3.25.2012

AS-29 PROVISIONS, CONTIGENT LIABILITIES AND CONTINGENT ASSETS




PROVISION:
A provision is a liability which can be measured only by using a substantial
degree of estimation.

Treatment : A provision should be recognized when:

(a) An enterprise has a present obligation as a result of past event
(b) It is probable that an outflow of resources embodying economic benefits will be required
to settle the obligation; and
(c) A reliable estimate can be made of the amount of the obligation.

Present Obligation: An obligation is a present obligation if, based on the evidence available, its existence at the balance sheet date is considered Probable, i.e. more likely than not.


Past Event: A Past event that leads to a present obligation is called an obligating event.


CONTINGENT LIABILITY:

1] A contingent liability is
• A possible obligation that arises from past events
• And; existence of which will be confirmed by the occurrence or non occurrence of future
events not wholly within the control of the enterprise

2] A contingent liability is
• A present obligation that arises from past events
• And; not recognized because of lower probability of outflow of resources or non-
availability of reliable estimate

Possible Obligation: An obligation is a present obligation if, based on the evidence available,
its existence at the balance sheet date is considered Not Probable.

Treatment: An enterprise should not recognize a contingent liability.
It should be disclosed in financial statements unless the possibility of
outflow is remote.


CONTINGENT ASSETS:

A contingent assets is a possible asset that arises from past events of the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise.

Treatment: An enterprise should not recognize a contingent asset.
An enterprise should not be disclosed in financial statements.
It may be disclosed in the report of approving authority, where an inflow
is probable.

Other Important Issues:

1. Provisioning is required for only those liabilities that exist at the balance sheet
date. ( i.e. No provision is required for costs that need to be incurred to operate in
future.)

2. Where details of a proposed new law have yet to be finalized, an obligation arises only
when the legislation is virtually certain to be enacted. For example, huge penalty shall
be imposed on the enterprise if the proposed law is enacted. No provisioning is required
unless the virtual certainty of the enactment of the law is established.

3. Where there are a number of similar obligations (e.g. product warranties) the
probability that an outflow will be required in settlement is determined by considering
the class of obligations as a whole.

4. If the reliable estimate of the liability cannot be made, it should be disclosed as a
contingent liability

5. Where an enterprise is jointly & severally liable for an obligation:
• Provision should be made for the portion on which enterprise has direct liability.
• The balance amount should be disclosed as contingent liability.

6. Gains from the expected disposal of assets should not be taken into account in measuring
a provision.

7. Reimbursement for expenditure of which provision is created, should be recognized when
and only when it is virtually certain that the reimbursement shall be received on
settlement of liability.

Such Reimbursement may be shown as a net figure in Profit & Loss statement but should be presented in balance sheet as a separate asset (i.e. net provision not to be shown)

8. A provision should be used only for expenditures for which the provision was originally
recognized. Provisions should also be reviewed at each balance sheet date and if no
longer required, it should be reversed.
9. Provision should not be recognized for future operating losses as it neither meets the
criteria of liability nor meets the criteria for recognition of provision.

RESTRUCTURING:


A restructuring is a program that is planned and controlled by management and materially changes either:
(a) the scope of a business undertaken by an enterprise; or
(b) the manner in which the business is expected.

Restructuring may include the following:
(a) sale or termination of a line of business;
(b) the closure of business location in a region
(c) eliminating a layer of management;

Treatment: A provision for recognition criteria is recognized only when the recognition criteria for provision is met.

A restructuring provision should include only the direct expenditures arising from the restructuring, which are those that are both;
(a) necessarily entailed by the restructuring; and
(b) not associated with the ongoing activities of the enterprise.

Restructuring provision does not include costs like
(a) retraining or relocating continuing staff
(b) marketing expenses
(c) investments in new systems and distribution networks.

Identifiable future operating losses up to the date of a restructuring and gains on disposal of assets (even if it is included as part of restructuring) are not included in provisions.


