Accounting Standard

Anandi Sarkar Pyne

ACCOUNTING STANDARD-16

BORROWING COSTS
 DEFINITIONS

Borrowing costs Qualifying asset is

are interest and an asset that
other costs necessarily takes a
incurred by an substantial period
enterprise in of time to get
connection with ready for its
the borrowing of intended use or
funds sale
 BORROWING COSTS

Interest and commitment charges on bank & other short term

borrowings

Amortization of discounts or premiums relating to borrowings

Amortization of ancillary costs incurred in connection with the

arrangement of borrowings

Finance charges of assets acquired under finance leases or under

other similar arrangements

Exchange differences arising from foreign currency borrowings to the

extent that they are regarded as an adjustment to interest costs
 QUALIFYING ASSETS
Manufacturing plants

Power generation facilities

Inventories that require a substantial period of time to

bring them to a saleable condition

Investment properties
 NON QUALIFYING ASSETS

Other Investments

Inventories that are routinely manufactured or otherwise

produced in large quantities on repetitive basis over a
short period of time

Assets that are ready for their intended use or sale when
acquired
 RECOGNITION
Capitalize borrowing costs that are directly attributable to
the acquisition, construction or production of a qualifying
asset

Other borrowing costs to be expensed off

Capitalize if it is probable that they will result in future

economic benefits to the enterprise and costs can be
measured reliably
 CAPITALISATION- SPECIFIC
BORROWINGS

Borrowing costs that Actual borrowing costs

would have been avoided incurred less any income
if the expenditure on the on temporary investment
qualifying asset had not of those borrowings to
been made be capitalized
 CAPITALISATION- GENERAL
BORROWINGS
Capitalisation rate should
Determine borrowing be the weighted average
costs by applying a of the borrowing costs
capitalisation rate that are outstanding
during the period

Borrowing costs
capitalised not to exceed
amount of borrowing
costs incurred
 COMMENCEMENT OF
CAPITALISATION
Expenditure for the acquisition, construction or production of a
qualifying asset is being incurred

Borrowing costs are being incurred

Activities that are necessary to prepare the asset for its intended use
or sale are in progress
 CRITICAL ISSUES
• that has resulted in payment of cash
• transfer of other assets
Expenditure on a
qualifying asset includes
• assumption of interest bearing liabilities
only such expenditure:

• Average carrying amount of the asset during a

period including borrowing costs previously
capitalised is normally a reasonable
Expenditure to be approximation of the expenditure to which
reduced by progress
payments and grants capitalisation rate is applied in that period
 SUSPENSION /CESSATION OF
CAPITALISATION
Suspend during extended periods in which active development is
interrupted

Capitalisation should cease when substantially all activities

necessary to prepare the qualifying asset for its intended use or
sale are complete

In case of construction of a qualifying asset in parts and a

completed part is capable of being used while construction
continues for the other parts, capitalization of borrowing costs in
relation to a part should cease when substantially all the
activities necessary to prepare that part for its intended use or
sale are complete
 DISCLOSURE

The accounting policy adopted for borrowing costs

The amount of borrowing costs capitalised during the

period
ACCOUNTING STANDARD 4
CONTINGENCIES AND EVENTS
OCCURING AFTER BALANCE SHEET DATE
 Applicability of Accounting Standard
• AS-4 DEALS WITH –
– CONTINGENCIES
– EVENTS OCCURING AFTER BALANCE SHEET DATE
• AS-4 DOES NOT APPLY IN FOLLOWING CASES –
– Liabilities of life assurance and general life insurance
enterprises
– Obligations under retirement benefit plans
– Commitments arising from long-term lease contracts
 CONTINGENCIES

A condition or situation, the ultimate outcome of which,

gain or loss, will be known or determined only on the
occurrence, or non-occurrence, of one or more uncertain
future events.

• Result is not known on the date balance sheet

• Estimation of outcome of contingency is determined
by management.
• The fact that an estimate involved-does not make it a
contingency. (E.g. Depreciation not a contingency)
 ACCOUNTING TREATMENT OF
CONTINGENT LOSSES
• IF CONTINGENT LOSS LIKELY, PROVIDE
FOR THE LOSS IN FINANCIAL STATEMENTS.
• ILLUSTRATION
– A company has filed a legal suit against the debtor
from whom Rs.15 lakhs is recoverable as on
31/3/18. The chances of recovery of legal suit are
not good as per legal opinion.
– As per AS-4 company should make a provision for
doubtful debts.
• Third party counter claim to be
adjusted
• IN CASE OF INSUFFICIENT EVIDENCE
FOR ESTIMATION OF CONTINGENT
LOSS, MAKE DISCLOSURE.
• IF CONTINGENT LOSS IS REMOTE,
IGNORE IT.
• Discounting of Bills of Exchange
 EVENTS OCCURING AFTER BALANCE
SHEET DATE
• Events which occur between the balance
sheet date and the date of approval of
financial statements by competent authority.
• Two types of EVENTS:-
– Those which provide further evidence of
conditions that existed at the balance sheet date.
– Those which are indicative of conditions that
arose subsequent to the balance sheet date.
 Accounting Treatment
• Adjustments are required if we get additional
information which can materially affect the amounts
relating to conditions existing at balance sheet date.
(Insolvency confirmation after the balance sheet date)
• NO adjustment is required if the event does not relate
to the conditions existing at the balance sheet date.
(Decline in value of investments)
• Events which do not effect the figures of financial
statements but can significantly influence decision
making must be disclosed in report of approving
authority. (Information on new projects etc.)
 Accounting Treatment
• Certain events taking place after the balance
sheet date are reflected in financial statements
because of statutory requirements. (Proposed
dividend)
• Events that may indicate that the enterprise
ceases to be a going concern requires a proper
disclosure. ( Due to fire)
 DISCLOSURE
• Disclosure is required only in respect of those
events which materially affect the financial
position.
• Disclosure of events in the report of approving
authority should comprise of the following
information:-
– Nature of the event
– An estimate of their financial effects or a
statement that such estimates can not be made.
ACCOUNTING STANDARD 5
NET PROFIT OR LOSS FOR THE PERIOD,
PRIOR PERIOD ITEMS & CHANGES IN
ACCOUNTING POLICIES
SOME REQUISITE DEFINITIONS
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 and are not expected to recur
frequently or regularly.

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. It is generally infrequent in nature and can be
distinguished from changes in accounting estimates.
• Changes in Accounting Estimates:-
• An estimate may have to be revised if changes occur in
the circumstances based on which the estimate was
made, or as a result of new information, more
experience or subsequent developments.
• The effect of change in an accounting estimate should
be included in the determination of profit and loss in:-
– 1. The period of the change, if the change effects the period
only;
– 2. the period of the change and the future periods, if the
change affects the both.
• Accounting policies are the specific accounting
principles and the methods of applying those principles
in the preparation and presentation of financial
statements. Only if it is required by statute or for
compliance with an accounting policy.
Circumstances give rise to Special
Disclosure
The write-down of Inventories to net realizable value as well as the reversal
of such write-downs.

A restructuring of the activities of an enterprise and the reversal of any

provisions for the cost of restructuring.

Disposals of items of fixed assets.

Disposals of long-term investments.

Legislative changes having retrospective Application.

Litigation Settlements

Other Reversals of provisions.

 DISCLOSURE REQUIREMENTS

Ordinary items: When items

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