Indian GAAP

Embed Size (px)

Citation preview

  • 7/29/2019 Indian GAAP

    1/63

    1. Harmony In Indian Accounting Standards

    Recent global and domestic developments in the economic environment in India have led tomore measures being taken to standardize accounting standards. Further, cross-border raisingof huge amount of capital has also generated considerable interest in the generally acceptedaccounting principles in advanced countries such as USA. Initiatives taken by International

    Organisation Securities Commission (IOSCO) towards propagating International AccountingStandards (IASs)/ International Financial Reporting Standards (IFRSs), issued by theInternational Accounting Standards Board (IASB), as the uniform language of business toprotect the interests of international investors have brought into focus the IASs/ IFRSs. TheInstitute of Chartered Accountants of India, being a premier accounting body in the country, tookupon itself the leadership role by establishing Accounting Standards Board, more than twentyfive years ago, to fall in line with the international and national expectations. Today, accountingstandards in India have come a long way.Rationale of Accounting Standards

    Accounting Standards are formulated with a view to harmonise different accounting

    policies and practices in use in a country. The objective of Accounting Standards is,

    therefore, to reduce the accounting alternatives in the preparation of financialstatements within the bounds of rationality, thereby ensuring comparability of

    financial statements of different enterprises with a view to provide meaningful

    information to various users of financial statements to enable them to make

    informed economic decisions. The Companies Act, 1956, as well as many other

    statutes in India require that the financial statements of an enterprise should give a

    true and fair view of its financial position and working results. This requirement is

    implicit even in the absence of a specific statutory provision to this effect. The

    Accounting Standards are issued with a view to describe the accounting principles

    and the methods of applying these principles in the preparation and presentation of

    financial statements so that they give a true and fair view. The AccountingStandards not only prescribe appropriate accounting treatment of complex business

    transactions but also foster greater transparency and market discipline. Accounting

    Standards also helps the regulatory agencies in benchmarking the accounting

    accuracy.

    International Harmonisation of Accounting Standards

    Recognising the need for international harmonisation of accounting standards, in

    1973, the International Accounting Standards Committee (IASC) was established. It

    may be mentioned here that the IASC has been reconstituted as the International

    Accounting Standards Board (IASB). The objectives of IASC included promotion ofthe International Accounting Standards for worldwide acceptance and observance

    so that the accounting standards in different countries are harmonised. In recent

    years, need for international harmonisation of Accounting Standards followed in

    different countries has grown considerably as the cross-border transfers of capital

    are becoming increasingly common.

    Accounting Standards-setting in India

  • 7/29/2019 Indian GAAP

    2/63

    The Institute of Chartered Accountants of India (ICAI) being a member body of the

    IASC, constituted the Accounting Standards Board (ASB) on 21st April, 1977, with a

    view to harmonise the diverse accounting policies and practices in use in India.

    After the avowed adoption of liberalisation and globalisation as the corner stones of

    Indian economic policies in early 90s, and the growing concern about the need of

    effective corporate governance of late, the Accounting Standards have increasinglyassumed importance. While formulating accounting standards, the ASB takes into

    consideration the applicable laws,customs, usages and business environment

    prevailing in the country. The ASB also gives due consideration to International

    Financial Reporting Standards (IFRSs)/ International Accounting Standards (IASs)

    issued by IASB and tries to integrate them, to the extent possible, in the light of

    conditions and practices prevailing in India.

    Composition of the Accounting Standards Board

    The composition of the ASB is broad-based with a view to ensuring participation of

    all interest groups in the standard-setting process. These interest-groups includeindustry, representatives of various departments of government and regulatory

    authorities, financial institutions and academic and professional bodies. Industry is

    represented on the ASB by their apex level associations, viz., Associated Chambers

    of Commerce & Industry (ASSOCHAM), Confederation of Indian Industries (CII) and

    Federation of Indian Chambers of Commerce and Industry (FICCI). As regards

    government departments and regulatory authorities, Reserve Bank of India, Ministry

    of Company Affairs, Comptroller & Auditor General of India, Controller General of

    Accounts and Central Board of Excise and Customs are represented on the ASB.

    Besides these interest-groups, representatives of academic and professional

    institutions such as Universities, Indian Institutes of Management, Institute of Cost

    and Works Accountants of India and Institute of Company Secretaries of India are

    also represented on the ASB. Apart from these interest groups, certain elected

    members of the Central Council of ICAI are also on the ASB.

    The Accounting Standards-setting Process

    The accounting standard setting, by its very nature, involves reaching an optimal

    balance of the requirements of financial information for various interest-groups

    having a stake in financial reporting. With a view to reach consensus, to the extent

    possible, as to the requirements of the relevant interest-groups and thereby

    bringing about general acceptance of the Accounting Standards among such

    groups, considerable research, consultations and discussions with the

    representatives of the relevant interest-groups at different stages of standard

    formulation becomes necessary. The standard-setting procedure of the ASB, as

    briefly outlined below, is designed in such a way so as to ensure such consultation

    and discussions:

  • 7/29/2019 Indian GAAP

    3/63

    Identification of the broad areas by the ASB for formulating the Accounting

    Standards.

    Constitution of the study groups by the ASB for preparing the preliminary drafts of

    the proposed Accounting Standards.

    Consideration of the preliminary draft prepared by the study group by the ASB and

    revision, if any, of the draft on the basis of deliberations at the ASB.

    Circulation of the draft, so revised, among the Council members of the ICAI and 12

    specified outside bodies such as Standing Conference of Public Enterprises (SCOPE),

    Indian Banks Association, Confederation of Indian Industry (CII), Securities and

    Exchange Board of India (SEBI), Comptroller and Auditor General of India (C& AG),

    and Department of Company Affairs, for comments.

    Meeting with the representatives of specified outside bodies to ascertain their

    views on the draft of the proposed Accounting Standard.

    Finalisation of the Exposure Draft of the proposed Accounting Standard on the

    basis of comments received and discussion with the representatives of specified

    outside bodies.

    Issuance of the Exposure Draft inviting public comments.

    Consideration of the comments received on the Exposure Draft and finalisation of

    the draft

    Accounting Standard by the ASB for submission to the Council of the ICAI for its

    consideration and approval for issuance.

    Consideration of the draft Accounting Standard by the Council of the Institute, and

    if found necessary, modification of the draft in consultation with the ASB.

    The Accounting Standard, so finalised, is issued under the authority of the Council.

    Present status of Accounting Standards in India in harmonisation with the

    International

    Accounting Standards

    As indicated earlier, Accounting Standards are formulated on the basis of theInternational Financial Reporting Standards (IFRSs)/ International Accounting

    Standards (IASs) issued by the IASB. Of the 41 IASs issued so far, 29 are at present

    in force, the remaining standards have been withdrawn. Apart from this, 8 IFRSs

    have also been issued by the IASB. Corresponding to the IASs/IFRSs, so far, 30

    Indian Accounting Standards on the following subjects have been issued:

    AS 1 Disclosure of Accounting Policies

  • 7/29/2019 Indian GAAP

    4/63

    AS 2 Valuation of Inventories

    AS 3 Cash Flow Statements

    AS 4 Contingencies and Events Occurring after the Balance Sheet Date

    AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in

    Accounting Policies

    AS 6 Depreciation Accounting

    AS 7 Construction Contracts

    AS 8 Accounting for Research and Development (Withdrawn pursuant to

    AS 26 becoming mandatory)

    AS 9 Revenue Recognition

    AS 10 Accounting for Fixed Assets

    AS 11 The Effects of Changes in Foreign Exchange Rates

    AS 12 Accounting for Government Grants

    AS 13 Accounting for Investments

    AS 14 Accounting for Amalgamations

    AS 15 Employee Benefits

    AS 16 Borrowing Costs

    AS 17 Segment Reporting

    AS 18 Related Party Disclosures

    AS 19 Leases

    AS 20 Earnings Per Share

    AS 21 Consolidated Financial Statements

    AS 22 Accounting for Taxes on Income

    AS 23 Accounting for Investments in Associates in Consolidated Financial

    Statements

    AS 24 Discontinuing Operations

    AS 25 Interim Financial Reporting

  • 7/29/2019 Indian GAAP

    5/63

    AS 26 Intangible Assets

    AS 27 Financial Reporting of Interests in Joint Ventures

    AS 28 Impairment of Assets

    AS 29 Provisions, Contingent Liabilities and Contingent Assets

    AS 30 Financial Instruments: Recognition and Measurement

    AS 31 Financial Instruments: Presentation

    Compliance with Accounting Standards

    Accounting Standards issued by the ICAI have legal recognition through the

    Companies Act,1956, whereby every company is required to comply with theAccounting Standards and the statutory auditors of every company are required to

    report whether the Accounting Standards have been complied with or not. Also, the

    Insurance Regulatory and Development Authority (IRDA) (Preparation of Financial

    Statements and Auditors Report of Insurance Companies) Regulations, 2000

    requires insurance companies to follow the Accounting Standards issued by the

    ICAI. The Securities and Exchange Board of India (SEBI) and the Reserve Bank of

    India also require compliance with the Accounting Standards issued by the ICAI from

    time to time. Section 211 of the Companies Act, 1956, deals with the form and

    contents of balance sheet and profit and loss account. The Companies

    (Amendment) Act, 1999 has inserted new sub-sections 3A, 3B and 3C to Section211, with a view to ensure that the financial statements are prepared in accordance

    with the Accounting Standards. The new sub-sections as inserted are reproduced

    below:

    Section 211 (3A): Every profit and loss account and balance sheet of the company

    shall comply with the accounting standards Section 211 (3B): Where the profit

    and loss account and the balance sheet of the company do not comply with the

    accounting standards, such companies shall disclose in its profit and loss account

    and balance sheet, the following, namely:-

    a) the deviation from the accounting standards;

    b) the reasons for such deviation; and

    c) the financial effect, if any, arising due to such deviation

    Section 211 (3C): For the purposes of this section, the expression accounting

    standards

  • 7/29/2019 Indian GAAP

    6/63

    means the standards of accounting recommended by the Institute of Chartered

    Accountants of

    India, constituted under the Chartered Accountants Act, 1949 (38 of 1949), as may

    be

    prescribed by the Central Government in consultation with the National Advisory

    Committee on

    Accounting Standards established under sub- section (1) of section 210A:

    Providedthat the standards of accounting specified by the Institute of Chartered

    Accountants of India shall be deemed to be the Accounting Standards until the

    accounting standards are prescribed by the Central Government under this sub-

    section.It may also be mentioned that the National Advisory Committee on

    Accounting Standards NACAS) has been constituted under section 210A as referred

    to under section 211 (3C) to advise the Central Government on formulation andlaying down of the accounting standards for adoption by companies or class of

    companies. It is of significance to note that on the recommendation of NACAS, the

    Ministry of Company Affairs, has issued a Notification dated 7th December, 2006,

    whereby it has prescribed Accounting Standards 1 to 7 and 9 to 29, as

    recommended by the Institute of Chartered Accountants of India, which are

    included in the said

    Notification. As per the Notification, the Accounting Standards shall come into effect

    in respect of accounting periods commencing on or after the publication of these

    Accounting Standards, i.e., 7th December, 2006. Specific relaxations are given to

    particular kinds of companies, termed as Small and Medium Sized Companies,depending upon their size and nature. The above legal provisions have cast a duty

    upon the management to prepare the financial statements in accordance with the

    accounting standards. The corresponding provision to report on the compliance of

    accounting standards has been inserted under section 227 of the Companies Act,

    1956, thereby casting a duty upon the auditor of the company to report on such

    compliance. A new clause (d) under sub-section 3 of Section 227 of the Companies

    Act, 1956 is read as under:

    whether, in his opinion, the profit and loss account and balance sheet comply with

    the

    accounting standards referred to in sub-section (3C) of section 211

    As far as the reporting of compliance with the Accounting Standards by the

    management is

    concerned, clause (i) under the new sub-section 2AA of Section 217 of the

    Companies Act, 1956, (inserted by the Companies Amendment Act, 2000)

  • 7/29/2019 Indian GAAP

    7/63

    prescribes that the Boards report should include a Directors Responsibility

    Statement indicating therein that in the preparation of the annual accounts, the

    applicable accounting standards had been followed along with proper explanation

    relating to material departures.

    Accounting is the art of recording transactions in the best manner possible, so asto enable the reader to arrive at judgments/come to conclusions, and in this regard

    it is utmost necessary that there are set guidelines. These guidelines are generally

    called accounting policies. The intricacies of accounting policies permitted

    Companies to alter their accounting principles for their benefit. This made it

    impossible to make comparisons. In order to avoid the above and to have a

    harmonised accounting principle, Standards needed to be set by recognised

    accounting bodies. This paved the way for Accounting Standards to come into

    existence. Accounting Standards in India are issued By the Institute of Chartered

    Accountanst of India (ICAI). At present there are 30 Accounting Standards issued by

    ICAI.

    Objective of Accounting Standards

    Objective of Accounting Standards is to standarize the diverse accounting policies

    and practices with a view to eliminate to the extent possible the non-comparability

    of financial statements and the reliability to the financial statements.

    The institute of Chatered Accountants of India, recognizing the need to harmonize

    the diversre accounting policies and practices, constituted at Accounting Standard

    Board (ASB) on 21st April, 1977.

    Compliance with Accounting Standards issued by ICAI

    Sub Section(3A) to section 211 of Companies Act, 1956 requires that every

    Profit/Loss Account and Balance Sheet shall comply with the Accounting Standards.

    'Accounting Standards' means the standard of accounting recomended by the ICAI

    and prescribed by the Central Government in consultation with the National

    Advisory Committee on Accounting Standards(NACAs) constituted under section

    210(1) of companies Act, 1956.

    Accounting Standards Issued by the Institute of Chatered Accountants of

    India are as below:

    Disclosure of accounting policies:

    Valuation Of Inventories:

    Cash Flow Statements

    Contingencies and events Occurring after the Balance sheet Date

    http://www.saralaccounts.com/resources/accounting-std.php#1http://www.saralaccounts.com/resources/accounting-std.php#2http://www.saralaccounts.com/resources/accounting-std.php#3http://www.saralaccounts.com/resources/accounting-std.php#4http://www.saralaccounts.com/resources/accounting-std.php#1http://www.saralaccounts.com/resources/accounting-std.php#2http://www.saralaccounts.com/resources/accounting-std.php#3http://www.saralaccounts.com/resources/accounting-std.php#4
  • 7/29/2019 Indian GAAP

    8/63

    Net Profit or loss For the period, Prior period items and Changes in accounting

    Policies.

    Depreciation accounting.

    Construction Contracts.

    Revenue Recognition.

    Accounting For Fixed Assets.

    The Effect of Changes In Foreign Exchange Rates.

    Accounting For Government Grants.

    Accounting For Investments.

    Accounting For Amalgamation.

    Employee Benefits.

    Borrowing Cost.

    Segment Reporting.

    Related Party Disclosures.

    Accounting For Leases.

    Earning Per Share.

    Consolidated Financial Statement.

    Accounting For Taxes on Income.

    Accounting for Investment in associates in Consolidated Financial Statement.

    Discontinuing Operation.

    Interim Financial Reporting.

    Intangible assets.

    Financial Reporting on Interest in joint Ventures.

    Impairment Of assets.

    Provisions, Contingent, liabilities and Contingent assets.

    Financial instrument.

    Financial Instrument: presentation.

    http://www.saralaccounts.com/resources/accounting-std.php#5http://www.saralaccounts.com/resources/accounting-std.php#5http://www.saralaccounts.com/resources/accounting-std.php#6http://www.saralaccounts.com/resources/accounting-std.php#7http://www.saralaccounts.com/resources/accounting-std.php#8http://www.saralaccounts.com/resources/accounting-std.php#9http://www.saralaccounts.com/resources/accounting-std.php#10http://www.saralaccounts.com/resources/accounting-std.php#10http://www.saralaccounts.com/resources/accounting-std.php#11http://www.saralaccounts.com/resources/accounting-std.php#11http://www.saralaccounts.com/resources/accounting-std.php#12http://www.saralaccounts.com/resources/accounting-std.php#13http://www.saralaccounts.com/resources/accounting-std.php#14http://www.saralaccounts.com/resources/accounting-std.php#15http://www.saralaccounts.com/resources/accounting-std.php#15http://www.saralaccounts.com/resources/accounting-std.php#16http://www.saralaccounts.com/resources/accounting-std.php#17http://www.saralaccounts.com/resources/accounting-std.php#18http://www.saralaccounts.com/resources/accounting-std.php#18http://www.saralaccounts.com/resources/accounting-std.php#19http://www.saralaccounts.com/resources/accounting-std.php#20http://www.saralaccounts.com/resources/accounting-std.php#20http://www.saralaccounts.com/resources/accounting-std.php#21http://www.saralaccounts.com/resources/accounting-std.php#22http://www.saralaccounts.com/resources/accounting-std.php#22http://www.saralaccounts.com/resources/accounting-std.php#23http://www.saralaccounts.com/resources/accounting-std.php#24http://www.saralaccounts.com/resources/accounting-std.php#24http://www.saralaccounts.com/resources/accounting-std.php#25http://www.saralaccounts.com/resources/accounting-std.php#25http://www.saralaccounts.com/resources/accounting-std.php#26http://www.saralaccounts.com/resources/accounting-std.php#26http://www.saralaccounts.com/resources/accounting-std.php#27http://www.saralaccounts.com/resources/accounting-std.php#28http://www.saralaccounts.com/resources/accounting-std.php#29http://www.saralaccounts.com/resources/accounting-std.php#30http://www.saralaccounts.com/resources/accounting-std.php#5http://www.saralaccounts.com/resources/accounting-std.php#5http://www.saralaccounts.com/resources/accounting-std.php#6http://www.saralaccounts.com/resources/accounting-std.php#7http://www.saralaccounts.com/resources/accounting-std.php#8http://www.saralaccounts.com/resources/accounting-std.php#9http://www.saralaccounts.com/resources/accounting-std.php#10http://www.saralaccounts.com/resources/accounting-std.php#11http://www.saralaccounts.com/resources/accounting-std.php#12http://www.saralaccounts.com/resources/accounting-std.php#13http://www.saralaccounts.com/resources/accounting-std.php#14http://www.saralaccounts.com/resources/accounting-std.php#15http://www.saralaccounts.com/resources/accounting-std.php#16http://www.saralaccounts.com/resources/accounting-std.php#17http://www.saralaccounts.com/resources/accounting-std.php#18http://www.saralaccounts.com/resources/accounting-std.php#19http://www.saralaccounts.com/resources/accounting-std.php#20http://www.saralaccounts.com/resources/accounting-std.php#21http://www.saralaccounts.com/resources/accounting-std.php#22http://www.saralaccounts.com/resources/accounting-std.php#23http://www.saralaccounts.com/resources/accounting-std.php#24http://www.saralaccounts.com/resources/accounting-std.php#25http://www.saralaccounts.com/resources/accounting-std.php#26http://www.saralaccounts.com/resources/accounting-std.php#27http://www.saralaccounts.com/resources/accounting-std.php#28http://www.saralaccounts.com/resources/accounting-std.php#29http://www.saralaccounts.com/resources/accounting-std.php#30
  • 7/29/2019 Indian GAAP

    9/63

    Financial Instruments, Disclosures and Limited revision to accounting

    standards.