DISCLOSURES:
The enterprise should disclose for each class of provision:
(a) the carrying amount at the beginning & end of the period
(b) additional provision made during the period
(c) amount used during the period
(d) amount reversed during the period
(e) nature of obligation & and expected time of incurrence
(f) indication about the uncertainties attached to the provisions

The enterprise should disclose for each class of contingent liabilities:
(a) an estimate of its financial effects
(b) an indication of the uncertainties relating to any outflow
(c) the possibility of any reimbursement

Where any of the information required is not disclosed because it is not practicable to do so, that fact should be stated.
In extremely rare cases, disclosures can be expected to seriously harm the enterprise in a dispute with other parties. In such cases, instead of detailed information, general nature of dispute together with the reason of non-disclosures should be disclosed.

Example 1: Warranties

A manufacturer gives warranties et the time of sale to purchasers of its product. Under the terms of the contract for the manufacturer undertakes to make good, by repairs or replacement, manufacturer defects that become apparent within three years from the date of sale. On past experience, it is probable (i.e. more likely than not) that there will be some claims under the warranties.

Present obligation as a result of a past obligating event- The obligating event is the sale of the product with a warranty, which gives rise to an obligation

An outflow of resources embodying economics benefits in settlement- Probable for the warranties as a whole.

Conclusion – A provision is recognized for the best estimate of the costs of making good under the warranty products sold before the balance sheet date.

Example 2 Contaminated Land- Legislation Virtually Certain to be Enacted

An enterprise in the oil industry causes contaminated but does not clean up because there is no legislation requiring cleaning up, and the enterprise has been contaminating land for several years. At 31 March 2005 it is virtually certain that a law requiring a clean up of land already contaminated will be enacted shortly after the year end.

Present obligation as a result of a past obligating event- he obligating event is the contamination of the land because of the virtually certainty of legislation requiring cleaning up.

An outflow of resources embodying economics benefits in settlement- Probable.

Conclusion - A provision is recognized for the best estimate of the costs of the clean up.

Example 3: Offshore Oilfield

An enterprise operates an offshore oilfield where its licensing agreement requires it to remove the oil rig at the end of production and restore the seabed. Ninety percent of the eventual cost related to the removal of the oil rig and restoration of damage caused by building it, and ten percent arise through the extraction of oil. At the balance sheet date, the rig has been constructed but no oil has been extracted.

Present obligation as a result of past obligating event- The construction of the oil rig created an obligation under the terms of the license to remove the rig and restore the seabed and is thus as obligating event. At the balance sheet date, however, there is no obligation to rectify the damage that will be caused by extraction of oil.

An outflow of resources embodying economics benefits in settlement- Probable.

Conclusion- A provision is recognized for the best estimate of ninety percent of the eventual costs that relate to the removal of the oil rig and restoration of damage caused by building it. There coasts are included as part of the cost of the oil rig. The ten percent of costs that arise through the extraction of oil are recognized as a liability when the oil is extracted.

Example 4: Refunds Policy

A retail store has a policy of refunding purchases by dissatisfied customers, even though it is under no legal obligation to do so. Its policy of making refunds is generally known.
Present obligation as a result of a past obligating event- The obligating event is the sale of the product, which gives rise to an obligation because obligating also arise from normal business practice, custom and a desire to a maintain good business relations or act in an equitable manner
Outflows of resources embodying economic benefit in settlement–Probable, a proportion of goods are returned for refund.

Conclusion – A provision is recognized for the best estimate of the costs of refunds.


Example 5: Legal Requirement to Fit Smoke Filters

Under new legislation, an enterprise is required to fit smoke filters to its factories by 30 September 2005. The enterprise has not fitted the smoke filters.

(a) At the balance sheet date of 31 March 2005

Present obligation as a result of a past obligating event – There is no obligation because there is no obligating event either for the costs of fitting smoke filters or for fines under the legislation

Conclusion – No provision is recognized for the cost of fitting the smoke filters.
(b) At the balance sheet date of 31 March 2006
Present obligations as a result of a past obligating event – There is still no obligation for the costs of fitting smoke filters because no obligating event has occurred (the fitting of the filters). However, an obligation might arise to pay fines o penalties under the legislation because the obligating event has occurred (the non-complaint operation of the factory).

An outflow of resources embodying economic benefits in settlement - Assessment of probability of incurring fines and fines and penalties by non-compliant operation depends on the details of the legislation and the stringency of the enforcement regime.

Conclusion – No provision is recognized for the costs of fitting smoke filters. However, a provision is recognized for the best estimate of any fines and penalties that are more likely than not to be imposed.

