Objectives: To understand the prescribed Accounting Standards

issued by Institute of Chartered Accountants of India for preparation

of financial statements to have statutory compliance.

Contents: Elementary Acquaintance with Compulsory Accounting

Standard issued by Institute of Chartered Accountants of India being
–AS4, AS6, AS10, AS13 AS14 and AS16

NOTE: The Accounting Standard to be studied is that which is

pronounced by the ICAI for the year ended immediately before
commencement of the Academic Year.
[Link]

AS 4 Contingencies and Events Occurring After the Balance Sheet Date

Applicability
AS 4 deals with treatment in the financial statements of:
(A) contingencies
(B) events which occur after balance sheet date
The followings that might result in the contingencies are excluded from the scope of AS 4
bearing in mind special considerations which are applicable to them:
(a) liabilities of general insurance enterprises and life assurance which arises from the
insurance policies issued
(b) commitments which arise from a long-term lease contract
(c) obligations under a retirement benefit plan

Definitions

1. Contingency
Contingencies are situations or conditions, the eventual outcome of which, profit or loss,
would be determined or known only on happening, or non- happening, of an uncertain future
event(s).

2. Events occurring after the balance sheet date

These are those noteworthy events, favorable as well as unfavorable, which occurs between
balance sheet date and date on which such financial statements are considered and approved
by the BoD (Board of Directors) in case of companies, and, by equivalent approving
authorities in the of other entities.
There are two kinds of events that could be identified:
i. Events that gives further evidence of situations which subsisted at balance sheet date
ii. Events that are indicative of situations which occurred following balance sheet date.

Accounting Treatment of Contingent Losses

For a contingent loss, the accounting treatment is determined by likely outcome of such
contingency. In case it’s likely that such contingency would result in the loss of the
business, then it’s prudent to account for such loss in the enterprise’s financial statements.
In case there is insufficient or conflicting evidence for assessing the value of the contingent
loss, then the disclosure in financial statements is provided for the nature and existence of the
contingency. Obligations which might arise from the discounted bills of exchange and such
similar obligations which are undertaken by the enterprise are usually disclosed in the
financial statements by way of notes, even if the possibility of loss is remote.

Accounting Treatment of Contingent Gains

A Contingent gain isn’t recognized in the financial statements as their recognition could
result in recognition of revenue that might never be realized. When the realization of gain is
certain and not contingent anymore, the gain can be accounted in the books of accounts.

Determination of the amount of contingency

The value at which contingencies are stated in financial statements depends on the
information that is available on a date when the financial statements are considered and
approved.
Events which occurs after balance sheet date which suggest that the asset might have been
impaired, or a liability might have existed, at balance sheet date are, hence, taken into
consideration in recognizing the contingencies and determining the value at which the
contingencies are included in the financial statements

Events Occurring after the Balance Sheet Date

Events that occur between balance sheet date and date on which these are approved, might
suggest the requirement for an adjustment(s) to the assets and the liabilities as at balance
sheet date or might need disclosure.
(a) Adjusting Events: Adjustments are required to assets and liabilities for events which
occur after balance sheet date which offer added information substantially affecting the
determination of the amounts which relates to the conditions that existed at balance sheet
date.
(b) Non-Adjusting Events: Adjustments aren’t required to assets and liabilities for events
which occur after balance sheet date, in case such events don’t relate to the conditions which
existed at balance sheet date.
There’re events which, though occurring after balance sheet date, are sometimes presented in
financial statements because of their special nature or due to statutory requirements.

Disclosure
According to AS 4, disclosure requirements would be applicable only with respect to such
contingency or event that affect financial position to a substantial extent.
A. In case the contingent loss isn’t provided for, an estimate of the financial impact and
nature of such loss are usually disclosed through notes unless the probability of such loss is
remote
B. In case a reliable estimation of financial impact cannot be arrived at, this fact needs to be
disclosed
C. When events that occur after the balance sheet date are disclosed in the report of
approving authority, information provided includes nature of events and the estimate of their
financial impacts or the statement that such estimates cannot be arrived at

AS 10 Property, Plant and Equipment

Applicability
AS 10 is to be applied in accounting for property, P&E (Plant and Equipment) and this
standard are not applicable to:
(a) biological assets which are related to agricultural activities except for bearer plants. The
Standard is applicable to bearer plants, however, it doesn’t apply to the produce on bearer
plants; and
(b) wasting assets which include mineral rights, expenses related to exploration for and
extraction of oil, minerals, natural gas and other non-regenerative resources.

