Amended Accounting Standards
Accounting Standard – 2
Valuation of Inventories
Objective:
The objective of this standard
is to formulate the method of computation of cost of inventories/stock, to
determine the value of closing stock/ inventory at which, the inventory is to
be shown in balance sheet till its’ sale and recognition as revenue.
Accounting Standard-2 is not
applicable in following cases:
Work-in-progress arising under construction contract including directly related
to service contract (AS-7 Construction contracts).
Work-in-progress arising in ordinary course of business for service providers
(Incomplete consultancy services, Incomplete merchant bank activities, Medical
services in progress)
Financial Instrument held as stock-in-trade (Shares, Debentures, Bonds etc.)
Producer's inventories like
livestock, agricultural and forest products, mineral oils, ores and gases. Such
inventories are valued at net realisable value.
Inventories include:
Held for sale in the ordinary course of business (finished goods)
In the process of production of such sale (raw material and work-in-progress)
In the form of materials or supplies to be consumed in production process or in
the rendering of services (stores, spares, raw material, consumables).
Inventories do not include
machinery.
Spare parts and servicing
equipments —
Inventories consists of—
goods purchased and held for resale
Inventories also consists finished goods produced, or work in progress being produced,
by the enterprise and include materials, maintenance supplies, consumables and
loose tools held for use in the production process.
Inventories
do not include spare parts, servicing equipment and standby equipment which
meet the definition of property, plant and equipment as per AS-10, Property,
Plant and Equipment (PPE).
Machinery spares, not
specific to a particular item of fixed asset and which can be used generally
for various items of fixed assets, should be treated as inventories for the
purpose of AS-2. Such machinery spares should be charged to the statement of
profit and loss as and when issued for consumption in the ordinary course of
operations.
Inventories should be
valued at lower of cost and net realisable value.
Steps for valuation of
Inventories:
1.
Determination of cost of inventories;
2.
Determination of net realisable value;
3. Comparison between the cost
and net realisable value. The comparison should be made item by item or by
group of items.
Cost of inventory consists the following —
1.
Cost of purchase
2.
Cost of conversion
3. Other costs incurred in
bringing the inventories to their present location and condition
1. Cost of purchase includes
—
Purchase price, Duties and
Taxes, Freight inward, other expenditures directly attributable to the
acquisition.
Less:
Duties and taxes recoverable
by enterprises from taxing authorities, Trade discount, Rebate,
Duty drawback, Other similar items.
2. Cost of conversion —
It consists of the cost
directly related to the units + Systematic Allocation of fixed and variable
production overheads that are incurred in converting material into finished
goods.
Fixed Production overhead means Indirect cost of production that remains
relatively constant regardless of volume of production. Allocation of
fixed production overhead is done on normal capacity.
Variable Production overhead
means indirect cost of production
that varies directly or nearly directly with the volume of production.
Allocation of variable production overhead is done on actual production.
In aces of Joint-products, when the cost of conversion of each product is not
identifiable separately, total cost of conversion is allocated between the
products on the rational and consistent basis.
If by-products, scrap
or waste materials are not of material value, they are measured at net
realisable value, then the net realisable value is deducted from cost of
conversion. Net cost of conversion is distributed among the main products.
3. Other costs: Cost incurred in bringing the inventories
to their present location and condition.
Items to be excluded from
the cost of Inventories:
Abnormal amounts of wasted materials, labour, other production costs;
Storage cost;
Administrative overhead;
Selling
and distribution cost;
Interest and borrowing cost.
However, if AS-16 allows such cost to be included it, can form part of the
cost.
Cost formula
Specific identification
method means directly linking the
cost to the specific item of inventories.
If in any case, specific
identification method is not applicable the cost of inventories is valued by
the following methods:
ü FIFO (First In First Out)
ü Weighted
Average cost.
When it is not practical to
calculate the cost, the following methods may be followed to ascertain cost:
♦ Standard
Cost
♦
Retail Method
Net Realisable Value —
Net realisable value means the
estimated selling price in ordinary course of business, less estimated
cost of completion and estimated cost necessary to make the sale. It is
estimated on the basis of most reliable evidence at the time of valuation. The
estimation of net realisable value also considers the purpose for which the
inventory is held. The estimation is made as at each balance sheet date.
Estimation of net realisable
value —
♦
If finished product in which raw material
and supplies used is sold at cost or above cost, then the estimated realisable
value of raw material and supplies is considered more than its cost. Therefore
inventories of raw material will be valued at cost.
