Amended Accounting Standards

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.

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:

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.

2. Agricultural Produce is the harvested product of biological assets of the enterprise.

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.

4. Biological Asset is a living animal or plant.

5. Carrying amount is the amount at which an asset is recognised after deducting any accumulated depreciation and accumulated impairment losses.

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.

8. Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.

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.

10. Fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction.

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.

12. An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount.

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.

14. Recoverable amount is the higher of an asset’s net selling price and its value in use.

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.

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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