Recognition of Asset under AS 10 Property, Plant and Equipment

The cost of property and P&E should be recognized as an asset only if:
(i) it is apparent that the future economic benefits related to such asset would flow to the
business; and
(ii) the cost of such asset could be reliably measured.

Measurement of cost of the asset

An enterprise can select the revaluation model or the cost model as the accounting policy and
employ the same to the entire class of its properties and P&E. According to the cost model,
after recognizing the asset as an item of property or plant and equipment, it should be carried
at the cost less the accumulated depreciation and the accumulated impairment losses (if any).
As per revaluation model, once the asset is recognized and its fair value could be measured
reliably, then it must be carried at the revalued amount, which is the fair value of such asset at
the date of the revaluation as reduced any following accumulated depreciation and
accumulated impairment losses (if any). Revaluations must be done at regular intervals for
ensuring that the carrying amount doesn’t differ much from that which would be determined
using the fair value at balance sheet date.

Depreciation under AS 10 Property, Plant and Equipment

As per the standard, depreciation charge for every period must be recognized in the P/L
Statement unless it’s included in carrying the amount of any another asset. Depreciable
amount of any asset should be allocated on a methodical basis over the useful life of the asset.
Every part of property or P&E (Plant and Equipment) whose cost is substantial with respect
to the overall cost of the item must be depreciated separately.
The standard also prescribes, that the residual value and useful life of an asset must be
reviewed at the end of each financial year and, in case the expectations vary from the
previous estimates, changes must be accounted for as changes in accounting estimate as per
Accounting Standard 5 – Net Profit or Loss for the Period, Prior Period Items and Changes in
Accounting Policies.
The method of depreciation employed must reflect the pattern of future economic benefits of
the asset consumed by an enterprise. Various depreciation methods could be used for
allocating the depreciable amount of an asset on a methodical basis over the useful life of the
asset. The methods include SLM (Straight-line Method), diminishing balance method or units
of production method.

Major Differences Between AS 10 and Ind AS 16

Ind AS 16 Property, Plant, and Equipment deal with accounting for fixed assets which are
covered by AS 10. This Ind AS also deals with the depreciation of property, plant, and
equipment that covered by AS 6. The key differences between the existing AS 10 and Ind AS
10 are mentioned below:

Particulars Ind AS 16 AS 10

Accounting for real Ind AS 16 doesn’t exclude real estate AS 10 explicitly excludes
estate developers from its scope the
accounting for real estate
developers

Capitalization of Ind AS 16 necessitates capitalization of major AS 10 doesn’t deal with

inspections cost inspections cost with consequent de-recognition such aspect
of any residual carrying the amount of cost of the
 prior inspection

Self-constructed Ind AS 16 with respect to self-constructed assets, AS 10 doesn’t mention the

assets explicitly state that unusual amounts of labor, same
wasted material or other resources employed in
constructing any asset aren’t included in
asset’s cost

Joint Ownership AS 10 deals specifically with fixed assets which Ind AS 16 doesn’t deal
are jointly owned with others specifically with this as
these are covered in Ind
AS 31

Assets Held for Sale Ind AS 16 doesn’t deal with assets held for sale AS 10 deals with
and Fixed Assets as the accounting treatment is defined in Ind AS accounting for assets held
retired from Active 105, Non-current Assets Held for Sale and for sale and items of fixed
Use Discontinued Operations. assets retired from active
use

ICDS 5 vs AS 10

 The concept of Materiality for treating an item as the expense is recognized by AS

isn’t permissible under ICDS
 ICDS 5 particularly excludes Other Taxes that are consequently recoverable from the
cost of an acquired tangible fixed asset
 For assets acquired in exchange for other assets, the actual cost is recognized under
ICDS 5, where AS 10 permits determining the cost base on FMV (Fair Market Value)
of the asset acquired or given up whichever is apt. AS 10 suggest recording the cost at
the NBV (Net Book Value) of asset given up
 For assets acquired in exchange for shares or Securities, the actual cost of the asset is
recognized as per ICDS 5. Where AS 10 permits determining the cost base on FMV
(Fair Market Value) of the asset acquired or share or securities given up whichever is
apt
 Treatment for an expenditure that doesn’t increase the future benefits is not defined in
ICDS. However, according to Accounting Standard 10, such expenditure should be
treated as an expenditure and recognized in the P/L Statement accordingly
 ICDS has more disclosure requirements including grant or subsidy received on
account of a tangible fixed asset, changes in the rate of exchange of currency, etc

