ICAI ONLINE REFRESHER COURSE ON ACCOUNTING STANDARDS MAY 18, 2020 Faculty : CA Vinod Balachandran Accounting Standards Board The Institute of Chartered Accountants of India New Delhi, India Disclaimer: The views expressed herein are solely those of the Faculty/Presenter and not that of the ICAI or any of its committees. The ICAI or the Faculty or Preparer of this material do not accept any responsibility for omission or inadequacy of the contents in this document and also for loss caused to any person who acts or refrains from acting in reliance on the contents of this document irrespective of the cause of / reason for the loss.
Transcript
ICAI ONLINE REFRESHER COURSE ON
ACCOUNTING STANDARDS
MAY 18, 2020
Faculty : CA Vinod Balachandran
Accounting Standards Board
The Institute of Chartered Accountants of India
New Delhi, India Disclaimer: The views expressed herein are solely those of the Faculty/Presenter and not that of the ICAI or any ofits committees. The ICAI or the Faculty or Preparer of this material do not accept any responsibility for omissionor inadequacy of the contents in this document and also for loss caused to any person who acts or refrains fromacting in reliance on the contents of this document irrespective of the cause of / reason for the loss.
AS 3 CASH FLOW STATEMENTS
ASB, ICAI
ASB, ICAI
1. Objective and Scope
2. Definitions
3. Methods
4. Presentation
5. Format of cash flow statement
6. Disclosures
7. Classification of entities
2
AGENDA
ASB, ICAI
OBJECTIVE & SCOPE
4
• Objective
• Provide users of financial statements a basis to take economic decisions byassessing the entity’s ability to generate cash and the needs of the entityto utilize those cash flows
• Help users to compare operating performance of different enterprisesbecause it eliminates the effects of using different accounting treatmentsfor the same transactions and events.
• Scope
• Cash flow statement to be prepared and presented for each period forwhich financial statements are presented.
• Cash Flow Statement is applicable for all companies except one person,small and dormant company. However for non-companies, AS 3 is notmandatory for level II and Level III entities.
ASB, ICAI
CLASSIFICATION OF CORPORATE
ENTITIES
5
One person Company
Only one person as member
The member is the only
shareholder
Small Company
Paid Up Capital < 50 Lacs AND
Turnover< Rs. 2 crores
Dormant Company
Inactive Company not carrying on business OR
Has not made any significant accounting
transaction in last 2 years
ASB, ICAI
CLASSIFICATION – NON CORPORATE
6
Level 1 entity
Turnover( excl: other income)
>Rs. 50 cr
Borrowings ( incl. public
deposits) > Rs. 10 cr
Level 2 entity(unlisted)
Turnover( excl: other income) between Rs.
1cr– Rs. 50 cr
Borrowings ( inclpublic dep)
between Rs. 1 cr – Rs. 10 cr
Level 3 entity (unlisted)
Other than Level 1 & 11
Including Holding and
Subsidiary of above
ASB, ICAI
EXEMPTIONS FROM AS 3
7
One personcompany
Small/ Dormant Company
Companies
Level II entities
Level III entities
Non Companies
–NOT MANDATORY
ASB, ICAI
DEFINITIONS
8
Cash - Cash on hand and demand deposits with banks.
Cash Equivalents - Short term, highly liquid investments readily convertible into cash and subject
to an insignificant risk of changes in value ( 3 months or less)
Cash flows - Inflows and outflows of cash and cash equivalents.
Operating activities - Principal revenue-producing activities of the enterprise and other activities
that are not investing or financing activities.
Investing Activities - Acquisition and disposal of long-term assets and other investments not
included in cash equivalents.
Financing Activities - Activities that result in changes in the size and composition of the owners’
capital (including preference share capital) and borrowings of the enterprise.
ASB, ICAI
METHODS
9
Operating Activities
Direct Method
Major classes of gross cash receipts and payments are presented
Indirect Method
Net Profit/Loss is adjusted for effects of transactions of non-cash nature, deferrals or
accruals of past or future operating cash receipts or payments, and income and expense
items associated with investing or financing cash flows
Investing and Financing Activities
Report separately major classes of gross cash receipts and cash payments
ASB, ICAI
PRESENTATION
10
• Classification of Cash flows in the Cash Flow Statement:
• Operating activities,
• Investing activities and
• Financing activities.