Example 6: Staff retraining as a Result of Changes in the Income Tax System

The government introduces a number of changes to the income tax system. As a result of these changes, an enterprise in the financial services sector will need to retrain a large proportion of its administrative and sales workforce in order to ensure continued compliance with financial services regulation. At the balance sheet date, no retraining of staff has taken place.

Present obligation as a result of past obligating event – There is no obligation because no obligating event (retraining) has taken place.

Conclusion – No provision is recognized.

Example 7: A Single Guarantee

During 2004-05, Enterprise A gives a guarantee of certain borrowing of Enterprise B, whose financial condition at that time is sound. During 2005-06, the financial condition of Enterprise B deteriorates and at 30 September 2005 Enterprise B goes into liquidation..
(a) At 31 March 2005

Present obligation as a result of a past obligating event – The obligating event is the giving of the guarantee, which gives rise to an obligation.

An outflow of resources embodying economics benefits in settlement – No outflow of benefits is probable at 31 March 2005.
Conclusion – No provision is recognized. The guarantee is disclosed as a contingent liability unless the probability of any is regarded as remote At 31 March 2006

Present obligation as a result of a past obligating event – The obligating event is the giving of the guarantee, which gives to a legal obligation.

Conclusion – A provision is recognized for the best estimate of the obligation.
Note: This example deals with a single guarantee. If an enterprise has a portfolio of similar guarantee, it will assess that portfolio as a whole in determining whether an outflow of resources embodying economic benefit is probable. Where an enterprise gives guarantees in exchange for a fee, revenue is recognized under AS 9, Revenue recognition.

Example 8: A Court Case

After a wedding in 2004-05, ten people died, possibly as a result of food poisoning from products sold by the enterprise. Legal proceedings are started seeking damages from the enterprise but it disputes liability. Up to the date of approval of the financial statements for the year 31 March 2005, the enterprise’s lawyers advice that it is probable that the enterprise will not be found liable. However, when the enterprise prepares the financial statements for the year 31 March 2006, its lawyer’s advice that, owing to developments in the case, it is probable that the enterprise will be found liable.

(a) At 31 March 2005

Present obligation as a result of a past obligating event – On the basis of the evidence available when the financial statements were approved, there is no present obligation as a result of past events.
Conclusion – No provision is recognized. The matter is disclosed as a contingent liability unless the probability of any outflow is regarded as remote

(b) At 31 March 2006

Present obligation as a result of a past obligating event – On the basis of the evidence available, there is a present obligation.
An outflow of resources embodying economic benefits in settlement – Probable.

Conclusion – A provision is recognized for the best estimate of the amount to settle the
obligation.

Example 9A: Refurbishment Costs – No Legislative Requirement

A furnace has a lining that needs to be replaced every five years for technical reasons. At the balance sheet date, the lining has been in use for three years.
Present obligation as a result of a past obligating event- There is no present obligation.
Conclusion – No provision is recognized.

The cost of replacing the lining is not recognized because, at the balance sheet date, no obligation to replace the lining exits independently of the company’s future actions – even the intention to incur the expenditure depends on the company deciding to continue operating the furnace or to replace the lining.


Example 9B: Refurbishment Costs – Legislative Requirement

An Airline is required by law to overhaul its aircraft once every three years.

Present obligation as a result of a past obligating event – There is no present obligation.
Conclusion – No provision is recognized.

The costs of overhauling aircraft are not recognized as a provision for the same reason as the cost of replacing the lining is not recognized as a provision in example 9A. Even a legal requirement to overhaul does not make the cost of the overhaul a liability, because no obligation exits to overhaul the aircraft independently of the enterprise’s future actions – the enterprise could avoid the future expenditure by its future actions, for example by selling the aircraft.

Also Read Notes on :



3.21.2012

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AS - 9 Revenue Recognition

This is the best notes on accounting standard 9 revenue recognition with examples.
Accounting standard or AS 9 defines Revenue as Revenue is the gross inflow of cash, receivables or other consideration arising in the course of the ordinary activities of an enterprise from the sale of goods, from the rendering of services, and from the use by others of enterprise resources yielding interest, royalties and dividends.


Revenue includes: - Proceeds from sale of goods
- Proceeds from rendering of services
- Interest, royalty and dividends.