AS 13 Accounting for Investments

Applicability
AS 13 Accounting for Investments doesn’t deal with the following:

 The base for recognizing dividends, interest, and rentals which are earned on the
investments that are covered by AS 9
 Finance or operating leases which are covered by AS 19
 Investments in retirement benefit plans and life insurance enterprises which is
covered by AS 15
 The following which is formed under the Central or the State Government Act or
declared under Companies Act, 2013

1. Mutual Funds
2. Venture Capital Funds and related Asset Management Companies
3. Banks as well as public financial institutions

Classification of Investments
A. Current Investments – Current Investments are investments which by their nature are
readily realizable and are intended to be held for less than a year from the date when such
investment is done.
B. Long-Term Investments – Long-term investments are investments other than the current
investments, even though they might be freely marketable.

Cost of Investments

 Broker, duties, and fees – The cost of investments include charges related to
acquisition of brokerage, duties, and fees

 Non-cash consideration – In case investments are acquired, or partly acquired, by

1. issuing shares
2. issuing other securities
3. any other asset,

the cost of acquisition is the fair value of securities which are issued or the assets which are
given up.
The fair value might not essentially be same as the par or nominal value of securities which
are issued. It might be prudent to consider fair value of such investment acquired in case it’s
more evident

 Interest, dividend or other receivables – Dividends, interest and other receivables

that are in connection with the investments are usually considered as income, is the
ROI (return on the investment).

However, in certain conditions, such inflows signify a recovery of the cost and doesn’t form
part of the income.
In case it’s difficult to do such allocations, cost of investment is usually reduced to the extent
of dividends receivable only in case they represent clearly the recovery of a portion of the
cost

 Right Shares – In case right shares offered are subsequently subscribed for, cost of
such right shares is then added to carrying the amount of original holding.

In case the rights aren’t subscribed for, however, are sold, sale proceeds from the sale of such
rights are transferred to P/L statement. But, where an investment is acquired on a cum-right
basis and market value of the investment immediately after becoming ex-right is less than the
cost for which such investment was acquired, it might be prudent to apply the proceeds from
the sale of rights to reduce carrying the amount of the investment to the market value

Carrying Amount of Investments

Current investments must be carried in financial statements at lower of cost and fair value
which is determined either by category of investment or on an individual investment basis,
however, not on the overall basis.
Long-term investments must always be carried in financial statements at their cost. But, when
there’s a decline, apart from temporary, in value the long-term investment, carrying amount is
reduced for recognizing such decline.

Investment Property
Investment property is investments that are made in land or buildings which aren’t envisioned
to be used significantly for use, or in business operations of, the investing company.

Investment Treatment on Disposal

On sale or disposal of the investment, the difference between the carrying cost and proceeds
from the sales net of any expenses is transferred to P&L.

Reclassification of Investments
Where a long-term investment is reclassified as a current investment, the transfer is made at
carrying amount and lower of cost at the date of such transfer. Where an investment is
reclassified from current investment to long-term investment, the transfer is made at the
lower of its cost and the fair value of such investment at the date of such transfer.

Disclosures in the Financial Statements

The below mentioned are the disclosures in the financial statements with respect to AS 13
Accounting for Investments is applicable:
(a) accounting policies employed for determining carrying amount of investment
(b) the amounts which are included in the profit and loss statement for:
(i) Dividends, interest, and rentals on the investments presenting the income from such
long-term and current investments separately. Gross income must be stated, amount of TDS
(tax deducted at source) included under the Advance Taxes Paid
(ii) profits and losses on the disposal of current investment and the changes in carrying the
amount of the investment
(iii) profits and losses on the disposal of long-term investment and the changes in carrying
the amount of the investment
(c) substantial limitations on the right of ownership, realizability of the investments or
remittance of income and proceeds of disposal
(d) the total amount of both the quoted and unquoted investments, providing the total market
value of the quoted investments
(e) other disclosures as explicitly as required by the relevant statute governing the company

Major differences between AS 13 and Ind AS 40

Particulars AS 13 Ind AS 40

Guidance on AS 13 provides limited guidance Ind AS 40 provides a complete and

Investment over investment property separate guidance in this regard
property

Inclusion of leased AS 13 is silent with respect to Ind AS 40 covers property that is held by
property property held by the lessee under a the lessee under a finance lease
finance lease