Cash flows associated with extraordinary items separately disclosed under appropriate categories
• Cash Flows on a Net Basis
• Cash receipts and payments on behalf of customers when the cash flows reflect the
activities of the customer rather than those of the enterprise; and
• Cash receipts and payments for items in which the turnover is quick, the amounts are
Dividend received Investing Activities Operating Activities
ASB, ICAI
PRESENTATION
11
• Taxes on Income - Cash flows income tax to be separately disclosed and classified under
operating activities unless specifically identified with financing and investing activities.
• Reporting of foreign currency cash flows
Cash Flow From transactions in a foreign currency
Recorded in reporting currency using the exchange rate on the date of cash flow
Effects of changes in exchange rates on cash and cash equivalents held in a foreign
currency
Reported as a separate part of the reconciliation of the changes in cash and cash
equivalents during the period
ASB, ICAI
NON CASHTRANSACTIONS
12
• Non-cash Transactions - Investing and financing transactions that do not require use of cash
or cash equivalents to be excluded from Cash Flow Statement. Such transactions to be
disclosed elsewhere in the financial statements providing relevant information.(eg: Leases ,
forex fluctuation, etc…)
(a) the acquisition of assets by assuming directly related liabilities;
(b) the acquisition of an enterprise by means of issue of shares;
(c) the conversion of debt to equity.
ASB, ICAI
Q&A
13
• Ques: X Ltd. purchased debentures of ` 10 lacs of Y Ltd., which are redeemable within three
months. How will you show this item as per AS 3 while preparing cash flow statement for the
year ended on 31st March, 2015
Ans: As per AS 3 on „Cash flow Statement‟, cash and cash equivalents consists of cash in hand,
balance with banks and short-term, highly liquid investments*. If investment, of ` 10 lacs, made in
debentures is for short-term period then it is an item of „cash equivalents‟.
However, if investment of ` 10 lacs made in debentures is for long-term period then as per AS 3, it
should be shown as cash flow from investing activities
ASB, ICAI
CASH FLOW – OPERATING ACTIVITY
14
ASB, ICAI
CASH FLOW – INVESTING ACTIVITY
15
Cash flow from investing activities
Proceeds from sale of land 1,50,000
Proceeds from sale of plant 90,000
Proceeds from sale of investments 70,000
Purchase of plant (3,50,000)
Purchase of investments (25,000)
Pre-acquisition dividend received 5,000
Net cash used in investing activities (60,000)
ASB, ICAI
CASH FLOW – FINANCING ACTIVITY
16
ASB, ICAI
DISCLOSURES
17
• Disclose together with management comments, the amount of significant cash and
cash equivalent balances held by the enterprise that are not available for use by it.
• Components of Cash and Cash equivalents
• Reconciliation of the amount as per Cash Flow and that as per financial statement
AS 5, NET PROFIT OR LOSS FOR THE PERIOD, PRIOR
PERIOD ITEMS AND CHANGES IN ACCOUNTING
POLICIES
ASB, ICAI
ASB, ICAI
1. Objective and Scope
2. Definitions
3. Net P&L for the period
4. Exceptional , Prior Period & Extraordinary expenses
2
AGENDA
ASB, ICAI
OBJECTIVE & SCOPE
20
AS 5 should be applied by an enterprise in presenting profit or loss from ordinary activities,
extraordinary items and prior period items in the Statement of Profit and Loss, in accounting for
changes in accounting estimates, and in disclosure of changes in accounting policies.
ASB, ICAI
DEFINITIONS
21
Ordinary activities are any activities which are undertaken by an enterprise as part of its
business and such related activities in which the enterprise engages in furtherance of, incidental
to, or arising from, these activities.
Extraordinary items are income or expenses that arise from events or transactions that are
clearly distinct from the ordinary activities of the enterprise and, therefore, are not expected to
recur frequently or regularly.
Prior period items are income or expenses which arise in the current period as a result of errors
or omissions in the preparation of the financial statements of one or more prior periods.
ASB, ICAI
NET PROFIT OR LOSS FOR THE PERIOD
22
All items of income and expense which are recognised in a period should be included in the
determination of net profit or loss for the period unless an Accounting Standard requires or
permits otherwise.
The net profit or loss for the period comprises the following components, each of which should be
disclosed on the face of the Statement of Profit and Loss:
• profit or loss from ordinary activities; and
• extraordinary items.