Sale of goods

Revenue from sales should be recognized when

  •  All significant risks and rewards of ownership have been transferred to the buyer from the seller.
  • Ultimate realisability of receipt is reasonably certain.

Rendering of Services


Revenue from service transactions is usually recognized as the service is performed, either by proportionate completion method or by the completed service contract method.




1) Proportionate Completion method – This is a method of accounting, which recognises revenue in the statement of profit and loss proportionately with degree of completion of services under a contract.

Revenue is recognised by reference to the performance of each act. The revenue recognised under this method would be determined on the basis of contract value, associated costs, number of acts or other suitable basis.

2) Completed service contract method – This is a method of accounting, which recognises revenue in the statement of profit and loss only when the rendering of services under a contract is completed or substantially completed.

Revenue under this method is recognised on completion or substantial completion of the job.

Read Best Summary on A.S 9

Revenue from Interest : Recognised on time proportion basis

Revenue from Royalties: Recognised on accrual basis in accordance with the terms of the relevant agreement.

Revenue from Dividends: Recognised when right to receive is established

Subsequent uncertainty in collection: When the uncertainty relating to collectability arises subsequent to the time of sale or the rendering of services, it is more appropriate to make a separate provision to reflect the uncertainty rather than to adjust the amount of revenue originally recorded.

Disclosure: An enterprise should disclose the circumstances in which revenue recognition has
been postponed pending the resolution of significant uncertainties.

Read full A.S 9 as issued by ICAI

EXAMPLES

1] On sale, buyer takes title and accepts billing but delivery is delayed at buyer’s request
- Revenue should be recognised notwithstanding that physical delivery has not been
completed.

2] Delivery subject to installations and inspections
- Revenue should not be recognised until the customer accepts delivery and
installation and inspection are complete. However, when installation process is very
simple, revenue should be recognised. For example. Television sale subject to
installation.

3] Sale on approval
- Revenue should not be recognised until the goods have been formally accepted or time
for rejection has elapsed or where no time has been fixed, a reasonable time has
elapsed.

4] Sales with the condition of ‘money back if not completely satisfied’
- It may be appropriate to recognize the sale but to make suitable provision for
returns based on previous experience.

5] Consignment sales
- Revenue should not be recognised until the goods are sold to a third party.

6] Installment sales
- Revenue of sale price excluding interest should be recognised on the date of sale.

7] Special order and shipments
- Revenue from such sales should be recognized when the goods are identified and ready
for delivery.

8] Where seller concurrently agrees to repurchase the same goods at a later date
- The sale should not be recognised, as this is a financial arrangement.

9] Subscriptions received for publications
- Revenue received or billed should be deferred and recognised either on a straight-line
basis over time or where the items delivered vary in value from period to period, revenue
should be based on the sales value of the item delivered.

10] Advertisement commission received
- It is recognised when the advertisement appears before public.

11] Tution fees received
- Should be recognised over the period of instruction.

12] Entrance and membership fees
- Entrance fee is generally capitalized
- If the membership fee permits only membership and all other services or products are
paid for separately, the fee should be recognised when received. If the membership fee
entitles the member to services or publications to be provided during the year, it
should be recognised on a systematic and rational basis having regard to the timing and
nature of all services.

13] Sale of show tickets
- Revenue should be recognised when the event takes place.

14] Guaranteed sales of agricultural crops
- When sale is assured under forward contract or government guarantee, the crops can be
recognised at net realizable value although it does not satisfy the criteria of revenue
recognition.


The above accounting standard is not applicable for:

  •  Revenue arising from construction contracts
  •  Revenue arising from hire purchase, lease agreements
  •  Revenue arising from Government grants and subsidies
  •  Revenue of Insurance companies arising from insurance contracts
  •  Profit or loss on sale of fixed assets
  •  Realized or unrealized gains resulting from changes in foreign exchange rates

3.17.2012

AS-24 DISCONTINUING OPERATIONS

A discontinuing operation is a component of an enterprise:

(a) that the enterprise, pursuant to a single plan, is:

  • disposing of substantially in its entirety (example – demerger)
  • disposing of piecemeal (selling and settling assets and liabilities one by one)
  •  terminating through abandonment; and

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(b) that represents a separate major line of business or geographical area of operations; and

(c) that can be distinguished operationally and for financial reporting purposes.