Definition of AS 13 defines an investment Ind AS 40 explicitly distinguishes

Investment property between owner occupied-property and
property investment property

Recognition criteria AS 13 is silent with respect to any Ind AS 40 covers the recognition criteria
such treatments under various scenario

Accounting Standard – AS 14
(revised 2016)
Accounting for Amalgamations

Introduction
This standard deals with accounting for amalgamations and the treatment of any resultant
goodwill or reserves. This Standard is directed principally to companies although some of its
requirements also apply to financial statements of other enterprises.
This standard does not deal with cases of acquisitions which arise when there is a purchase by
one company (referred to as the acquiring company) of the whole or part of the shares, or the
whole or part of the assets, of another company (referred to as the acquired company) in
consideration for payment in cash or by issue of shares or other securities in the acquiring
company or partly in one form and partly in the other. The distinguishing feature of an
acquisition is that the acquired company is not dissolved and its separate entity continues to
exist.

Definitions
The following terms are used in this standard with the meanings specified:
(a) Amalgamation means an amalgamation pursuant to the provisions of the Companies Act,
2013 or any other statute which may be applicable to companies and includes ‘merger’.
(b) Transferor company means the company which is amalgamated into another company.
(c) Transferee company means the company into which a transferor company is
amalgamated.
(d) Reserve means the portion of earnings, receipts or other surplus of an enterprise (whether
capital or revenue) appropriated by the management for a general or a specific purpose other
than a provision for depreciation or diminution in the value of assets or for a known liability.
(e) Amalgamation in the nature of merger is an amalgamation which satisfies all the
following conditions.
(i) All the assets and liabilities of the transferor company become, after amalgamation, the
assets and liabilities of the transferee company.
(ii) Shareholders holding not less than 90% of the face value of the equity shares of the
transferor company (other than the equity shares already held therein, immediately before the
amalgamation, by the transferee company or its subsidiaries or their nominees) become
equity shareholders of the transferee company by virtue of the amalgamation.
(iii) The consideration for the amalgamation receivable by those equity shareholders of the
transferor company who agree to become equity shareholders of the transferee company is
discharged by the transferee company wholly by the issue of equity shares in the transferee
company, except that cash may be paid in respect of any fractional shares.
(iv) The business of the transferor company is intended to be carried on, after the
amalgamation, by the transferee company.
(v) No adjustment is intended to be made to the book values of the assets and liabilities of the
transferor company when they are incorporated in the financial statements of the transferee
company except to ensure uniformity of accounting policies.
(f) Amalgamation in the nature of purchase is an amalgamation which does not satisfy any
one or more of the conditions specified in sub-paragraph (e) above.
(g) Consideration for the amalgamation means the aggregate of the shares and other securities
issued and the payment made in the form of cash or other assets by the transferee company to
the shareholders of the transferor company.
(h) Fair value is the amount for which an asset could be exchanged between a knowledgeable,
willing buyer and a knowledgeable, willing seller in an arm’s length transaction.
(i) Pooling of interests is a method of accounting for amalgamations the object of which is to
account for the amalgamation as if the separate businesses of the amalgamating companies
were intended to be continued by the transferee company. Accordingly, only minimal
changes are made in aggregating the individual financial statements of the amalgamating
companies.

Explanation

Types of Amalgamations
Generally speaking, amalgamations fall into two broad categories. In the first category are
those amalgamations where there is a genuine pooling not merely of the assets and liabilities
of the amalgamating companies but also of the shareholders’ interests and of the businesses
of these companies. Such amalgamations are amalgamations which are in the nature of
‘merger’ and the accounting treatment of such amalgamations should ensure that the resultant
figures of assets, liabilities, capital and reserves more or less represent the sum of the relevant
figures of the amalgamating companies.
In the second category are those amalgamations which are in effect a mode by which one
company acquires another company and, as a consequence, the shareholders of the company
which is acquired normally do not continue to have a proportionate share in the equity of the
combined company, or the business of the company which is acquired is not intended to be
continued. Such amalgamations are amalgamations in the nature of ‘purchase’.

Methods of Accounting for Amalgamations

There are two main methods of accounting for amalgamations:
(a) the pooling of interests method; and
(b) the purchase method.
The use of the pooling of interests method is used for an amalgamation in the nature of
merger.
The object of the purchase method is to account for the amalgamation by applying the same
principles as are applied in the normal purchase of assets. This method is used in accounting
for amalgamations in the nature of purchase.