    Disclosure of Accounting Policies: Accounting Policies refer to specific

    accounting principles and the method of applying those principles adopted by the

    enterprises in preparation and presentation of the financial statements.

    Valuation of Inventories: The objective of this standard is to formulate the

    method of computation of cost of inventories / stock, determine the value of closing

    stock / inventory at which the inventory is to be shown in balance sheet till it is not

    sold and recognized as revenue.

    Cash Flow Statements: Cash flow statement is additional information to user of

    financial statement. This statement exhibits the flow of incoming and outgoing

    cash. This statement assesses the ability of the enterprise to generate cash and to

    utilize the cash. This statement is one of the tools for assessing the liquidity and

    solvency of the enterprise.

    Contigencies and Events occuring after the balance sheet date: In preparing

    financial statement of a particular enterprise, accounting is done by following

    accrual basis of accounting and prudent accounting policies to calculate the profit

    or loss for the year and to recognize assets and liabilities in balance sheet. While

    following the prudent accounting policies, the provision is made for all known

    liabilities and losses even for those liabilities / events, which are probable.

    Professional judgement is required to classify the likehood of the future events

    occuring and, therefore, the question of contingencies and their accounting arises.

    Objective of this standard is to prescribe the accounting of contigencies and the

    events, which take place after the balance sheet date but before approval of

    balance sheet by Board of Directors. The Accounting Standard deals with

    Contingencies and Events occuring after the balance sheet date.

    Net Profit or Loss for the Period, Prior Period Items and change in

    Accounting Policies : The objective of this accounting standard is to prescribe the

    criteria for certain items in the profit and loss account so that comparability of the

    financial statement can be enhanced. Profit and loss account being a period

    statement covers the items of the income and expenditure of the particular period.

    This accounting standard also deals with change in accounting policy, accounting

    estimates and extraordinary items.

    Depreciation Accounting : It is a measure of wearing out, consumption or other

    loss of value of a depreciable asset arising from use, passage of time. Depreciation

    is nothing but distribution of total cost of asset over its useful life.

    Construction Contracts : Accounting for long term construction contracts

    involves question as to when revenue should be recognized and how to measure

    http://www.saralaccounts.com/resources/accounting-std.php#31http://www.saralaccounts.com/resources/accounting-std.php#31http://www.saralaccounts.com/resources/accounting-std.php#31http://www.saralaccounts.com/resources/accounting-std.php#31
  • 7/29/2019 Indian GAAP

    10/63

    the revenue in the books of contractor. As the period of construction contract is

    long, work of construction starts in one year and is completed in another year or

    after 4-5 years or so. Therefore question arises how the profit or loss of construction

    contract by contractor should be determined. There may be following two ways to

    determine profit or loss: On year-to-year basis based on percentage of completion

    or On cpmpletion of the contract.

    Revenue Recognition : The standard explains as to when the revenue should be

    recognized in profit and loss account and also states the circumstances in which

    revenue recognition can be postponed. Revenue means gross inflow of cash,

    receivable or other consideration arising in the course of ordinary activities of an

    enterprise such as:- The sale of goods, Rendering of Services, and Use of

    enterprises resources by other yeilding interest, dividend and royalties. In other

    words, revenue is a charge made to customers / clients for goods supplied and

    services rendered.

    Accounting for Fixed Assets : It is an asset, which is:- Held with intention ofbeing used for the purpose of producing or providing goods and services. Not held

    for sale in the normal course of business. Expected to be used for more than one

    accounting period.

    The Effects of changes in Foreign Exchange Rates : Effect of Changes in

    Foreign Exchange Rate shall be applicable in Respect of Accounting Period

    commencing on or after 01-04-2004 and is mandatory in nature. This accounting

    Standard applicable to accounting for transaction in Foreign currencies in

    translating in the Financial Statement Of foreign operation Integral as well as non-

    integral and also accounting for For forward exchange.Effect of Changes in Foreign

    Exchange Rate, an enterprises should disclose following aspects:

    Amount Exchange Difference included in Net profit or Loss;

    Amount accumulated in foreign exchange translation reserve;

    Reconciliation of opening and closing balance of Foreign Exchange translation

    reserve;

    Accounting for Government Grants : Governement Grants are assistance by the

    Govt. in the form of cash or kind to an enterprise in return for past or future

    compliance with certain conditions. Government assistance, which cannot be valued

    reasonably, is excluded from Govt. grants,. Those transactions with Governement,

    which cannot be distinguished from the normal trading transactions of the

    enterprise, are not considered as Government grants.

    Accounting for Investments : It is the assets held for earning income by way of

    dividend, interest and rentals, for capital appreciation or for other benefits.

  • 7/29/2019 Indian GAAP

    11/63

    Accounting for Amalgamation : This accounting standard deals with accounting

    to be made in books of Transferee company in case of amalgamtion. This

    accounting standard is not applicable to cases of acquisition of shares when one

    company acquires / purcahses the share of another company and the acquired

    company is not dissolved and its seperate entity continues to exist. The standard is

    applicable when acquired company is dissolved and seperate entity ceased existand purchasing company continues with the business of acquired company

    Employee Benefits : Accounting Standard has been revised by ICAI and is

    applicable in respect of accounting periods commencing on or after 1st April 2006.

    the scope of the accounting standard has been enlarged, to include accounting for

    short-term employee benefits and termination benefits.

    Borrowing Costs : Enterprises are borrowing the funds to acquire, build and install

    the fixed assets and other assets, these assets take time to make them useable or

    saleable, therefore the enterprises incur the interest (cost on borrowing) to acquire

    and build these assets. The objective of the Accounting Standard is to prescribe thetreatment of borrowing cost (interest + other cost) in accounting, whether the cost

    of borrowing should be included in the cost of assets or not.

    Segment Reporting : An enterprise needs in multiple products/services and

    operates in different geographical areas. Multiple products / services and their

    operations in different geographical areas are exposed to different risks and

    returns. Information about multiple products / services and their operation in

    different geographical areas are called segment information. Such information is

    used to assess the risk and return of multiple products/services and their operation

    in different geographical areas. Disclosure of such information is called segment

    reporting.

    Related Paty Disclosure : Sometimes business transactions between related

    parties lose the feature and character of the arms length transactions. Related

    party relationship affects the volume and decision of business of one enterprise for

    the benefit of the other enterprise. Hence disclosure of related party transaction is

    essential for proper understanding of financial performance and financial position of

    enterprise.

    Accounting for leases : Lease is an arrangement by which the lesser gives the

    right to use an asset for given period of time to the lessee on rent. It involves two

    parties, a lessor and a lessee and an asset which is to be leased. The lessor whoowns the asset agrees to allow the lessee to use it for a specified period of time in

    return of periodic rent payments.

    Earning Per Share :Earning per share (EPS)is a financial ratio that gives the

    information regarding earning available to each equiy share. It is very important

    financial ratio for assessing the state of market price of share. This accounting

    standard gives computational methodology for the determination and presentation

  • 7/29/2019 Indian GAAP

    12/63

    of earning per share, which will improve the comparison of EPS. The statement is

    applicable to the enterprise whose equity shares or potential equity shares are

    listed in stock exchange.

    Consolidated Financial Statements : The objective of this statement is to

    present financial statements of a parent and its subsidiary (ies) as a singleeconomic entity. In other words the holding company and its subsidiary (ies) are

    treated as one entity for the preparation of these consolidated financial statements.

    Consolidated profit/loss account and consolidated balance sheet are prepared for

    disclosing the total profit/loss of the group and total assets and liabilities of the

    group. As per this accounting standard, the conslidated balance sheet if prepared

    should be prepared in the manner prescribed by this statement.

    Accounting for Taxes on Income : This accounting standard prescribes the

    accounting treatment for taxes on income. Traditionally, amount of tax payable is

    determined on the profit/loss computed as per income tax laws. According to this

    accounting standard, tax on income is determined on the principle of accrualconcept. According to this concept, tax should be accounted in the period in which

    corresponding revenue and expenses are accounted. In simple words tax shall be

    accounted on accrual basis; not on liability to pay basis.

    Accounting for Investments in Associates in consolidated financial

    statements :The accounting standard was formulated with the objective to set out

    the principles and procedures for recognizing the investment in associates in the

    cosolidated financial statements of the investor, so that the effect of investment in

    associates on the financial position of the group is indicated.

    Discontinuing Operations :The objective of this standard is to establishprinciples for reporting information about discontinuing operations. This standard

    covers "discontinuing operations" rather than "discontinued operation". The focus of

    the disclosure of the Information is about the operations which the enterprise plans

    to discontinue rather than dsclosing on the operations which are already

    discontinued. However, the disclosure about discontinued operation is also covered

    by this standard.

    Interim Financial Reporting (IFR) : Interim financial reporting is the reporting for

    periods of less than a year generally for a period of 3 months. As per clause 41 of

    listing agreement the companies are required to publish the financial results on a

    quarterly basis.