Examples of activities that may not satisfy criteria (a) above but that can be discontinuing operations in combination with other circumstances include:


  • gradual or evolutionary phasing out of a product line or class of service;
  • discontinuing, even if relatively abruptly, several products within an ongoing line of business;
  • shifting of some production or marketing activities for a particular line of business from one location to another; and
  • closing of a facility to achieve productivity improvements or other cost savings;
  • Selling shares of subsidiary whose activities are similar to those of the parent or other subsidiaries. (In case of Consolidated Financial Statements)


A reportable business segment or geographical segment as defined in AS-17 would normally satisfy criteria (b) above.

A component that can be distinguished operationally and for financial reporting purposes {criteria [c] above}

  • if all the following conditions are met:


  1.  the operating assets and liabilities of the component can be directly attributed to it;
  2.  its revenue can be directly attributed to it;
  3.  at least a majority of its operating expenses can be directly attributed to it.


Presentation and Disclosure

An enterprise should include the following information relating to a discontinuing operation in its financial statements beginning with the financial statements for the period in which the initial disclosure event occurs and up to and including the period in which discontinuance is completed.

INITIAL DISCLOSURE:

1. A description of the discontinuing operation(s);
2. the business or geographical segment(s) in which it is reported as per AS – 17
3. the date and nature of the initial disclosure event;
4. the date or period in which the discontinuance is expected to be completed if known or
determinable;
5. the carrying amounts, as of the balance sheet date, of the total assets to be disposed
of and the total liabilities to be settled;
6. revenue and expenses from such discontinuing operation in current reporting period;
7. pre-tax profit/loss from discontinuing operation during the current financial reporting
period, and income tax expense.
8. net cash flows attributable to the operating, investing, and financing activities of the
discontinuing operation during the current financial reporting period.

With respect to a discontinuing operation, the initial disclosure event is the occurrence of one of the following, whichever occurs earlier

  • the enterprise has entered into a binding sale agreement for substantially all of the assets of the discontinuing operation; or
  • the enterprise’s board of directors or similar governing body has both
  1. approved a formal plan; and
  2. made an announcement of the plan.


Other Disclosures

When an enterprise disposes of assets or settles liabilities attributable to a discontinuing operation or enters into binding agreements for the sale of such assets or the settlement of such liabilities, it should include, in its financial statements, the following information when the event occurs.

(a) Gain or loss recognized on such disposal.
(b) Net selling prices (or range of prices) of those assets for whih the enterprise has entered into binding contract, the expected timing of receipt of cash flow and the carrying amount of those assets.

The disclosures required above should be presented in the notes to the financial statements except the following, which should be shown on the face of the statements of profit or loss;

(a) pre-tax profit/loss from ordinary activities of discontinuing operation and related
income tax expense
(b) pre-tax gain or loss recognized on disposal of assets or settlement of liabilities.

If an enterprise abandons or withdraws from a plan that was previously reported as a discontinuing operation, that fact, reason therefor and its effect should be disclosed.

Comparative information for prior periods in respect of discontinuing operations should also be deemed as discontinuing operations.

3.15.2012

AS-22 ACCOUNTING FOR TAXES ON INCOME



Applicability :-

a) Mandatory w.e.f. 1-04-2001 in respect of the following:
1.Enterprises whose equity or debt securities are listed on a recognized stock exchange in India;
2.All the enterprises of a group, if the parent presents consolidated financial statements.
b) Mandatory w.e.f. 1.04.2002, in respect of companies not covered by a);
c) Mandatory w.e.f. 1.04.2006 in respect of all other enterprises.

Accounting income (loss) is the net profit or loss for a period, as reported in the statement of profit and loss, before deducting income tax expense or adding income tax saving. (i.e. PBT as per P/L A/c)
Taxable income (tax loss) is the amount of income (loss) for a period, determined in accordance with the tax laws, based upon which income tax payable (recoverable) is determined. (i.e. GTI)

Tax expense (tax saving) is the aggregate of current tax and deferred tax charged or credited to the statement of profit and loss for the period. (i.e. tax which is to be debited or credited to P/L A/c).
Current tax is the amount of income tax determined to be payable (recoverable) in respect of the taxable income (tax loss) for a period. (i.e. tax as per Income tax Act)