♦
If finished product in which raw material
and supplies used is sold below cost. Then the estimated realisable value of
raw material or supplies is equal to replacement price of raw material or
supplies and this raw material will be valued at replacement price.
Disclosure in the financial
statement
Accounting policy adopted in measuring inventories.
Cost formula used.
Classifications
of inventories are:
(i) Raw materials and components
(ii) Work-in-progress
(iii) Finished goods
(iv) Stock-in-trade (in respect of goods acquired for
trading)
(v) Stores and spares
(vi) Loose tools
(vii)
Others (specify nature)
Accounting Standard – 4
Contingencies and events
occurring after the Balance Sheet date
This Standard deals with the
treatment in financial statements of (a) contingencies, and (b) events
occurring after the balance sheet date.
The following subjects, which
may result in contingencies, are excluded from the scope of this standard in
view of special considerations applicable to them:
a.
liabilities of life assurance and general insurance enterprises arising from
policies issued;
b.
obligations under retirement benefit plans; and
c. commitments arising from
long-term lease contracts.
The following terms are used
in this Standard:
Contingency is 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.
Contingencies are of two types:
Contingencies relating to existing condition or situation at the balance sheet
date, the expected outcomes are two:
ü Contingent loss, it may be —
-
Probable Loss
-
Reasonably possible
-
Remote
ü Contingent
gain, it is covered by AS - 29
No accounting treatment is
required, neither by way of provision nor by giving accounting notes.
Note:
Probable - future event or events are likely to occur.
Reasonably possible - chance of the future event or events occurring is more
than remote but less than likely.
Remote - chance of the future
event or events occurring is slight.
Estimates are required for
determining the amounts to be stated in the financial statements for many
on-going and recurring activities of an enterprise. One must, however,
distinguish between an event which is certain and one which is uncertain.
The estimates of the outcome
and of the financial effect of contingencies are determined by the judgement of
the management of the enterprise. This judgement is based on consideration of
information available up to the date on which the financial statements are
approved and will include a review of events occurring after the balance sheet
date, supplemented by experience of similar transactions and, in some cases,
reports from independent experts.
Provision for loss is estimated
on the basis of information available up to the date of approval of accounts by
competent authority. But the contingency must exist on the date of balance
sheet. If contingency does not exist on balance sheet date no provision nor
notes to accounts is required.
Accounting Treatment of
Contingent Gains
Contingent gains are not
recognised in financial statements since their recognition may result in the
recognition of revenue which may never be realized. The contingent gains are
not disclosed in the financial statements. If the realization of a gain is
virtually certain, then such gain is not a contingency and accounting for the
gain is appropriate.
Events occurring after the
Balance Sheet date are as under:—
Events, which occur between
the balance sheet date and date on which financial statements are approved by
competent authority.
For the purpose of
accounting treatment the events are classified in two categories.
The events related to circumstances existing on the date of Balance Sheet — the
loss should be accounted in the accounts and assets & liabilities to be
adjusted. (Known as adjusting events)
The events not related to
circumstances existing on the date of Balance Sheet — to be disclosed by way of
notes to accounts only, no adjustment in accounts are required. (Known as
non-adjusting events)
Insolvency of a customer is an
Adjusting event as insolvency of a customer, occurs after the balance sheet
date usually, provides additional information on the condition that existed at
the balance sheet date. Therefore, the carrying amount receivables should be
adjusted for the event.
It is assumed that —
The condition of insolvency existed at the balance sheet date
The entity could not collect the complete information about the collectability
of the receivable
it could not estimate the
insolvency of the customer
However,
insolvency due to a major casualty occurring after the balance sheet date is
not an adjusting event.
Event occurring after
approval of accounts
Event occurring after the
balance sheet date and also after approval of accounts by board of directors of
a company such event should be disclosed in the director's report if material.
Disclosure
The disclosure requirements
herein referred to apply only in respect of those contingencies or events which
affect the financial position to a material extent.
If a contingent loss is not
provided for, its nature and an estimate of its financial effect are generally
disclosed by way of note unless the possibility of a loss is remote. If a
reliable estimate of the financial effect cannot be made, this fact is disclosed.
When the events occurring
after the balance sheet date are disclosed in the report of the approving
authority, the information given comprises the nature of the events and an
estimate of their financial effects or a statement that such an estimate cannot
be made.