The Pooling of Interests Method

Under the pooling of interests method, the assets, liabilities and reserves of the transferor
company are recorded by the transferee company at their existing carrying amounts. If, at the
time of the amalgamation, the transferor and the transferee companies have conflicting
accounting policies, a uniform set of accounting policies is adopted following the
amalgamation.
The effects on the financial statements of any changes in accounting policies are reported in
accordance with Accounting Standard (AS) 5, Net Profit or Loss for the Period, Prior Period
Items and Changes in Accounting Policies.
The Purchase Method
Under the purchase method, the transferee company accounts for the amalgamation either by
incorporating the assets and liabilities at their existing carrying amounts or by allocating the
consideration to individual identifiable assets and liabilities of the transferor company on the
basis of their fair values at the date of amalgamation. The identifiable assets and liabilities
may include assets and liabilities not recorded in the financial statements of the transferor
company.
Where assets and liabilities are restated on the basis of their fair values, the determination of
fair values may be influenced by the intentions of the transferee company.

Consideration
The consideration for the amalgamation may consist of securities, cash or other assets. In
determining the value of the consideration, an assessment is made of the fair value of its
elements. A variety of techniques is applied in arriving at fair value. For example, when the
consideration includes securities, the value fixed by the statutory authorities may be taken to
be the fair value. In case of other assets, the fair value may be determined by reference to the
market value of the assets given up. Where the market value of the assets given up cannot be
reliably assessed, such assets may be valued at their respective net book values.
15. Many amalgamations recognise that adjustments may have to be made to the
consideration in the light of one or more future events. When the additional payment is
probable and can reasonably be estimated at the date of amalgamation, it is included in the
calculation of the consideration. In all other cases, the adjustment is recognised as soon as the
amount is determinable.

Treatment of Reserves on Amalgamation

If the amalgamation is an ‘amalgamation in the nature of merger’, the identity of the reserves
is preserved and they appear in the financial statements of the transferee company in the same
form in which they appeared in the financial statements of the transferor company. Thus, for
example, the General Reserve of the transferor company becomes the General Reserve of the
transferee company, the Capital Reserve of the transferor company becomes the Capital
Reserve of the transferee company and the Revaluation Reserve of the transferor company
becomes the Revaluation Reserve of the transferee company. As a result of preserving the
identity, reserves which are available for distribution as dividend before the amalgamation
would also be available for distribution as dividend after the amalgamation. The difference
between the amount recorded as share capital issued (plus any additional consideration in the
form of cash or other assets) and the amount of share capital of the transferor company is
adjusted in reserves in the financial statements of the transferee company.
 If the amalgamation is an ‘amalgamation in the nature of purchase’, the identity of the
reserves, other than the statutory reserves dealt with in paragraph 18, is not preserved. The
amount of the consideration is deducted from the value of the net assets of the transferor
company acquired by the transferee company. If the result of the computation is negative, the
difference is debited to goodwill arising on amalgamation and dealt with in the manner stated
in paragraphs 19-20. If the result of the computation is positive, the difference is credited to
Capital Reserve.

Treatment of Goodwill Arising on Amalgamation

Goodwill arising on amalgamation represents a payment made in anticipation of future
income and it is appropriate to treat it as an asset to be amortised to income on a systematic
basis over its useful life. Due to the nature of goodwill, it is frequently difficult to estimate its
useful life with reasonable certainty. Such estimation is, therefore, made on a prudent basis.
Accordingly, it is considered appropriate to amortise goodwill over a period not exceeding
five years unless a somewhat longer period can be justified.

Balance of Profit and Loss Account

In the case of an ‘amalgamation in the nature of merger’, the balance of the Profit and Loss
Account appearing in the financial statements of the transferor company is aggregated with
the corresponding balance appearing in the financial statements of the transferee company.
Alternatively, it is transferred to the General Reserve, if any.
In the case of an ‘amalgamation in the nature of purchase’, the balance of the Profit and Loss
Account appearing in the financial statements of the transferor company, whether debit or
credit, loses its identity.