Deferred tax is the tax effect of timing differences. Model journal entries to be passed in books of account should be as under:


Current Tax A/c ………..Dr
To Provision for Current Tax

Deferred Tax A/c ………Dr
To Deferred Tax Liability A/c

OR
Deferred Tax Assets A/c …….Dr
To Deferred Tax A/c

Tax Expense A/c……Dr
Deferred Tax A/c……Dr (In case DTA is created)
To Current Tax A/c
To Deferred Tax A/c (In case DTL is created)

P/L A/c………………Dr
To Current Tax A/c

Permanent differences are the differences between taxable income and accounting income for a period that originate in one period and do not reverse subsequently.
Examples:
- Expenditure disallowed as per Income Tax Act (Forever)
- Excess expenditure allowed by Income Tax Act, 1961 in respect of Scientific Expenditure

Timing differences are the differences between taxable income and accounting income for a period that originate in one period and are capable of reversal in one or more subsequent periods.
Examples:
- Depreciation rate/method different as per Accounts and Income tax Calculation
- Expenditure of the nature mentioned in Section 43B (e.g. sales tax charged in account on accrual basis but not paid;
such sales tax will be an allowable expenditure in the year of payment and a disallowable expenditure in the year in which accrued).
Hints for creation of DTL or DTA

When accounting profit/ loss is higher than taxable profit/loss: Deferred Tax liability is created or Deferred tax asset is reversed.

When accounting profit/loss is less than taxable profit/loss: Deferred tax asset is created or Deferred Tax Liability is reversed.

When taxable loss is carried forward for set off: Deferred Tax Asset is created.

When carried forward taxable loss is set off : Deferred Tax Asset is reversed.

However, Deferred Tax Asset (DTA) should be recognized and carried forward only to the extent that there is a reasonable certainty that sufficient future taxable income will be available against which such deferred tax assets can be reversed/ realized.
Example: Deferred Tax Asset should be created in respect of taxable loss being carried forward, when there is reasonable certainty that carried forward taxable loss will be set off. (i.e. Adequate taxable profit is expected in future)

The carrying amount of deferred tax assets should be reviewed at each balance sheet date. An enterprise should write down the carrying amount of deferred tax asset to the extent that it is no longer reasonably certain that sufficient profits will be available.

Such, written down value can be re-stated if it becomes virtually certain that sufficient profits will be available (for set off).

Also at each balance sheet date, an enterprise re-assesses unrecognized deferred tax assets. The enterprise recognizes previously unrecognized deferred tax assets to the extent that it has become reasonably certain that sufficient future taxable income will be available against which such deferred tax assets can be realized.

Presentation & Disclosure

In the Balance Sheet, a Deferred Tax Asset should be shown after the head “INVESTMENT” and Deferred Tax Liability should be shown after the head “UNSECURED LOAN”.

Current Tax assets and liabilities should be separately shown with Deferred Tax assets and liabilities.

Deferred Tax asset is set-off with deferred tax liabilities when
- the enterprise has a legally enforceable right to set-off assets against liabilities representing current tax; and
- the deferred tax assets and the deferred tax liabilities relate to taxes on income levied by the same governing taxation laws.

The nature of the evidence supporting the recognition of deferred tax assets should be disclosed, if an enterprise has unabsorbed depreciation or carry forward of losses under tax laws.

3.07.2012

AS – 6 DEPRECIATION ACCOUNTING

Depreciation is a measure of the wearing out, consumption or other loss of value of a depreciable asset arising from use, passage of time or obsolescence through technology and market changes.
Depreciation is allocated so as to charge a fair proportion of the depreciable amount in each accounting period during the expected useful life of the asset. Depreciation includes amortisation of assets whose useful life is predetermined.

  • The depreciable amount of a depreciable asset should be allocated on a systematic basis to each accounting period during the useful life of the asset.
Depreciable assets are assets which

[1] are expected to be used during more than one accounting period; and
[2] have a limited useful life; and
[3] are held by an enterprise for use in the production or supply or for administrative purposes.

Depreciable amount of a depreciable asset is its historical cost, or other amount substituted for historical cost less the estimated residual value.

Useful life is the period over which a depreciable asset is expected to be used by the enterprise.
The useful life of a depreciable asset is shorter than its physical life.