    Intangible Assets : An Intangible Asset is an Identifiable non-monetary Asset

    without physical substance held for use in the production or supplying of goods or

    services for rentals to others or for administrative purpose

    Financial Reporting of Interest in joint ventures : Joint Venture is defined as a

    contractual arrangement whereby two or more parties carry on an economic

  • 7/29/2019 Indian GAAP

    13/63

    activity under 'joint control'. Control is the power to govern the financial and

    operating policies of an economic activity so as to obtain benefit from it. 'Joint

    control' is the contractually agreed sharing of control over economic activity.

    Impairment of Assets : The dictionary meanong of 'impairment of asset' is

    weakening in value of asset. In other words when the value of asset decreases, itmay be called impairment of an asset. As per AS-28 asset is said to be impaired

    when carrying amount of asset is more than its recoverable amount.

    Provisions, Contingent Liabilities And Contingent Assets : Objective of this

    standard is to prescribe the accounting for Provisions, Contingent Liabilitites,

    Contingent Assets, Provision for restructuring cost.

    Provision: It is a liability, which can be measured only by using a substantial degree

    of estimation.

    Liability: A liability is present obligation of the enterprise arising from past events

    the settlement of which is expected to result in an outflow from the enterprise of

    resources embodying economic benefits.

    Financial Instrument: Recognition and Measurement, issued by The Council of

    the Institute of Chartered Accountants of India, comes into effect in respect of

    Accounting periods commencing on or after 1-4-2009 and will be recommendatory

    in nature for An initial period of two years. This Accounting Standard will become

    mandatory in respect of Accounting periods commencing on or after 1-4-2011 for all

    commercial, industrial and business Entities except to a Small and Medium-sized

    Entity. The objective of this Standard is to establish principles for recognizing and

    measuring Financial assets, financial liabilities and some contracts to buy or sellnon-financial items. Requirements for presenting information about financial

    instruments are in Accounting Standard.

    Financial Instrument: presentation :The objective of this Standard is to

    establish principles for presenting financial instruments as liabilities or equity and

    for offsetting financial assets and financial liabilities. It applies to the classification

    of financial instruments, from the perspective of the issuer, into financial assets,

    financial liabilities and equity instruments; the classification of related interest,

    dividends, losses and gains; and the circumstances in which financial assets andfinancial liabilities should be offset. The principles in this Standard complement the

    principles for recognising and measuring financial assets and financial liabilities in

    Accounting Standard Financial Instruments:

  • 7/29/2019 Indian GAAP

    14/63

    Financial Instruments, Disclosures and Limited revision to accounting

    standards:The objective of this Standard is to require entities to provide

    disclosures in their financial statements that enable users to evaluate:

    the significance of financial instruments for the entitys financial position and

    performance; and

    the nature and extent of risks arising from financial instruments to which the

    entity is exposed during the period and at the reporting date, and how the

    entity manages those risks.

    The Institute of Chartered Accountants of India (ICAI) is a statutory body established

    under the Chartered Accountants Act, 1949 (Act No. XXXVIII of 1949) for the

    regulation of the profession of Chartered Accountants in India. During its 61 years of

    existence, ICAI has achieved recognition as a premier accounting body not only in

    the country but also globally, for its contribution in the fields of education,

    professional development, maintenance of high accounting, auditing and ethicalstandards.ICAI now is the second largest accounting body in the whole world.

    Indian Accounting Standards, abbreviated as Ind AS are a set of accounting

    standards notified by the Ministry of Corporate Affairs which are converged with

    International Financial Reporting Standards(IFRS). These accounting standards are

    formulated bu Accounting Standards Board ofInstitute of Chartered Accountants of

    India. Now India will have two sets of accounting standards viz. existing accounting

    standards under Companies (Accounting Standard) Rules, 2006 and IFRS converged

    Indian Accounting Standards(Ind AS). The Ind AS are named and numbered in the

    same way as the corresponding IFRS. NACAS recommend these standards to the

    Ministry of Corporate Affairs. The Ministry of Corporate Affairs has to spell out theaccounting standards applicable for companies in India. As on date the Ministry of

    Corporate Affairs notified 35 Indian Accounting Standards(Ind AS). But it has not

    notified the date of implementation of the same.

    Convergence with IFRS

    The inception of the idea of convergence of Indian GAAP with IFRS was made my

    the Prime Minister of India Dr. Manmohan Singh by committing in G20 to align

    Indian accounting standards with IFRS. Thereafter ICAI has decided to converge its

    Accounting Standards with IFRS for accounting periods commencing on or after 1

    April 2011 in a phased manner as envisaged the Roadmap to IFRS formulated bythe Ministry of Corporate Affairs. For smooth transition to IFRS, ICAI has taken up

    the matter of convergence with the National Advisory Committee on Accounting

    Standards and various regulators such as the RBI, SEBI and IRDA, CBDT. IASB, the

    issuer of IFRS, is also supporting the ICAI in its endeavours towards convergence.

    It has been decided that there shall be two sets of Accounting Standards under the

    Companies Act. The new set of standards which have been converged with IFRS are

    http://en.wikipedia.org/wiki/Ministry_of_Corporate_Affairs_(India)http://en.wikipedia.org/wiki/International_Financial_Reporting_Standardshttp://en.wikipedia.org/wiki/IFRShttp://en.wikipedia.org/wiki/Institute_of_Chartered_Accountants_of_Indiahttp://en.wikipedia.org/wiki/Institute_of_Chartered_Accountants_of_Indiahttp://en.wikipedia.org/wiki/IFRShttp://en.wikipedia.org/wiki/NACAShttp://en.wikipedia.org/wiki/Ministry_of_Corporate_Affairs_(India)http://en.wikipedia.org/wiki/Ministry_of_Corporate_Affairs_(India)http://en.wikipedia.org/wiki/Ministry_of_Corporate_Affairs_(India)http://en.wikipedia.org/wiki/GAAPhttp://en.wikipedia.org/wiki/IFRShttp://en.wikipedia.org/wiki/Dr._Manmohan_Singhhttp://en.wikipedia.org/wiki/G20http://en.wikipedia.org/wiki/IFRShttp://en.wikipedia.org/wiki/Accounting_periodhttp://en.wikipedia.org/wiki/Ministry_of_Corporate_Affairs_(India)http://en.wikipedia.org/wiki/National_Advisory_Committee_on_Accounting_Standardshttp://en.wikipedia.org/wiki/National_Advisory_Committee_on_Accounting_Standardshttp://en.wikipedia.org/wiki/Reserve_Bank_of_Indiahttp://en.wikipedia.org/wiki/Securities_and_Exchange_Board_of_Indiahttp://en.wikipedia.org/wiki/Insurance_Regulatory_and_Development_Authorityhttp://en.wikipedia.org/wiki/Central_Board_of_Direct_Taxeshttp://en.wikipedia.org/wiki/IASBhttp://en.wikipedia.org/wiki/Ministry_of_Corporate_Affairs_(India)http://en.wikipedia.org/wiki/International_Financial_Reporting_Standardshttp://en.wikipedia.org/wiki/IFRShttp://en.wikipedia.org/wiki/Institute_of_Chartered_Accountants_of_Indiahttp://en.wikipedia.org/wiki/Institute_of_Chartered_Accountants_of_Indiahttp://en.wikipedia.org/wiki/IFRShttp://en.wikipedia.org/wiki/NACAShttp://en.wikipedia.org/wiki/Ministry_of_Corporate_Affairs_(India)http://en.wikipedia.org/wiki/Ministry_of_Corporate_Affairs_(India)http://en.wikipedia.org/wiki/Ministry_of_Corporate_Affairs_(India)http://en.wikipedia.org/wiki/GAAPhttp://en.wikipedia.org/wiki/IFRShttp://en.wikipedia.org/wiki/Dr._Manmohan_Singhhttp://en.wikipedia.org/wiki/G20http://en.wikipedia.org/wiki/IFRShttp://en.wikipedia.org/wiki/Accounting_periodhttp://en.wikipedia.org/wiki/Ministry_of_Corporate_Affairs_(India)http://en.wikipedia.org/wiki/National_Advisory_Committee_on_Accounting_Standardshttp://en.wikipedia.org/wiki/National_Advisory_Committee_on_Accounting_Standardshttp://en.wikipedia.org/wiki/Reserve_Bank_of_Indiahttp://en.wikipedia.org/wiki/Securities_and_Exchange_Board_of_Indiahttp://en.wikipedia.org/wiki/Insurance_Regulatory_and_Development_Authorityhttp://en.wikipedia.org/wiki/Central_Board_of_Direct_Taxeshttp://en.wikipedia.org/wiki/IASB
  • 7/29/2019 Indian GAAP

    15/63

    now known as Indian Accounting Standards or Ind AS. The Ministry of Corporate

    Affairs has notified the 35 Ind AS on 25 February 2011.[2] The text of the 35 Ind AS

    are now available at the Ministry of Corporate Affairs portal.[3] At the same time The

    Ministry of Corporate Affairs haven't specified the date of implementation of the

    same. This reluctance of The Ministry of Corporate Affairs to notify the date even

    when the proposed date is less than a month away is seen as rooted in the stronglobbying my the Corporates in India to defer the implementation. But the president

    ofICAI. CA.G.Ramaswamy expects that it will be notified soon and there wont be

    any deferment.[4]