ASB, ICAI
WHAT IS NOT CHARGED TO P&L DUE TO
ANOTHER AS
23
AS TREATMENT
AS 10 Revaluation Revaluation reserve
AS 28 Impairment Losses First set off from any revaLuation surplus
for the same before charging P&L
AS 11 Forex gains/losses on PPE Para 46 & 46 A – Dr PPE
AS 12 Govt grants Reduce from asset or deferred revenue
AS 16 Interest costs for qualifying asset Capitalise
ASB, ICAI
EXCEPTIONAL ITEMS
24
➢ Short Provision difference is an exceptional items
➢ Sale of a part of business undertaking/segment
➢ Eg: Short provision for Bonus, Income Tax
Subject to nature
/ size and
significance
VRS can be exceptional item
except for banks (RBI
guidance) it is extra ordinary
NOT EXCEPTIONAL:
Forex translation reserve written back
Gains / losses on lease
ASB, ICAI
PROFIT OR LOSS FROM ORDINARY ACTIVITIES
& PRIOR PERIOD ITEMS
25
Profit or loss from ordinary activities
When items of income and expense within profit or loss from ordinary activities are of such size,
nature or incidence that their disclosure is relevant to explain the performance of the enterprise for
the period, the nature and amount of such items should be disclosed separately.
Prior period items
• The nature and amount of prior period items should be separately disclosed in the Statement
of Profit and Loss in a manner that their impact on the current profit or loss can be perceived.
• An alternative approach is to show such items in the statement of profit and loss after
determination of current net profit or loss. BUT BEFORE TAX
ASB, ICAI
NOT PRIOR PERIOD ITEMS
26
a. Short / Excess Provision
b. Litigation settled in current year
c. Sec 43 B Disallowances /IT prior period
d. Demand settled in current year
e. Wage settlement arrears
f. Sundry balances written off
g. Change in accounting policy is not prior period
it can be exceptional item
h. Fixed assets converted to stock in trade and then changed back. No dep during stock in
trade. Reclassifying now at cost or NRV whichever is lower. No retro depreciation.
i. All retrospective changes due to statutory is only exceptional . Not prior period
➢ DO NOT NET OFF
➢ NOT PART OF OTHER
INCOME
➢ SHOW SEPERATELY
➢ DISCLOSE BEFORE TAX
ASB, ICAI
IS IT PRIOR PERIOD?
27
➢ Wrong classification of income as liability - YES PRIOR PERIOD
➢ Fraud detected in current year relating to previous years – Satyam Computers balance sheet
➢ Case filed for huge service tax liability. No provision was made in previous years. YES PRIOR
PERIOD.
ASB, ICAI
EXTRAORDINARY ITEMS
28
Extraordinary items should be disclosed in the Statement of Profit and Loss as a part of
net profit or loss for the period.
The nature and the amount of each extraordinary item should be separately disclosed in
the Statement of Profit and Loss in a manner that its impact on current profit or loss can
be perceived.
Examples :
➢ attachment of property of the enterprise, or an earthquake.
➢ Insurance claim received next year for fire in previous year
LOSS BY FIRE /
PENALTIES PAID FOR
BUSINESS
ASB, ICAI
ORDER OF PRESENTATION
29
EXCEPTIONAL
PRIOR PERIOD
EXTRAORDINARY
ASB, ICAI
CHANGES IN ACCOUNTING POLICY
30
A change in an accounting policy should be made only if :
• the adoption of a different accounting policy is required by statute; or
• for compliance with an Accounting Standard; or
• if it is considered that the change would result in a more appropriate presentation of the
financial statements of the enterprise.
➢ New introduction of accounting policy ( eg: employee more than 50 hence AS 15 is
applicable) - NOT A CHANGE IN ACCOUNTING POLICY
ASB, ICAI
DISCLOSURE OF CHANGES IN ACCOUNTING
POLICY
31
a. Disclose change which has material effect in the current period or is reasonably expected to
have material impact in later periods.
b. In case of change which has material effect in the current period, disclose, to the extent
ascertainable, the amount by which any item in the financial statements is affected by such
change.
c. If not ascertainable, wholly or in part, indicate the fact.
AS -10 : Depreciation
change is change in
estimate &
prospectively
ASB, ICAI
CHANGES IN ACCOUNTING ESTIMATES
32
❖ Use of estimates is essential for preparation of financial statements. Estimates may have to be
revised if changes occur regarding the circumstances on which the estimates were made or as
a result of new information, more experience or subsequent developments.