There are two method of depreciation:
1] Straight Line Method (SLM)
2] Written Down Value Method (WDVM)
Note: A combination of more than one method may be used.

Read Revised AS -10 Property, Plant and Equipment 


The depreciation method selected should be applied consistently from period to period. The change in method of depreciation should be made only if;
  • The adoption of the new method is required by statute; or
  • For compliance with an accounting standard; or
  • If it is considered that change would result in a more appropriate preparation of financial statement; or
  • When there is change in method of depreciation, depreciation should be recalculated in accordance with the new method from the date of the assets coming into use. (i.e RETROSPECTIVELY)

The deficiency or surplus arising from such recomputation should be adjusted in the year of change through profit and loss account.

Such change should be treated as a change in accounting policy and its effect should be quantified and disclosed.

 The useful lives of major depreciable assets may be reviewed periodically. Where there is a revision of the estimated useful life, the unamortised depreciable amount should be charged over the revised remaining useful life. (i.e. PROSPECTIVELY)

 Any addition or extension which becomes an integral part of the existing asset should be depreciated over the remaining useful life of that asset.


The depreciation on such addition may also be applied at the rate applied to the existing asset.
Where an addition or extension retains a separate identity and is capable of being used after the existing asset is disposed of, depreciation should be provided independently on the basis of estimate of its own useful life.

 Where the historical cost of a depreciable asset has undergone a change due to increase or decrease in the long term liability on account of exchange fluctuations, price adjustments, changes in duties or similar factors, the depreciation on the revised unamortised depreciable amount should be provided prospectively over the residual useful life of the asset.

This accounting standard is not applied on the following items.
• Forests and plantations
• Wasting assets
• Research and development expenditure
• Goodwill
• Live stock

Disclosure requirements
1] the historical cost
2] total depreciation for each class charged during the period
3] the related accumulated depreciation
4] depreciation method used ( Accounting policy)
5] depreciation rates if they are different from those prescribed by the statute governing the enterprise.

Please Note that this Accounting Standard on Depreciation has now been deprecated , and new revised A.S - 10 Property,Plan and Equipment has been issued by ICAI, You can read summary note on revised accounting standard 10 Here and ICAI copy of this standard Here.

Also Read Notes on :




AS-4 CONTINGENCIES AND EVENTS OCCURRING AFTER THE BALANCE SHEET DATE

Accounting Standard - 4  CONTINGENCIES AND EVENTS OCCURRING AFTER THE BALANCE SHEET DATE


Contingency: A 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.

Accounting Treatment:
If it is likely that a contingency will result in

LOSS: It is prudent to provide for that loss in the financial statements.
PROFIT: Not recognized as revenue (However, when the realization of a gain is virtually certain, then such gain is not a contingency and accounting for the gain is appropriate.)

The estimates of the outcome and of the financial effect of contingencies are determined
- by the judgement of the management
- by review of events occurring after the balance sheet date
- by experience of the enterprise in similar transaction
- by reviewing reports from independent experts.

If estimation cannot be made, disclosure is made of the existence and nature of the contingency.

Provision for contingencies are not made in respect of general or unspecified risks.

The existence and amount of guarantees and obligations arising from discounted bills of exchange are generally disclosed by way of note even though the possibility of loss is remote.

The amount of a contingent loss should be provided for by a charge in the statement of profit and loss if:
(a) it is probable that future events will confirm that, after taking into account any related probable recovery, an asset has been impaired or a liability has been incurred as at the balance sheet date, and
(b) a reasonable estimate of the amount of the resulting loss can be made.

If either of aforesaid two conditions are not met, e.g where a reasonable estimate of the loss is not practicable, the existence of the contingency should be disclosed by way of note unless the possibility of loss is remote.Such disclosure should provide following information:

(a) the nature of the contingency;
(b) the uncertainities which may affect the future outcome;
(c) an estimate of the financial effect, or a statement that such an estimate cannot be made.

Events Occurring after the Balance Sheet Date:
Events occurring after the balance sheet date are those significant events, both favourable and unfavourable, that occur between the balance sheet date and the date on which the financial statements are approved by the Board of Directors in case of a company, and, by the corresponding approving authority in the case of any other entity.