Disclosure
For all amalgamations, the following disclosures are considered appropriate in the first
financial statements following the amalgamation:
(a) names and general nature of business of the amalgamating companies;
(b) effective date of amalgamation for accounting purposes;
(c) the method of accounting used to reflect the amalgamation; and
(d) particulars of the scheme sanctioned under a statute.
For amalgamations accounted for under the pooling of interests method, the following
additional disclosures are considered appropriate in the first financial statements following
the amalgamation:
(a) description and number of shares issued, together with the percentage of each company’s
equity shares exchanged to effect the amalgamation;
(b) the amount of any difference between the consideration and the value of net identifiable
assets acquired, and the treatment thereof.
For amalgamations accounted for under the purchase method, the following additional
disclosures are considered appropriate in the first financial statements following the
amalgamation:
(a) consideration for the amalgamation and a description of the consideration paid or
contingently payable; and
(b) the amount of any difference between the consideration and the value of net identifiable
assets acquired, and the treatment thereof including the period of amortisation of any
goodwill arising on amalgamation.

AS 16 – Borrowing Costs

Updated on Mar 15, 2018 - [Link] PM

The main objective of this Accounting Standard is only to prescribe accounting principles for
the accounting of borrowing cost.

1. Nature & Scope

This Notified accounting standard is mandatorily applicable to all enterprises. It is
specifically stated that this accounting standard is only related to External Borrowings
and does not deal with the cost of raising Equity or Convertible Preference Shares.

2. Borrowing Cost
As per ICAI “Borrowing Costs are interest and other costs incurred by an enterprise in
connection with the borrowing of funds”
a. Interest on short term loans or long-term debts should be included as part of borrowing
cost. Ex: Interest paid to financial institutions for loan taken to acquire the asset.
b. If an enterprise has incurred any discounts or premiums related to the borrowing cost, then
it will also be amortised. Ex: Amount paid to the financial institutions as loan processing cost
c. If an enterprise has incurred any finance/ancillary cost in connection with the borrowings,
then it will also be amortised. Ex: Amount to the professionals for preparation of project
reports, etc.
d. If an enterprise has acquired any asset under finance lease or any other similar
arrangement, then those finance cost will also be amortised. Ex: Leasing cost paid to the
lessor every year.
If an enterprise has taken any borrowing in foreign currency, then the exchange rate
fluctuation will also be amortised to the extent they are regarded as an adjustment of interest
costs. Ex: An enterprise has taken a loan from foreign financial institutions when the rate of
US $ was 64, while at the end of the financial year the rate of US $ was 65. The rate
difference of US $ 1 will be treated as Borrowing Cost.

3. Qualifying Assets
Qualifying Assets are those assets which take substantial time to be ready for the intent of
sale or use.
Substantial period primarily depends on the facts and circumstances of the case. Generally, a
period of 12 months is considered as a substantial period unless a shorter or longer period can
be justified based on facts and circumstances of the case.
Borrowing costs are capitalized in the books of accounts with the qualifying assets when it is
certain that it will have future economic benefits. Any other borrowing costs must be treated
as an expense in the period in which they are incurred.

4. Capitalization of Borrowing Cost

The following conditions should be satisfied for capitalization of borrowing costs:
a. Those borrowings costs which are directly attributable to the acquisition, construction or
production of qualifying asset, are eligible for capitalization. Directly attributable costs are
those costs which would have been avoided if the expenditure on the qualifying assets has not
been made.
b. Qualifying assets will give future benefit to the enterprises and the cost can be measured
reliably

5. Types of Borrowings
The two types of borrowings which are detailed below in the table are:
a. Specific borrowings
b. General borrowings
Amount of borrowing cost to be capitalized is:

Type of Amount to be Capitalized

Borrowing

Specific The amount to be capitalized is:

Borrowing Actual Borrowing Cost incurred during the period
Minus
Any income on temporary investment of borrowed funds(Ex: The excess money
invested in Fixed Deposit will have interest gain)

General The amount to be capitalized involves few steps:

Borrowing a. Calculate Capitalization Rate. It will be weighted average of borrowing cost.
b. Cost to be Capitalized = Capitalization rate * Amount spent on qualifying asset out
of general borrowingNote: Amount of borrowing cost capitalized during a period
should not exceed the amount of borrowing cost incurred during the period.

6. Commencement of Capitalization
The Commencement of Capitalization of borrowing cost should commence when all the
conditions below are fulfilled:
a. Expenditure for the acquisition, construction or production of a qualifying asset is being
incurred. Here expenditure includes those expenditure in the nature of cash or transfer of any
asset or the assumption of interest bearing liabilities
b. Borrowing Costs are being incurred.
c. Activities that are necessary to prepare the asset for its intended use or sale are in progress.
The activities here need not be the physical activities, but the technical and administrative
work related to the assets is also taken into consideration

7. Suspension of Capitalization
Capitalization of Borrowing cost are commenced when the above mentioned 3 points are
satisfied. However, if there is a temporary delay in which the active necessary developments
are interrupted then then there will be a suspension of capitalization.
However, if the temporary delay is necessary part of the process of getting an asset ready for
its intended use or sale, then there will be no suspension of capitalization.