❖ The effect of a change in an accounting estimate should be included in the determination of
net profit or loss in:
• the period of the change, if the change affects the period only; or
• the period of the change and future periods, if the change affects both.
The nature and amount of a change in an accounting estimate which has a material effect in the
current period, or which is expected to have material effect in subsequent periods, should be
disclosed. If it is impracticable to quantify the amount, this fact should be disclosed.
ASB, ICAI
CHANGES IN ACCOUNTING ESTIMATES
33
Note- Whenever it is difficult to distinguish between change in an accounting policy and change in
an accounting estimate, the change is treated as change in an accounting estimate.
AS 7 – CONSTRUCTION CONTRACTS
ASB, ICAI
ASB, ICAI
1. Objective and Scope
2. Definitions
3. Contract revenue and
costs
4. Recognition
5. Measurement
6. Case study
7. Disclosures
2
AGENDA
ASB, ICAI
ASB, ICAI
OBJECTIVE & SCOPE
Objective
• The main objective is to prescribe the accounting treatment of
revenue and costs associated with construction contracts.
• Allocation of contract revenue and contract costs to the accounting
periods in which construction work is performed.
• Determines when contract revenue and contract costs should be
recognized as revenue and expenses in the statement of profit and
loss.
Scope
This statement is applied in accountingfor construction
contractsin the financial statements of contractors.3
6
ASB, ICAI
ASB, ICAI
DEFINITIONS- CONSTRUCTION
CONTRACT
• A construction contract is a contract specifically negotiated for the
construction of an asset or a combination of assets that are closely
interrelated or interdependent in terms of their design, technology
and function or their ultimate purpose or use.
• A construction contract may be negotiated for the construction of
a single asset Examples : Bridge, building, dam, pipeline, road,
ship or tunnel.
• A construction contract may also deal with the construction of a
number of assets which are closely interrelated or interdependent in
terms of their design, technology and function or their ultimate purpose
or use.
Examples : Construction of refineries and other complex pieces of
plant or equipment.
3
7
ASB, ICAI
ASB, ICAI
DEFINITIONS
▪ Fixed price contract
• A fixed price contract is a construction contract in which the
contractor agrees to a fixed contract price, or a fixed rate per
unit of output, which in some cases is subject to cost escalation
clauses.
▪ Cost plus contract
• A cost plus contract is a construction contract in which the
contractor is reimbursed for allowable or otherwise defined costs,
plus percentage of these costs or a fixed fee.
▪ Construction contracts are formulated in a number of ways which, for the purposes of this
Standard, are classified as fixed price contracts and cost plus contracts.
▪ Some construction contracts may contain characteristics of both a fixed price contract and a
cost plus contract, for example, in the case of a cost plus contract with an agreed maximum
price.
ASB, ICAI
ASB, ICAI
CONTRACT REVENUE
Contract revenue
• Contract revenue should comprise:
a) Initial amount of revenue agreed in the contract; and
b) Variations in contract work, claims and incentive payments:
• i. to the extent that it is probable that they will result in revenue; and
• ii. they are capable of being reliably measured.
• Contract revenue is measured at the consideration received or receivable. The
measurement of contract revenue is affected by a variety of uncertainties that depend
on the outcome of future events. The estimates often need to be revised as events
occur and uncertainties are resolved.
• Contract revenue may change due to following illustrative reasons :
- Cost escalation clause
- Variations or claims that increase or decrease contract revenue
- Penalties arising from delays
- Variations due to changes in the specifications or design of the asset
- Changes in the duration of thecontract.
ASB, ICAI
ASB, ICAI
CONTRACT COSTS
•# Particulars Amount
1 ▪ Costs that relate directly to the specific contract
▪ Examples : Site labour costs, material costs, costs of hiring plant and equipment,
depreciation, costs of design and technical assistance that is directly related to the
contract etc.
XXXX
2 ▪ Costs attributable to contract activity in general and can be allocated
to the contract
▪ Examples : Insurance, construction overheads, borrowing costs, cost of design and
technical assistance that is not directly related to aspecific contract etc.
XXXX
3 ▪ Other costs as are specifically chargeable to the customer under
the terms of the contract
▪ Examples : General administration costs and development costs for which
reimbursement is specified in the terms of contract.
XXXX
TOTAL XXXX
▪ Following costs are excluded :
• General administration costs for which reimbursement is not specified in the contract.