    [edit] List of Ind AS

    1. Ind AS 101 First-time Adoption of Indian Accounting Standards

    2. Ind AS 102 Share based Payment

    3. Ind AS 103 Business Combinations

    4. Ind AS 104 Insurance Contracts

    5. Ind AS 105 Non current Assets Held for Sale and Discontinued Operations

    6. Ind AS 106 Exploration for and Evaluation of Mineral Resources

    7. Ind AS 107 Financial Instruments: Disclosures

    8. Ind AS 108 Operating Segments

    9. Ind AS 1 Presentation of Financial Statements

    10.Ind AS 2 Inventories

    11.Ind AS 7 Statement of Cash Flows

    12.Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors

    13.Ind AS 10 Events after the Reporting Period

    14.Ind AS 11 Construction Contracts

    15.Ind AS 12 Income Taxes

    16.Ind AS 16 Property, Plant and Equipment

    17.Ind AS 17 Leases

    18.Ind AS 18 Revenue

    19.Ind AS 19 Employee Benefits

    http://en.wikipedia.org/wiki/Ind_AShttp://en.wikipedia.org/wiki/Indian_Accounting_Standards#cite_note-1http://en.wikipedia.org/wiki/Indian_Accounting_Standards#cite_note-2http://en.wikipedia.org/wiki/ICAIhttp://en.wikipedia.org/wiki/CA.G.Ramaswamyhttp://en.wikipedia.org/wiki/Indian_Accounting_Standards#cite_note-3http://en.wikipedia.org/w/index.php?title=Indian_Accounting_Standards&action=edit&section=2http://en.wikipedia.org/wiki/Ind_AShttp://en.wikipedia.org/wiki/Indian_Accounting_Standards#cite_note-1http://en.wikipedia.org/wiki/Indian_Accounting_Standards#cite_note-2http://en.wikipedia.org/wiki/ICAIhttp://en.wikipedia.org/wiki/CA.G.Ramaswamyhttp://en.wikipedia.org/wiki/Indian_Accounting_Standards#cite_note-3http://en.wikipedia.org/w/index.php?title=Indian_Accounting_Standards&action=edit&section=2
  • 7/29/2019 Indian GAAP

    16/63

    20.Ind AS 20 Accounting for Government Grants and Disclosure of Government

    Assistance

    21.Ind AS 21 The Effects of Changes in Foreign Exchange Rates

    22.Ind AS 23 Borrowing Costs

    23.Ind AS 24 Related Party Disclosures

    24.Ind AS 27 Consolidated and Separate Financial Statements

    25.Ind AS 28 Investments in Associates

    26.Ind AS 29 Financial Reporting in Hyperinflationary Economies

    27.Ind AS 31 Interests in Joint Ventures

    28.Ind AS 32 Financial Instruments: Presentation

    29.Ind AS 33 Earnings per Share

    30.Ind AS 34 Interim Financial Reporting

    31.Ind AS 36 Impairment of Assets

    32.Ind AS 37 Provisions, Contingent Liabilities and Contingent Assets

    33.Ind AS 38 Intangible Assets

    34.Ind AS 39 Financial Instruments: Recognition and Measurement

    35.Ind AS 40 Investment Property

    News:

    http://www.moneycontrol.com/news/the-firm/jamil-khatris-ifrs-diary-part-

    10_526759.html

    Through a press release, the Ministry of Corporate Affairs (MCA) notified the final

    Ind AS on February 25, 2011. This is an important first step in operationalizing the

    adoption of the Ind AS by Indian companies.

    Key points:

    The February 25 press release states that the Ind AS will be implemented

    after various issues, including tax related issues are resolved with other

    relevant government departments (for example, the Ministry of Finance).

    Accordingly, the actual date of implementation of the Ind AS is proposed to

    be notified by the MCA at a later date

    http://www.moneycontrol.com/news/the-firm/jamil-khatris-ifrs-diary-part-10_526759.htmlhttp://www.moneycontrol.com/news/the-firm/jamil-khatris-ifrs-diary-part-10_526759.htmlhttp://www.moneycontrol.com/news/the-firm/jamil-khatris-ifrs-diary-part-10_526759.htmlhttp://www.moneycontrol.com/news/the-firm/jamil-khatris-ifrs-diary-part-10_526759.html
  • 7/29/2019 Indian GAAP

    17/63

    Per its announcement dated January 22, 2010, the MCA had issued a phased

    approach for IFRS convergence by Indian companies based on net worth and

    certain other specified criteria. The MCA now needs to notify whether the

    previously specified timelines (which would require certain companies to

    follow the Ind AS from April 1, 2011) would continue; or alternatively specify

    the new timelines for adoption of Ind AS

    The adoption of Ind AS will need an amendment of various sections of the

    Companies Act. In addition to amendments to Schedule VI and Schedule XIV

    of the Companies Act, various individual sections of the Companies Act may

    also need to be changed. Similarly, amendments would need to be made to

    specify how distributable profits will be determined by companies that follow

    Ind AS

    The government needs to notify how income taxes (including Minimum

    Alternate Tax) will be computed by companies that follow Ind AS. While it

    may seem intuitive to permit companies that follow Ind AS, to use profitscomputed per Ind AS as a starting point for computing their income tax

    liability; this approach has its own limitations. Profits computed per Ind AS

    are likely to include various types of unrealized gains/losses (for example,

    unrealized gains/losses on derivatives) and other notional non-cash

    accounting adjustments (for example, notional higher interest cost on

    convertible instruments based on fair value principles). It may be difficult to

    identify and list in the income tax laws all such items that may require a

    treatment for tax purposes, which is different from the books of accounts.

    Alternatively, requiring that taxable profits be computed per some other

    bases (for example, old Indian GAAP) would require Ind AS companies to

    make several adjustments to Ind AS book profits to compute taxable profits.

    This is a sensitive issue, and I am aware that various government

    departments are currently working through this issue. In this regard, the

    experience of European countries may be relevant as Indian regulators seek

    to address this issue. Several European countries opted to disregard the

    IFRS-based profits and required companies to compute taxable income per

    other frameworks, which were based more on historical cost conventions.

    The previous chapter of my diary (Part 9) had a discussion on the carve outs that

    had been proposed in the near final Ind AS submitted by the ICAI (mandatory

    deviations from IFRS, voluntary deviations from IFRS and removal of options underIFRS). There are a few substantive differences between the final Ind AS and the

    near final Ind AS previously issued by the ICAI. Consequently all carve outs

    proposed in the near final Ind AS have been accepted in the final versions with

    some modifications and additions which are outlined below:

    The near final Ind AS specified that a company could choose to use the Indian

    GAAP carrying values of fixed assets acquired before April 1, 2007, as the

  • 7/29/2019 Indian GAAP

    18/63

    deemed cost for future accounting under Ind AS (i.e. a company could

    choose not to make any adjustment in the opening Ind AS balance sheet for

    such assets). The final Ind AS extend the benefit of this exemption to all such

    assets acquired before the transition date. This is a major relief to all

    transitioning companies

    The final Ind AS defer the application of guidance on accounting for

    embedded leases and service concession arrangements. While guidance on

    accounting for such arrangements has been included as part of the Ind AS,

    the effective date for the application of these principles is not the transition

    date, and will be notified separately. This deferral would impact infrastructure

    and power companies

    Similarly, the Ind AS that governs accounting for exploration and evaluation

    of mineral resources will be applied (with potential modification) from a date

    to be notified later.

    Even though the transition date for adoption of Ind AS has not been notified, the

    notification of the final Ind AS affirms Indias commitment for convergence to IFRS.

    However, as discussed above, there are several important steps that need to be

    implemented by the regulators to fully operationalize the adoption of Ind AS.

    It is now clear that while Ind AS financial statements presented for the first

    transition period cannot be fully compliant with IFRS (since comparatives would not

    be presented), Ind AS financial statements for subsequent years can be made fully

    compliant with IFRS, if a company chooses optimal accounting policies and does not

    adopt the diluted alternatives available under Ind AS. This is assuming that a

    company is not impacted by the mandatory deviations.

    With the issuance of final Ind AS, it is now up to each company to finalize its

    preparations for the eventual transition. Any additional time that may be available

    due to the deferral of the transition date, should be used to further embed Ind AS

    reporting into the financial reporting systems and processes.

    http://pib.nic.in/newsite/erelease.aspx?relid=70248

    Indian Accounting Standards Converged with IFRS Notified

    Reliable, consistent and uniform financial reporting is important part of good

    corporate governance practices worldwide in order to enhance the credibility of the

    businesses in the eyes of investors to take informed investment decisions. In

    pursuance of G-20 commitment given by India, the process of convergence of

    Indian Accounting Standards with IFRS has been carried out in Ministry of Corporate

    Affairs through wide ranging consultative exercise with all the stakeholders. Thirty

    five Indian Accounting Standards converged with International Financial Reporting

    Standards (henceforth called IND AS) are being notified by the Ministry and placed

    http://pib.nic.in/newsite/erelease.aspx?relid=70248http://pib.nic.in/newsite/erelease.aspx?relid=70248
  • 7/29/2019 Indian GAAP

    19/63

    on the website. . These are: IND ASs 1, 2, 7, 8, 10, 11, 12, 16, 17, 18, 19, 20, 21, 23,

    24, 27, 28, 29, 31, 32, 33, 34, 36, 37, 38, 39, 40, 101, 102, 103, 104, 105, 106, 107

    and 108. The Ministry of Corporate Affairs will implement the IFRS converged Indian

    Accounting Standards in a phased manner after various issues including tax related

    issues are resolved with the concerned Departments. It would be ensured that the

    implementation of the converged standards in a phased manner is smooth for thestakeholders. The date of implementation of the IND AS will be notified by the

    Ministry at a later date.