8. Cessation of Capitalization
Capitalization of borrowing cost ceases when all the activities necessary to prepare the
qualifying assets are complete. If an asset has been completed in parts and a completed part is
capable of being used while the construction for the other part continues then the
capitalization for that completed part will cease.
Example: A business park consists of several buildings and each building can be treated as an
individual part.

9. Disclosures
The Financial Statements should disclose the following:
a. The accounting policy adopted for borrowing costs
b. The amount of borrowing costs capitalized during the year

10. Example
ABC Ltd. obtained a loan from a bank for Rs. 50 lakhs on 30th April 2017. ABC Ltd utilized
the money:
Construction of Shed: Rs 50 Lakhs
Purchase of Machinery: Rs 40 Lakhs
Working Capital: Rs 20 lakhs
Advance for purchase of truck: Rs. 10 Lakhs
Construction of shed was completed in March 2018. The Machinery was installed on the
same day. Truck was not yet received. Total interest charged by the bank for the year ending
31-03-2018 was Rs 18 lakhs.
The treatment will be:
Qualifying Asset as per AS 16 = Rs 50 Lakhs (Construction of Shed)
Borrowing Cost to be capitalized = 18 * 50/120 = Rs. 7.5 Lakhs
Interest to be debited to profit or loss account = (18-7.5) Lakhs = Rs. 10.50 Lakhs

AS 6 Depreciation Acounting
1. The depreciable amount of a depreciable asset should be allocated on a systematic basis
to each accounting period during the useful life of the asset.
2. The depreciation method selected should be applied consistently from period to period.
A change from one method of providing depreciation to another should be made only if
the adoption of the new method is required by statute or for compliance with an
accounting standard or if it is considered that the change would result in a more
appropriate preparation or presentation of the financial statements of the enterprise.
When such a change in the method of depreciation is made, depreciation should be
recalculated in accordance with the new method from the date of the asset coming into
use. The deficiency or surplus arising from retrospective recomputation of depreciation
in accordance with the new method should be adjusted in the accounts in the year in
which the method of depreciation is changed. In case the change in the method results in
deficiency in depreciation in respect of past years, the deficiency should be charged in
the statement of profit and loss. In case the change in the method results in surplus, the
surplus should be credited to the statement of profit and loss. Such a change should be
treated as a change in accounting policy and its effect should be quantified and
disclosed.
3. The useful life of a depreciable asset should be estimated after considering the following
factors:
(ii) expected physical wear and tear;
(iii) obsolescence;
(iv) legal or other limits on the use of the asset.

4. The useful lives of major depreciable assets or classes of depreciable assets may be
reviewed periodically. Where there is a revision of the estimated useful life of an asset, the
unamortised depreciable amount should be charged over the revised remaining useful life.

5. Any addition or extension which becomes an integral part of the existing asset should be
depreciated over the remaining useful life of that asset. The depreciation on such addition or
extension may also be provided at the rate applied to the existing asset. Where an addition or
extension retains a separate identity and is capable of being used after the existing asset is
disposed of, depreciation should be provided independently on the basis of an estimate of its
own useful life.
6. Where the historical cost of a depreciable asset has undergone a change due to increase or
decrease in long-term liability on account of exchange fluctuations, price adjustments,
changes in duties or similar factors, the depreciation on the revised unamortised depreciable
amount should be provided prospectively over the residual useful life of the asset.

7. Where the depreciable assets are revalued, the provision for depreciation should be based
on the revalued amount and on the estimate of the remaining useful lives of such assets. In
case the revaluation has a material effect on the amount of depreciation, the same should be
disclosed separately in the year in which revaluation is carried out.

8. If any depreciable asset is disposed of, discarded, demolished or destroyed, the net surplus
or deficiency, if material, should be disclosed separately.

9. The following information should be disclosed in the financial statements :

(i) the historical cost or other amount substituted for historical cost of each class of
depreciable assets;

(ii) total depreciation for the period for each class of assets; and

(iii) the related accumulated depreciation.