Two types of events can be identified:

Adjusting Event:
Those, which provide further evidence of conditions that, existed at the balance sheet date

Actual adjustments in financial statements are required for adjusting event.

Exceptions:
1] Although, not adjusting event, Proposed dividend are adjusted in books of account.
2] Adjustments are required for the events, which occur after balance sheet date that indicates that fundamental accounting assumption of going concern is no longer, appropriate.


Non-Adjusting Events:

Those, which are indicative of conditions that arose subsequent to the balance sheet date.

No adjustments are required to be made for such events. But, disclosures should be made in the report of the approving authority of those events occurring after the balance sheet date that represent material changes and commitments affecting the financial position of the enterprise. Such disclosure should provide following information.

(a) the nature of the events
(b) an estimate of the financial effect, or a statement that such an estimate cannot be made.

AS-5 NET PROFIT OR LOSS FOR THE PERIOD, PRIOR PERIOD ITEMS AND CHANGES IN ACCOUNTING POLICIES





All items of income and expense, which are recognized in a period, should be included in the determination of net profit or loss for the period unless an Accounting Standard requires or permits otherwise.

The net profit or loss for the period comprises the following components, each of which should be disclosed on the face of the statement of profit and loss:

(a) profit or loss from ordinary activities; and
(b) extraordinary items.
Ordinary Activities are any activities, which are undertaken by an enterprise as part of its business, and such related activities in which the enterprise engages in furtherance of, incidental to, or arising from, these activities.

When items of income and expenses within profit or loss from ordinary activities are of such size, nature 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 properly. Examples of such circumstances are:
(Exceptional Items)
- disposal of items of fixed assets
- litigation settlements
- legislative changes having retrospective application
- disposal of long term investments
- reversal of provisions

Extraordinary items are income or expense that arise from events or transactions that are clearly distinct from the ordinary activities of the enterprise and, therefore, are not expected to recur frequently or regularly.
Examples of events or transactions that generally give rise to extraordinary items for most enterprises are:
- attachment of property of the enterprise;
- an earthquake

However, claims from policyholders arising from an earthquake do not qualify as an extraordinary item for an insurance enterprise that insures against such risks.

Extraordinary items should be disclosed in the statement of profit and loss as a part of net profit or loss for the period. 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.
Prior Period Items:
Prior period items are income or expenses that arise in the current period as a result of ERROR or OMMISSIONS in the preparation of the financial statements of one or more prior periods.

The nature and amount of prior period items should be separately disclosed in the statement of profit and loss in a manner that their impact on the current profit or loss can be perceived.
Changes in Accounting Policy:
Accounting policies are the specific accounting principles and the methods of applying those principles adopted by an enterprise in the preparation and presentation of financial statements.

A change in an accounting policy should be made only if the adoption of a different accounting policy is required:
(a) by statute
(b) for compliance with an accounting standard
(c) if it is considered that the change would result in a more appropriate presentation of the financial statements of the enterprise.

Any change in accounting policy which has a material effect, should be disclosed. Such changes should be disclosed in the statement of profit and loss in a manner that their impact on profit or loss can be perceived.

Where the effect of such change is not ascertainable, the fact should be indicated.
If a change is made in the accounting policies which has no material effect on the financial statements for the current period but which is reasonably expected to have material effect in later periods, the fact of such change should be appropriately disclosed in the period in which the change is adopted.

The following are not changes in accounting policies:

(a) the adoption of an accounting policy for events which differ in substance from previously occurring events e.g. introduction of a formal retirement gratuity scheme by an employer in place of ad hoc ex-gratia payments to employees on retirement; and
(b) the adoption of a new accounting policy for events or transactions which did not occur previously or that were immaterial.

Change in Accounting Estimate:

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 it is impracticable to quantify the amount, this fact should be disclosed.

The effect of a change in an accounting estimate should be classified using the same classification in the statement of profit and loss as was previously for the estimate.
For example, the effect of a change in an accounting estimate that was previously included as an extraordinary item is reported as an extraordinary item.

Clarifications:
(a) Change in accounting estimate does not bring the adjustment within the definitions of an extraordinary item or a prior period item.
(b) Sometimes, it is difficult to distinguish between a change in an accounting policy and a change in accounting estimate. In such cases, the change is treated as a change in an accounting estimate, with appropriate disclosures.