    Reference

    http://220.227.161.86/9548Indian%20Accounting%20Standards.pdf

    http://www.saralaccounts.com/resources/accounting-std.php

    2. IFRS and Indian GAAP

    India, in 2011, joins the global accounting revolution: International

    Financial Reporting Standards. Convergence with IFRS is not just aboutswitching over from one set of accounting & reporting standards toanother. It takes the description of a revolution because conceptualdifferences are expected, as evidenced in this publication.

    Convergence is more about a complete business and financial strategyto adopt international standards which is expected to be a long drawnprocess involving investment of time and resources.

    http://220.227.161.86/9548Indian%20Accounting%20Standards.pdfhttp://www.saralaccounts.com/resources/accounting-std.phphttp://220.227.161.86/9548Indian%20Accounting%20Standards.pdfhttp://www.saralaccounts.com/resources/accounting-std.php
  • 7/29/2019 Indian GAAP

    20/63

  • 7/29/2019 Indian GAAP

    21/63

  • 7/29/2019 Indian GAAP

    22/63

  • 7/29/2019 Indian GAAP

    23/63

  • 7/29/2019 Indian GAAP

    24/63

  • 7/29/2019 Indian GAAP

    25/63

  • 7/29/2019 Indian GAAP

    26/63

  • 7/29/2019 Indian GAAP

    27/63

  • 7/29/2019 Indian GAAP

    28/63

  • 7/29/2019 Indian GAAP

    29/63

  • 7/29/2019 Indian GAAP

    30/63

  • 7/29/2019 Indian GAAP

    31/63

  • 7/29/2019 Indian GAAP

    32/63

  • 7/29/2019 Indian GAAP

    33/63

  • 7/29/2019 Indian GAAP

    34/63

  • 7/29/2019 Indian GAAP

    35/63

  • 7/29/2019 Indian GAAP

    36/63

  • 7/29/2019 Indian GAAP

    37/63

  • 7/29/2019 Indian GAAP

    38/63

  • 7/29/2019 Indian GAAP

    39/63

  • 7/29/2019 Indian GAAP

    40/63

    3. Difference between financial accounting and management accounting

    Management accounting or managerial accounting is concerned with the

    provisions and use ofaccounting information to managers within organizations,

    to provide them with the basis to make informed business decisions that will

    allow them to be better equipped in their management and control functions.

    In contrast to financial accountancy information, management accounting

    information is:

    forward-looking, instead of historical;

    model based with a degree of abstraction to support decision making

    generically, instead of case based;

    designed and intended for use by managers within the organization, instead

    of being intended for use by shareholders, creditors, and public regulators;

    usually confidential and used by management, instead of publicly reported;

    computed by reference to the needs of managers, often using management

    information systems, instead of by reference to general financial accounting

    standards.

    According to the Chartered Institute of Management Accountants (CIMA), Management

    Accounting is "the process of identification, measurement, accumulation, analysis,

    preparation, interpretation and communication of information used by management toplan, evaluate and control within an entity and to assure appropriate use of and

    accountability for its resources. Management accounting also comprises the preparation

    of financial reports for non-management groups such as shareholders, creditors,regulatory agencies and tax authorities" (CIMA Official Terminology).

    http://en.wikipedia.org/wiki/Accountinghttp://en.wikipedia.org/wiki/Financial_accountancyhttp://en.wikipedia.org/wiki/Management_information_systemhttp://en.wikipedia.org/wiki/Management_information_systemhttp://en.wikipedia.org/wiki/Chartered_Institute_of_Management_Accountantshttp://en.wikipedia.org/wiki/Accountinghttp://en.wikipedia.org/wiki/Financial_accountancyhttp://en.wikipedia.org/wiki/Management_information_systemhttp://en.wikipedia.org/wiki/Management_information_systemhttp://en.wikipedia.org/wiki/Chartered_Institute_of_Management_Accountants
  • 7/29/2019 Indian GAAP

    41/63

    The Institute of Management Accountants(IMA)[1] recently updated its definition as

    follows: "management accounting is a profession that involves partnering in management

    decision making, devising planning and performance management systems,and providingexpertise in financial reporting and control to assist management in the formulation and

    implementation of an organizations strategy."

    Financial accounting reports are prepared for the use of external parties such as

    shareholders and creditors, whereas managerial accounting reports are prepared

    for managers inside the organization.

    This contrast in basic orientation results in a number of major differences

    between financial and managerial accounting, even though both financial and

    managerial accounting often rely on the same underlying financial data. In

    addition to the to the differences in who the reports are prepared for, financial

    and managerial accounting also differ in their emphasis between the past and

    the future, in the type of data provided to users, and in several other ways.

    These differences are discussed in the following paragraphs.

    Emphasis on the Future:

    Since planning is such an important part of the manager's job, managerial

    accounting has a strong future orientation. In contrast, financial accounting

    primarily provides summaries of past financial transactions. These summaries

    may be useful in planning, but only to a point. The future is not simply a

    reflection of what has happened in the past. Changes are constantly taking place

    in economic conditions, and so on. All of these changes demand that the

    manager's planning be based in large part on estimates of what will happen

    rather than on summaries of what has already happened.

    Relevance of Data:

    Financial accounting data are expected to be objective and verifiable. However,

    for internal use the manager wants information that is relevant even if it is not

    completely objective or verifiable. By relevant, we mean appropriate for the

    problem at hand. For example, it is difficult to verify estimated sales volumes for

    a proposed new store at good Vibrations, Inc., but this is exactly the type of

    information that is most useful to managers in their decision making. The

    managerial accounting information system should be flexible enough to provide

    whatever data are relevant for a particular decision.

    Less Emphasis on Precision:

    Timeliness is often more important than precision to managers. If a decision

    must be made, a manager would rather have a good estimate now than wait a

    week for a more precise answer. A decision involving tens of millions of dollars

    does not have to be based on estimates that are precise down to the penny, or

    http://www.imanet.org/ima_home.aspxhttp://www.imanet.org/ima_home.aspx
  • 7/29/2019 Indian GAAP

    42/63

    even to the dollar. In fact, one authoritative source recommends that, "as a

    general rule, no one needs more than three significant digits., this means, for

    example, that if a company's sales are in the hundreds of millions of dollars,

    than nothing on an income statement needs to be more accurate than the

    nearest million dollars. Estimates that accurate to the nearest million dollars

    may be precise enough to make a good decision. Since precision is costly interms of both time and resources, managerial accounting places less emphasis

    on precision than does financial accounting. In addition, managerial accounting

    places considerable weight on non monitory data, for example, information

    about customer satisfaction is tremendous importance even though it would be

    difficult to express such data in monitory form.

    Segments of an Organization:

    Financial accounting is primarily concerned with reporting for the company as a

    whole. By contrast, managerial accounting forces much more on the parts, or

    segments, of a company. These segments may be product lines, sales territoriesdivisions, departments, or any other categorizations of the company's activities

    that management finds useful. Financial accounting does require breakdowns of

    revenues and cost by major segments in external reports, but this is secondary

    emphasis. In managerial accounting segment reporting is the primary emphasis.

    Generally Accepted Accounting Principles (GAAP):

    Financial accounting statements prepared for external users must be prepared in

    accordance with generally accepted accounting principles (GAAP). External users

    must have some assurance that the reports have been prepared in accordance

    with some common set of ground rules. These common ground rules enhancecomparability and help reduce fraud and misrepresentations, but they do not

    necessarily lead to the type of reports that would be most useful in internal

    decision making. For example, GAAP requires that land be stated at its historical

    cost on financial reports. However if, management is considering moving a store

    to a new location and then selling the land the store currently sits on,

    management would like to know the current market value of the land, a vital

    piece of information that is ignored under generally accepted accounting

    principles (GAAP).

    Managerial Accounting Not Mandatory:

    Financial accounting is mandatory; that is, it must be done. Various out side

    parties such as Securities and exchange commission (SEC) and the tax

    authorities require periodic financial statements. Managerial accounting, on the

    other hand, is not mandatory. A company is completely free to do as much or as

    little as it wishes . No regularity bodies or other outside agencies specify what is

    to be done, for that matter, weather anything is to be done at all. Since

    http://www.accountingformanagement.com/generally_accepted_accounting_principles_gaap.htmhttp://www.accountingformanagement.com/generally_accepted_accounting_principles_gaap.htmhttp://www.accountingformanagement.com/generally_accepted_accounting_principles_gaap.htmhttp://www.accountingformanagement.com/generally_accepted_accounting_principles_gaap.htmhttp://www.accountingformanagement.com/generally_accepted_accounting_principles_gaap.htmhttp://www.accountingformanagement.com/generally_accepted_accounting_principles_gaap.htmhttp://www.accountingformanagement.com/generally_accepted_accounting_principles_gaap.htmhttp://www.accountingformanagement.com/generally_accepted_accounting_principles_gaap.htm
  • 7/29/2019 Indian GAAP

    43/63

    managerial accounting is completely optional, the important question is always,

    "Is the information useful?" rather than, "Is the information required?"

    Summary:

    Financial Accounting Managerial Accounting

    Reports to those outside the

    organization owners, lenders,

    tax authorities and regulators.

