarise with the accounting standards and should be able to relate a given accounting policy with the accounting standard 4.You have to familiarize with segments wise information reported in the annual report. You may be asked to relate segment wise

information with corresponding accounting standard. 5.You have to familiarize with disclosures? In addition you have to understand why they important? 6.You have to familiarise with interest in Joint ventures as reported in the annual report. 7.You have to familiarise with Operating activities, investment activities and financing activities reported in page 117? You should be in a position to Define each type of activity 8.Familiarise with related party disclosure & its significance in reporting 9.You have to familiarise with the kinds of disclosures are presented in Management Discussion and Analysis (MD&A) section of the annual report