• Selling costs.
• Depreciation of idle plant and equipment that is not used on a particularcontract.
• Research and development costs for which reimbursement is not specified in the contract.
ASB, ICAI
RECOGNITION OF CONTRACT REVENUE &
EXPENSES
When outcome can be estimated
reliably
When outcome cannot be
estimated reliably
• Apply percentage completion
method, ie, recognise the
revenue and expenses having
regard to the stage of
completion of the contract
activity at the reporting date
• An expected loss should be
recognized as an expense
immediately.
• Recognise the revenue only
to the extent of such
contract costs incurred, the
recovery of which is
probable.
• Further, contract costs are
to be treated as period
expense41
ASB, ICAI
ASB, ICAI
MEASUREMENT
• Determination of stage of completion- Examples of methods (depends on
nature of the contract).
▪ Treatment of contract costs relating to future activity• Recognised as an asset provided it is probable that they will be recovered.
• Such costs represent an amount due from the customer and are often classified as
contract work-in- progress. Example: uninstalled material, etc.
▪ Treatment of expected loss on the contract• When it is probable that total contract costs will exceed total contract revenue, the
expected loss on the contract should be immediately recognised as an expense.
ASB, ICAI
Q&A
43
• B Ltd. undertook a construction contract for ` 50 crores in April, 2014. The cost of construction
was initially estimated at ` 35 crores. The contract is to be completed in 3 years. While
executing the contract, the company estimated the cost of completion of the contract at ` 53
crores. Can the company provide for the expected loss in the book of account for the year
ended 31st March, 2015?
Ans:As per para 35 of AS 7 “Construction Contracts”, when it is probable that total contract costs
will exceed total contract revenue, the expected loss should be recognised as an expense
immediately. Therefore, The foreseeable loss of ` 3 crores (` 53 crores less ` 50 crores) should be
recognised as an expense immediately in the year ended 31st March, 2015. The amount of loss is
determined irrespective of
Whether or not work has commenced on the contract;
Stage of completion of contract activity; or
The amount of profits expected to arise on other contracts which are not treated as a single
construction contract in accordance with para 8 of AS 7.
ASB, ICAI
Q&A
44
• M/s Highway .Constructions undertook the construction of a highway on 01.04.2013. The
contract was to be completed in 2 years. The contract price was estimated at ` 150 crores. Up
to 31.03.2014 the company incurred ` 120 crores on the construction. The engineers involved in
the project estimated that a further ` 45 crores would be incurred for completing the work.
• What amount should be charged to revenue for the year 2013 -14 as per the provisions of
Accounting Standard 7 "Construction Contracts"? Show the extract of the Profit & Loss A/c in
the books of M/s. Highway Constructions.
ASB, ICAI
Q&A
45
` in crores
Cost of construction incurred upto 31.03.2014 120
Add: Estimated future cost 45
Total estimated cost of construction 165
Degree of completion (120/165 x 100) 72.73%
Revenue recognized (72.73% of 150) 109 (approx)
Total foreseeable loss (165 – 150) 15
Less: Loss for the current year (120 – 109) 11
Loss to be provided for 4
` in crores ` in crores
To Construction Costs 120 By Contract Price 109
To Provision for loss 4 By Net loss 15 124 124
PROFIT & LOSS A/C
ASB, ICAI
ASB, ICAI
CASE STUDY
• A construction contractor has a fixed price contract for Rs. 9,000 to build a
bridge. The initial amount of revenue agreed in the contract is Rs. 9,000.
• The contractor’s initial estimate of contract costs is Rs. 8,000. It will take 3
years to build the bridge.
• By the end of year 1, the contractor’s estimate of contract costs has increased
to Rs. 8,050.
• In year 2, the customer approves a variation resulting in an increase in
contract revenue of Rs. 200 and estimated additional contract costs of Rs.
150.
• At the end of year 2, costs incurred include Rs. 100 for standard materials
stored at the site to be used in year 3 to complete the project.
Compute the contract revenue and contract costs to be recognised in
each year.
17
CASE STUDYASB, ICAI
Computation of revenue, expenses and profit (Amount in Lakhs)
Particulars Year I Year 2 Year 3Initial amount of revenue agreed in contract(A) 9,000 9,000 9,000Variation (B) - 200 200Total contract revenue (C ) 9,000 9,200 9,200Contract costs incurred upto the reporting date(D)