    Reports to those inside the

    organization for planning, directing

    and motivating, controlling and

    performance evaluation.

    Emphasis is on summaries of

    financial consequences of past

    activities.

    Emphasis is on decisions affecting the

    future.

    Objectivity and verifiability of

    data are emphasized.

    Relevance of items relating to

    decision making is emphasized. Precision of information is

    required.

    Timeliness of information is required.

    Only summarized data for the

    entire organization is prepared.

    Detailed segment reports about

    departments, products, customers,

    and employees are prepared.

    Must follow Generally Accepted

    Accounting Principles (GAAP).

    Need not follow Generally Accepted

    Accounting Principles (GAAP).

    Mandatory for external reports. Not mandatory

    Introduction

    Financial accounting means Recording of events (transactions)

    Financial management means Planning of events (transactions)

    Managerial accounting is used primarily by those within a company or

    organization. Reports can be generated for any period of time such as daily,

    weekly or monthly. Reports are considered to be "future looking" and have

    forecasting value to those within the company.

    Financial accounting is used primarily by those outside of a company or

    organization. Financial reports are usually created for a set period of time, such

    as a fiscal year or period. Financial reports are historically factual and have

    predictive value to those who wish to make financial decisions or investments in

    a company. Management Accounting is the branch of Accounting that deals

    primarily with confidential financial reports for the exclusive use of top

    management within an organization. These reports are prepared utilizing

    http://www.accountingformanagement.com/generally_accepted_accounting_principles_gaap.htmhttp://www.accountingformanagement.com/generally_accepted_accounting_principles_gaap.htmhttp://www.accountingformanagement.com/generally_accepted_accounting_principles_gaap.htmhttp://www.accountingformanagement.com/generally_accepted_accounting_principles_gaap.htmhttp://en.wikipedia.org/wiki/Managerial_accountinghttp://en.wikipedia.org/wiki/Financial_accountinghttp://www.accountingformanagement.com/generally_accepted_accounting_principles_gaap.htmhttp://www.accountingformanagement.com/generally_accepted_accounting_principles_gaap.htmhttp://www.accountingformanagement.com/generally_accepted_accounting_principles_gaap.htmhttp://www.accountingformanagement.com/generally_accepted_accounting_principles_gaap.htmhttp://en.wikipedia.org/wiki/Managerial_accountinghttp://en.wikipedia.org/wiki/Financial_accounting
  • 7/29/2019 Indian GAAP

    44/63

    scientific and statistical methods to arrive at certain monetary values which are

    then used for decision making. Such reports may include:

    Sales Forecasting reports

    Budget analysis and comparative analysis

    Feasibility studies

    Merger and consolidation reports

    Financial Accounting, on the other hand, concentrates on the production of

    financial reports, including the basic reporting requirements of profitability,

    liquidity, solvency and stability. Reports of this nature can be accessed by

    internal and external users such as the shareholders, the banks and the

    creditors.

    [edit] Regulation and standardization

    While financial accountants follow Generally Accepted Accounting Principles set

    by professional bodies in each country, managerial accountants make use of

    procedures and processes that are not regulated by a standard-setting bodies.

    However, multinational companies prefer to employ managerial accountants

    who have passed the Certified Management Accountant certification. The CMA is

    an examination given by the Institute of Management Accountant, a professional

    organization of Accounting professionals. This certification is different.

    [edit] Time Period

    Managerial Accounting provides top management with reports that are future-

    oriented, while Financial Accounting provides reports based on historical

    information. There is no time span for producing managerial accounting

    statements but financial accounting statements are generally required to be

    produced for the period of 12 previous months.

    [edit] Other differences

    There is no legal requirement for an organization to use management

    accounting but publicly-traded firms (limited companies or whose shares are

    bought and sold on an open market) must, by law, prepare financial account

    statements.

    In management accounting systems there is no requirement for an

    independent external review but financial accounting annual statements

    must be audited by an independent CPA firm.

    http://en.wikipedia.org/w/index.php?title=Differences_between_managerial_accounting_and_financial_accounting&action=edit&section=2http://en.wikipedia.org/wiki/Generally_Accepted_Accounting_Principleshttp://en.wikipedia.org/w/index.php?title=Differences_between_managerial_accounting_and_financial_accounting&action=edit&section=3http://en.wikipedia.org/w/index.php?title=Differences_between_managerial_accounting_and_financial_accounting&action=edit&section=4http://en.wikipedia.org/w/index.php?title=Differences_between_managerial_accounting_and_financial_accounting&action=edit&section=2http://en.wikipedia.org/wiki/Generally_Accepted_Accounting_Principleshttp://en.wikipedia.org/w/index.php?title=Differences_between_managerial_accounting_and_financial_accounting&action=edit&section=3http://en.wikipedia.org/w/index.php?title=Differences_between_managerial_accounting_and_financial_accounting&action=edit&section=4
  • 7/29/2019 Indian GAAP

    45/63

    In management accounting systems, management may be concerned about

    how reports will affect employees behavior whereas management concerns

    are about the adequacy of disclosure in financial statements. (BAC)

    There are two broad types of accounting information:

    Financial Accounts: geared toward external users of accounting information Management Accounts: aimed more at internal users of accounting information

    Although there is a difference in the type of information presented in financial andmanagement accounts, the underlying objective is the same - to satisfy the information

    needs of the user.

    Financial Accounts Management Accounts

    Financial accounts describe the

    performance of a business over a specificperiod and the state of affairs at the end of

    that period. The specific period is often

    referred to as the "Trading Period" and is

    usually one year long. The period-end dateas the "Balance Sheet Date"

    Management accounts are used to help management

    record, plan and control the activities of a businessand to assist in the decision-making process. They

    can be prepared for any period (for example, many

    retailers prepare daily management information on

    sales, margins and stock levels).

    Companies that are incorporated under the

    Companies Act 1989 are required by law to

    prepare and publish financial accounts. Thelevel of detail required in these accounts

    reflects the size of the business with smaller

    companies being required to prepare onlybrief accounts.

    There is no legal requirement to prepare management

    accounts, although few (if any) well-run businesses

    can survive without them.

    The format of published financial accounts

    is determined by several differentregulatory elements:

    Company Law

    Accounting Standards

    Stock Exchange

    There is no pre-determined format for management

    accounts. They can be as detailed or brief asmanagement wish.

  • 7/29/2019 Indian GAAP

    46/63

    Financial Accounts Management Accounts

    Financial accounts concentrate on the

    business as a whole rather than analysing

    the component parts of the business. For

    example, sales are aggregated to provide afigure for total sales rather than publish a

    detailed analysis of sales by product, marketetc.

    Management accounts can focus on specific areas of

    a business' activities. For example, they can provide

    insights into performance of:

    Products

    Separate business locations (e.g. shops)

    Departments / divisions

    Most financial accounting information is of

    a monetary nature

    Management accounts usually include a wide variety

    of non-financial information. For example,

    management accounts often include analysis of:

    - Employees (number, costs, productivity etc.)

    - Sales volumes (units sold etc.)

    Customer transactions (e.g. number of calls received

    into a call centre)

    By definition, financial accounts present ahistoric perspective on the financial

    performance of the business

    Management accounts largely focus on analysinghistorical performance. However, they also usually

    include some forward-looking elements - e.g. a sales

    budget; cash-flow forecast.

    4. Limited Liability Partnership

    A limited liability partnership (LLP) is a partnership in which some or all partners (depending

    on the jurisdiction) have limited liability. It therefore exhibits elements ofpartnershipsand

    corporations.[1] In an LLP one partner is not responsible or liable for another partner's misconductor negligence. This is an important difference from that of an unlimited partnership. In an LLP,

    some partners have a form oflimited liability similar to that of the shareholders of a corporation.[2] In some countries, an LLP must also have at least one "general partner" with unlimited

    liability. Unlike corporate shareholders, the partners have the right to manage the businessdirectly. In contrast, corporate shareholders have to elect a board of directors under the laws of

    various state charters. The board organizes itself (also under the laws of the various state

    charters) and hires corporate officers who then have as "corporate" individuals the legalresponsibility to manage the corporation in the corporation's best interest. An LLP also contains

    a different level of tax liability from that of a corporation.

    Limited liability partnerships are distinct from limited partnerships in some countries, which may

    allow all LLP partners to have limited liability, while a limited partnership may require at least

    http://en.wikipedia.org/wiki/Partnershipshttp://en.wikipedia.org/wiki/Partnershipshttp://en.wikipedia.org/wiki/Partnershipshttp://en.wikipedia.org/wiki/Corporationshttp://en.wikipedia.org/wiki/Limited_liability_partnership#cite_note-0http://en.wikipedia.org/wiki/Limited_liabilityhttp://en.wikipedia.org/wiki/Limited_liability_partnership#cite_note-1http://en.wikipedia.org/wiki/Limited_partnershipshttp://en.wikipedia.org/wiki/Partnershipshttp://en.wikipedia.org/wiki/Corporationshttp://en.wikipedia.org/wiki/Limited_liability_partnership#cite_note-0http://en.wikipedia.org/wiki/Limited_liabilityhttp://en.wikipedia.org/wiki/Limited_liability_partnership#cite_note-1http://en.wikipedia.org/wiki/Limited_partnerships
  • 7/29/2019 Indian GAAP

    47/63

    one unlimited partner and allow others to assume the role of a passive and limited liability

    investor. As a result, in these countries the LLP is more suited for businesses where all investors

    wish to take an active role in management.