10. The following information should also be disclosed in the financial statements along with
the disclosure of other accounting policies :

(i) depreciation methods used; and (ii) depreciation rates or the useful lives of
the assets, if they are different from the principal rates specified in the statute governing the
enterprise.

Additional Material

AS 9 Revenue Recognition

Introduction of AS 9 Revenue Recognition

Revenue has to be measured by the amount charged to the clients for the sale of goods and
services.
However, in the case of the agency relationship, the revenue has to be measured by the
amount charged for commission and not on the gross inflow of the cash, receivables or other
consideration.
There are few exceptions to the above-mentioned statement where the special consideration
applies: –

1. Revenue arising from Construction Contracts

2. Revenue arising from hire-purchase, lease agreements
3. Revenue arising from government grants and other similar subsidies
 4. Revenue of Insurance companies arising from insurance contracts

Applicability of AS 9 Revenue Recognition

This standard was issued by ICAI in the year 1985 and in the initial years, it was re-
commendatory for only Level I enterprises and but was made mandatory for all other
enterprises from April 01, 1993.
As per ICAI, “Enterprise means a company as defined in section 3 of the Companies Act,
1956”.
Level I enterprises are those enterprises whose turnover for the immediately preceding
accounting year exceeds 50 crores. The turnover here does not include other income and is
applicable for holding as well as subsidiary companies.

Explanation

1. Revenue recognition emphasizes on the timing of recognition of revenue in the

statement of profit and loss of an enterprise
2. The amount of revenue arising from a transaction is usually determined by an
agreement between the parties involved in the transaction
3. When uncertainties arise regarding the determination of the amount or its associated
costs, these uncertainties may influence the timing of the revenue

A. Sale of Goods
One key element for determining the recognition of revenue of a transaction involving the
sale of goods is that the seller has transferred the property in the goods to the buyer for a
consideration. In most cases, the transfer of property in the goods results in the transfer of the
significant risks and rewards in ownership of the goods.
However, there are situations where the transfer of significant risks doesn’t coincide with the
transfer of goods to the buyer, in such cases revenue has to be recognized at the time of
transfer of significant risks and rewards to the buyer. Example: Goods sent to the consignee
on approval basis.
There are certain cases in the specific industry where the performance may be substantially
complete prior to the execution of the transaction generating revenue.
In such cases, when the sale is assured under government guarantee or a forward contract or
where the market exists and there is a negligible risk of failure to sell, the goods involved are
often valued at the net realizable value (NRV).
Such amounts are not defined in the definition of the revenue but are still sometimes
recognized in the statement of profit and loss. Example: Harvesting of Agricultural Crops or
extraction of mineral ores.

B. Rendering of Services
Revenue recognition of services depends as the service is performed. This is further divided
into two ways:
(a) Proportionate Completion Method: This method of accounting recognizes revenue in
the statement of profit & loss proportionately with the degree of completion of each service.
Here the service completion consists of the execution of more than one act. Revenue is
recognized with the completion of each such act.
(b) Completed Service Contract Method: This method of accounting recognizes revenue in
the statement of profit & loss only when the rendering of services under a contract is
completed or substantially completed.

C. Interest, royalties & dividends

The use by others of such enterprise resources gives rise to:
(i) Interest: Revenue is recognized on the time proportion basis after taking into account the
amount outstanding and the rate applicable.
For Example: If the interest on FD is due on 30th June and 31st Dec. On 31st March when
the books will be closed, though the interest for the period of Jan-March will be received in
June, still we have to recognize the revenue in March itself.
(ii) Royalties: Royalty includes the charge for the use of patents, know-how, trademarks, and
copyrights. Revenue has to be recognized on the basis of accrual basis and in accordance with
the relevant agreement.
For Example: If the royalty is payable based on the number of copies of the book, then it has
to be recognized on that basis only.
(iii) Dividends: Revenue has to be recognized when the owner’s right to receive payment is
established. It is only certain when the company declare the dividends on the shares and the
directors actually decide to pay the dividends to their shareholders.

Difference between IND AS -18 & AS -9

AS 9 Revenue Recognition IND AS 18

It is recognized at nominal value It is recognized at fair value

This aspect is not covered in AS-9 IND AS – 18 also includes the exchange of goods and services
with goods and services of similar and dissimilar nature
(Barter Transactions are included in Ind AS-18)

Interest Income is recognized on Interest Income is recognized using effective interest rate
time proportion basis method
It recognizes revenue as per It only recognizes revenue as per percentage of completion
completed service method or method
percentage completion method