Financial Audit Autonomous Bodies AS 1 and 4 Session 1.3

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Accounting Standards

Financial Audit Autonomous Bodies AS 1 and 4 Session 1.3

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Session overview

• . Every profession develops a body of knowledge consisting of principles, which are considered as standard to be attained. Accounting is no exception. In India, the Institute of Chartered Accountants of India has developed Accounting Standards; based on the ‘generally accepted accounting standards’ to be used in preparation of financial statements.

Financial Audit Autonomous Bodies AS 1 and 4 Session 1.3

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Session coverage• During this session, we will learn:

•  the importance of the accounting standards in preparation of financial statements; and

application of AS 1 relating to ‘Disclosure of Accounting Policies’, and

application of AS 4 relating to ‘Events Occurring After the Balance Sheet Date’ for preparation of financial statements.

Financial Audit Autonomous Bodies AS 1 and 4 Session 1.3

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Learning Objective

• At the end of the session, the learner will be able to state the importance of Accounting Standards in the preparation of financial statements and application of AS 1 relating to ‘Disclosure of Accounting Policies’ and AS 4 relating to ‘Events Occurring After the Balance Sheet Date’ in the preparation of Financial Statements.

Financial Audit Autonomous Bodies AS 1 and 4 Session 1.3

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Importance of Accounting Standards

• The users of the financial statements need an assurance that the entities preparing their financial statements follow the accepted standards while presenting their financial information in the financial statements.

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Accounting Standard Board

• The main function of the ASB is to formulate standards so that the Council of the ICAI may establish such standards, to be followed by all the entities while preparing and presenting their financial statements.

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LIST OF ACCOUNTING

STANDARDS ISSUED SO FAR • Institute of Chartered Accountants of India

has so far issued 29 Accounting Standards on the advise of the accounting Standards Board

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LIST OF ACCOUNTING

STANDARDS ISSUED SO FAR • AS 1-Disclosure of Accounting Policies• 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

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LIST OF ACCOUNTING

STANDARDS ISSUED SO FAR • AS 7-Accounting for Construction Contracts• AS 8-Accounting for Research and Development• AS 9-Revenue Recognition• AS 10-Accounting for Fixed Assets• AS 11-Accounting for the Effects of Changes in

Foreign Exchange Rates• AS 12-Accounting for Government Grants

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LIST OF ACCOUNTING

STANDARDS ISSUED SO FAR • AS 13-Accounting for Investments• AS 14-Accounting for Amalgamations• AS 15-Accounting for Retirement Benefits in the

financial Statements of Employers• AS 16-Borrowing Costs• AS 17-Segment Reporting• AS 18-Related Party Disclosures• AS 19-Leases

Financial Audit Autonomous Bodies AS 1 and 4 Session 1.3

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LIST OF ACCOUNTING

STANDARDS ISSUED SO FAR • 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

Financial Audit Autonomous Bodies AS 1 and 4 Session 1.3

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LIST OF ACCOUNTING

STANDARDS ISSUED SO FAR • 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

Financial Audit Autonomous Bodies AS 1 and 4 Session 1.3

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Accounting Standard (AS 1) – Disclosure of Accounting

Policies

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AS 1 – Disclosure of Accounting Policies

• Fundamental Accounting Assumptions

• Accounting Policies

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Fundamental Accounting Assumptions

• Going concern

• Consistency

• Accrual

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Areas in which differing accounting Policies are encountered

Methods of depreciation, depletion and amortization;

Treatment of expenditure during construction;

Conversion or translation of foreign currency items;

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Areas in which differing accounting Policies are encountered

Valuation of inventories;

Treatment of goodwill;

Valuation of investments;

Treatment of retirement benefits;

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Areas in which differing accounting Policies are encountered

Recognition of profit on long-term contracts;

Valuation of fixed assets;

Treatment of contingent liabilities.

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Considerations in the selection of Accounting Policies

Prudence Substance over formMateriality

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Accounting Standard-1

        All significant accounting policies adopted in preparation and presentation of financial statements should be disclosed.

          The disclosure of significant accounting

policies as such should form part of the financial statement and the significant accounting policies should normally be disclosed in one place.  

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Accounting Standard-1

        Any change in the accounting policies which has a material, affect in the current period or which is reasonably expected to have a material affect in later periods should be disclosed. In the case of a change in accounting policies, which has a material affect in the current period, the amount by which any item in the financial statement is affected by such change should also be disclosed to the extent ascertainable. Where such amount is not ascertainable, wholly or in part, the fact should be disclosed.

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Accounting Standard-1

        If the fundamental accounting assumptions, viz., going concern, consistency and accrual are followed in financial statements, specific disclosure is not required. If a fundamental accounting assumption is not followed, the fact should be disclosed.

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Accounting Standard (AS) 4 - Contingencies and Events

Occurring After the Balance Sheet Date

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Accounting Standard-4

• This standard deals with treatment in financial statements of:

Contingencies; and

Events occurring after the balance sheet date.

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Accounting Standard-4

• Does not apply to:• (a)    Liabilities of life assurance and general

insurance enterprises arising from policies issued;• (b)   Obligations under retirement benefit plans;

and• © Commitments arising from long-term lease

contracts.•

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Definitions

• 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.

• Events 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

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Accounting Standard-4

• Contingencies•           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

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Accounting Standard-4

• Contingencies• b.      a reasonable estimate of the amount of the

resulting loss can be made.         The existence of a contingent loss should

be disclosed in the financial statements if either of the conditions is not met, unless the possibility of a loss is remote.

        Contingent gains should not be recognized in the financial statements

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Accounting Standard-4

• Events Occurring after the Balance Sheet Date

        Assets and liabilities should be adjusted for events occurring after the balance sheet date that provide additional evidence to assist the estimation of amounts relating to conditions existing at the balance sheet date or that indicate that the fundamental accounting assumption of going concern (i.e., the continuance of existence or substratum of the enterprise) is not appropriate.

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Accounting Standard-4

• Events Occurring after the Balance Sheet Date         Dividends stated to be in respect of the period

covered by the financial statements, which are proposed or declared by the enterprise after the balance sheet date but before approval of the financial statements, should be adjusted.

        Disclosure 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

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Accounting Standard-4 

• Disclosure         If disclosure of contingencies is required

by this Statement, the following information should be provided:

• a.      the nature of the contingency;• b.      the uncertainties which may affect the

future outcome;• c.       an estimate of the financial effect, or a

statement that such an estimate cannot be made.

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Accounting Standard-4

•  • Disclosure       If disclosure of events occurring after the

balance sheet date in the report of the approving authority is required by paragraph 15 of this Statement, the following information should be provided:

• a.      the nature of the event;• an estimate of the financial effect, or a statement

that such an estimate cannot be made.