    There is considerable confusion between LLPs as constituted in the U.S. and that introduced in

    the UK in 2001 and adopted elsewhere - see below - since the UK LLP is, despite the name,specifically legislated as a Corporate body rather than aPartnership.

    India

    The Limited Liability Partnership Act 2008 was published in the official Gazette of India onJanuary 9, 2009 and has been notified with effect from 31 March 2009. However, the Act, has

    been notified with limited sections only.[4] The rules have been notified in the official gazette on

    April 1, 2009. The first LLP was incorporated in the first week of April 2009.

    In India for all purposes of taxation, an LLP is treated like any other partnership firm.

    The salient features of the LLP Act, 2008 are as under:-

    1. The LLP has an alternative corporate business vehicle that would give the benefits of limited

    liability but allows its members the flexibility of organizing their internal structure as a

    partnership based on an agreement.

    2. The LLP Act does not restrict the benefit of LLP structure to certain classes of professionalsonly and would be available for use by any enterprise which fulfills the requirements of the Act.

    3. While the LLP has a separate legal entity, liable to the full extent of its assets, the liability of

    the partners would be limited to their agreed contribution in the LLP. Further, no partner wouldbe liable on account of the independent or unauthorized actions of other partners, thus allowing

    individual partners to be shielded from joint liability created by another partners wrongful

    business decisions or misconduct.

    4. LLP shall be a body corporate and a legal entity separate from its partners. It will haveperpetual succession. Indian Partnership Act, 1932 shall not be applicable to LLPs and there

    shall not be any upper limit on number of partners in an LLP unlike an ordinary partnership firm

    where the maximum number of partners can not exceed 20, LLP Act makes a mandatory

    statement where one of the partner to the LLP should be an Indian.

    5. Provisions have been made for corporate actions like mergers, amalgamations etc.

    6. While enabling provisions in respect of winding up and dissolutions of LLPs have been made,

    detailed provisions in this regard would be provided by way of rules under the Act.

    7. The Act also provides for conversion of existing partnership firm, private limited companyand unlisted public company into a LLP by registering the same with the Registrar of Companies

    (ROC)

    http://en.wikipedia.org/wiki/Partnershiphttp://en.wikipedia.org/wiki/Partnershiphttp://en.wikipedia.org/wiki/Partnershiphttp://en.wikipedia.org/wiki/Limited_liability_partnership#cite_note-3http://en.wikipedia.org/wiki/Partnershiphttp://en.wikipedia.org/wiki/Limited_liability_partnership#cite_note-3
  • 7/29/2019 Indian GAAP

    48/63

    8. Nothing Contained in the Partnership Act 1932 shall effect an LLP.

    9. The Registrar of Companies (Roc) shall register and control LLPs also.

    10. The governance of LLPs shall be in electronic mode based on the successful model of the

    present Ministry of Corporate Affairs Portal. Visit LLP Portal to register a new LLP.

    Limited Liability Partnership (LLP) in India All you need to know about

    By Sharda Balaji on 12, May, 2009 | Topic: Legal Resources for startups

    LLP, a legal form available world-wide is now introduced in India and is governed by the

    Limited Liability Partnership Act 2008, with effect from April 1, 2009. link (pdf) .

    LLP combines the advantages of ease of running a Partnership and separate legal entity statusand limited liability aspect of a Company.

    Here are some of the main features of a LLP

    LLP is a separate legal entity separate from its partners, can own assets in its name, sue

    and be sued.

    Unlike corporate shareholders, the partners have the right to manage the business directly

    One partner is not responsible or liable for another partners misconduct or negligence.

    Minimum of 2 partners and no maximum.

    Should be for profit business.

    Perpetual succession.

    The rights and duties of partners in LLP, will be governed by the agreement between

    partners and the partners have the flexibility to devise the agreement as per their choice.The duties and obligations of Designated Partners shall be as provided in the law.

    Liability of the partners is limited to the extent of his contribution in the LLP. No

    exposure of personal assets of the partner, except in cases of fraud.

    LLP shall maintain annual accounts. However, audit of the accounts is required only ifthe contribution exceeds Rs. 25 lakhs or annual turnover exceeds Rs.40 lakhs.

    A LLP is indeed advantageous because of comparatively lower cost of formation, lesser

    compliance requirements, easy to manage and run and also easy to wind-up and dissolve, no

    requirement of minimum capital contributions, partners are not liable for the acts of the otherpartners and importantly no minimum alternate tax (as of date). But, LLP cannot raise money

    from the public.

    The process for incorporating a LLP is pretty simple. The flow chart here depicts it clearly.

    The Registrar of Companies (ROC) is the authority having jurisdiction over the incorporation.The steps required are:

    Decide on the Partners and the Designated Partners

    http://mca.gov.in/http://llp.gov.in/http://www.pluggd.in/author/sharda/http://www.pluggd.in/category/legal-resources-startups/http://www.pluggd.in/limited-liability-partnership-llp-company-comparison-297/http://www.mca.gov.in/MinistryWebsite/dca/actsbills/pdf/LLP_Act_2008_15jan2009.pdfhttp://www.pluggd.in/limited-liability-partnership-llp-company-comparison-297/http://www.pluggd.in/limited-liability-partnership-llp-company-comparison-297/http://www.llp.gov.in/http://mca.gov.in/http://llp.gov.in/http://www.pluggd.in/author/sharda/http://www.pluggd.in/category/legal-resources-startups/http://www.pluggd.in/limited-liability-partnership-llp-company-comparison-297/http://www.mca.gov.in/MinistryWebsite/dca/actsbills/pdf/LLP_Act_2008_15jan2009.pdfhttp://www.pluggd.in/limited-liability-partnership-llp-company-comparison-297/http://www.pluggd.in/limited-liability-partnership-llp-company-comparison-297/http://www.llp.gov.in/
  • 7/29/2019 Indian GAAP

    49/63

    Obtain Designated Partner Identification Number (DPIN) and a digital signature

    certificate.

    Decide on the name of the LLP and check whether it is available.

    Draft the LLP agreement

    File the LLP Agreement, incorporation documents and obtain the Certificate of

    Incorporation.

    In order to help you decide on which legal form to choose, heres a feature comparison betweenthe LLP, Partnership firm and a Company:

    Features Company Partnership firm LLP

    Registration Compulsory

    registration requiredwith the ROC.

    Certificate of

    Incorporation is

    conclusive evidence.

    Not compulsory.

    UnregisteredPartnership Firm will

    not have the ability to

    sue.

    Compulsory

    registrationrequired with the

    ROC

    Name Name of a public

    company to end with

    the word limited

    and a privatecompany with the

    words private

    limited

    No guidelines. Name to end with

    LLP Limited

    Liability

    Partnership

    Capital contribution Private company

    should have a

    minimum paid up

    capital of Rs. 1 lakhand Rs.5 lakhs for a

    public company

    Not specified Not specified

    Legal entity status Is a separate legal

    entity

    Not a separate legal

    entity

    Is a separate legal

    entity

    Liability Limited to the extent

    of unpaid capital.

    Unlimited, can

    extend to the

    personal assets of thepartners

    Limited to the

    extent of the

    contribution to theLLP.

    No. of

    shareholders /Partners

    Minimum of 2. In a

    private company,maximum of 50shareholders

    2- 20 partners Minimum of 2. No

    maximum.

    Foreign Nationals

    as shareholder /

    Partner

    Foreign nationals can

    be shareholders.

    Foreign nationals

    cannot form

    partnership firm.

    Foreign nationals

    can be partners.

    Taxability The income is taxedat 30% +

    The income is taxedat 30% +

    Not yet notified.

    http://www.pluggd.in/limited-liability-partnership-llp-company-comparison-297/http://www.pluggd.in/limited-liability-partnership-llp-company-comparison-297/http://www.pluggd.in/limited-liability-partnership-llp-company-comparison-297/http://www.pluggd.in/limited-liability-partnership-llp-company-comparison-297/http://www.pluggd.in/limited-liability-partnership-llp-company-comparison-297/http://www.pluggd.in/limited-liability-partnership-llp-company-comparison-297/
  • 7/29/2019 Indian GAAP

    50/63

    surcharge+cess surcharge+cess

    Meetings Quarterly Board of

    Directors meeting,

    annual shareholdingmeeting is mandatory

    Not required Not required.

    Annual Return Annual Accounts andAnnual Return to be

    filed with ROC

    No returns to be filedwith the Registrar of

    Firms

    Annual statementof accounts and

    solvency &Annual Return has

    to be filed with

    ROC

    Audit Compulsory,

    irrespective of share

    capital and turnover

    Compulsory Required, if the

    contribution is

    above Rs.25 lakhs

    or if annualturnover is above

    Rs. 40 lakhs.

    How do the bankers

    view

    High

    creditworthiness, dueto stringent

    compliances and

    disclosures required

    Creditworthiness

    depends on goodwilland credit worthiness

    of the partners

    Perception is

    higher comparedto that of a

    partnership but

    lesser than acompany.

    Dissolution Very procedural.

    Voluntary or by

    Order of National

    Company LawTribunal

    By agreement of the

    partners, insolvency

    or by Court Order

    Less procedural

    compared to

    company.

    Voluntary or byOrder of National

    Company LawTribunal

    Whistle blowing No such provision No such provision Protection

    provided to

    employees andpartners who

    provide useful

    information duringthe investigation

    process.The parliament on 12.12.2008 has passed the limited liability partnership

    Act 2008 and the rules under the act have been framed and are made

    eff