Accounting Standard — 10
Property, Plant and
Equipment
Objective:
The objective of this Standard
is to prescribe the accounting treatment for property, plant and equipment so
that users of the financial statements can discern information about investment
made by an enterprise in its property, plant and equipment and the changes in
such investment. The principal issues in accounting for property, plant and
equipment are the recognition of the assets, the determination of their carrying
amounts and the depreciation charges and impairment losses to be recognised in
relation to them.
Scope / Applicability:
This Standard should be applied
in accounting for property, plant and equipment except when another Accounting
Standard requires or permits a different accounting treatment.
This Standard does not apply
to:
a)
Biological assets related to agricultural activity other than bearer plants.
This Standard applies to bearer plants but it does not apply to the produce on
bearer plants; and
b) Wasting assets including
mineral rights, expenditure on the exploration for and extraction of minerals,
oil, natural gas and similar non-regenerative resources.
However, this Standard applies
to property, plant and equipment used to develop or maintain the assets
described in (a) and (b) above.
Other Accounting Standards may
require recognition of an item of property, plant and equipment based on an
approach different from that in this Standard. For example, AS 19, Leases,
requires an enterprise to evaluate its recognition of an item of leased
property, plant and equipment on the basis of the transfer of risks and
rewards.
However, in such cases other
aspects of the accounting treatment for these assets, including depreciation,
are prescribed by this Standard.
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Investment property, as
defined in AS 13, Accounting for Investments, should be accounted for only in
accordance with the cost model prescribed in this standard. Important
Terminology:
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1. Agricultural Activity is the management by an enterprise of the biological
transformation and harvest of biological assets for sale or for conversion
into agricultural produce or into additional biological assets.
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2. Agricultural Produce is the harvested product of biological assets of the
enterprise.
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3. Bearer plant is a plant that:
a) is used in the production
or supply of agricultural produce;
b) is expected to bear
produce for more than a period of twelve months; and
c) has a remote likelihood of
being sold as agricultural produce, except for incidental scrap sales.
The following are not bearer
plants:
a) plants cultivated to be
harvested as agricultural produce (for example, trees grown for use as
lumber);
b) plants cultivated to
produce agricultural produce when there is more than a remote likelihood that
the entity will also harvest and sell the plant as agricultural produce,
other than as incidental scrap sales (for example, trees that are cultivated
both for their fruit and their lumber); and
c) annual crops (for example,
maize and wheat).
When bearer plants are no
longer used to bear produce they might be cut down and sold as scrap, for
example, for use as firewood. Such incidental scrap sales would not prevent
the plant from satisfying the definition of a bearer plant.
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4. Biological Asset is a living animal or plant.
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5. Carrying amount is the amount at which an asset is recognised after
deducting any accumulated depreciation and accumulated impairment losses.
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6. Cost is the amount of cash or cash equivalents paid or
the fair value of the other consideration given to acquire an asset at the
time of its acquisition or construction or, where applicable, the amount
attributed to that asset when initially recognised in accordance with the specific
requirements of other Accounting Standards.
7. Depreciable amount is the cost of an asset, or other amount substituted
for cost, less its residual value.
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8. Depreciation is the systematic allocation of the depreciable
amount of an asset over its useful life.
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9. Enterprise -specific
value is the present value of the
cash flows an enterprise expects to arise from the continuing use of an asset
and from its disposal at the end of its useful life or expects to incur when
settling a liability.
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10. Fair value is the amount for which an asset could be exchanged
between knowledgeable, willing parties in an arm’s length transaction.
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11. Gross carrying amount of an asset is its cost or other amount substituted
for the cost in the books of account, without making any deduction for
accumulated depreciation and accumulated impairment losses.
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12. An impairment loss is the amount by which the
carrying amount of an asset exceeds its recoverable amount.
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13. Property, plant and
equipment are tangible items that:
a) are held for use in the
production or supply of goods or services, for rental to others, or for
administrative purposes; and
b) are expected to be used
during more than a period of twelve months.
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14. Recoverable amount is the higher of an asset’s net selling price and
its value in use.
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15. The residual value of an asset is the estimated amount that an
enterprise would currently obtain from disposal of the asset, after deducting
the estimated costs of disposal, if the asset were already of the age and in
the condition expected at the end of its useful life.
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16. Useful life is:
a) the period over which an
asset is expected to be available for use by an enterprise ; or
b) the number of production
or similar units expected to be obtained from the asset by an enterprise.
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