1.1 Introduction to Accounting standards and IFRS | unit 1 introduction to accounting standards and ifrs

Unit – I

Introduction to Accounting Standards and IFRS

1.1 Introduction to Accounting standards and IFRS

Meaning of Accounting Standards

Accounting Standards are written policy documents issued by expert accounting body or by the government or other regulatory body covering the aspects of recognition, measurement, treatment, presentation, and disclosure of accounting transactions in financial statements

Classification of Enterprises

The enterprises are classified and labeled as Level I, Level II and Level III companies. Based on this classification and the category in which they fall the Accounting standards are applicable to the enterprises

Level I Enterprises

Enterprises which fall under any one or more category below mentioned are termed as Level I Companies -

Enterprises whose equity or debt securities are listed whether in India or outside India.

Enterprises which are in the process of listing their equity or debt securities. Board of directors resolution must be available as an evidence.

Banks including co-operative banks.

Financial institutions.

Enterprises carrying on insurance business.

All commercial, industrial and business reporting enterprises, whose turnover not including ‘other income’ for the immediately preceding accounting period on the basis of audited financial statements exceeds Rs. 50 crore.

All commercial, industrial and business reporting enterprises having borrowings, including public deposits, in excess of Rs. 10 crores at any time during the accounting period.

Holding and subsidiary enterprises of any one of the above at any time during the accounting period.

Level II Enterprises

Enterprises which fall under any one or more category below mentioned are termed as Level II Companies-

All commercial, industrial and business reporting enterprises, whose turnover (excluding ‘other income’) for the immediately preceding accounting period on the basis of audited financial statements is greater than Rs. 40 lakhs but less than Rs. 50 crore.

All commercial, industrial and business reporting enterprises having borrowings, including public deposits, is greater Rs. 1 crore but less than Rs. 10 crores at any time during the accounting period.

Holding and subsidiary enterprises of any one of the above at any time during the accounting period.

Level III Enterprises:

Enterprises which do not fall under Level I and Level II, are considered as Level III enterprises

Applicability of Accounting Standards

Accounting Standard	Level I	Level II	Level III
AS 1 Disclosure of Accounting Principles	Yes	Yes	Yes
AS 2 Valuation of Inventories	Yes	Yes	Yes
AS 3 Cash Flow Statements	Yes	No	No
AS 4 Contingencies and Events Occurring After the Balance Sheet Date	Yes	Yes	Yes
AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies	Yes	Yes	Yes
~~AS 6 Depreciation Accounting~~	~~Yes~~	~~Yes~~	~~Yes~~
AS 7 Construction Contracts (Revised 2002)	Yes	Yes	Yes
AS 9 Revenue Recognition	Yes	Yes	Yes
AS 10 Accounting for Fixed Assets	Yes	Yes	Yes
AS 11 The Effects Of Changes In Foreign Exchange Rates (Revised 2003)	Yes	Yes	Yes
AS 12 Accounting for Government Grants	Yes	Yes	Yes
AS 13 Accounting for Investments	Yes	Yes	Yes
AS 14 Accounting for Amalgamations	Yes	Yes	Yes
AS 15 Employee Benefits (Revised 2005)	Yes	Yes	Yes
AS 16 Borrowing Costs	Yes	Yes	Yes
AS 17 Segment Reporting	Yes	No	No
AS 18 Related Party Disclosures	Yes	No	No
AS 19 Leases	Yes	Partial	Partial
AS 20 Earnings Per Share	Yes	Partial	Partial
AS 21 Consolidated Financial Statements	Yes	No	No
AS 22 Accounting for taxes on income	Yes	Yes	Yes
AS 23 Accounting for Investments in Associates in Consolidated Financial Statements	Yes	No	No
AS 24 Discontinuing Operations	Yes	No	No
AS 25 Interim Financial Reporting	Yes	No	No
AS 26 Intangible Assets	Yes	Yes	Yes
AS 27 Financial Reporting of Interests in Joint Ventures	Yes	No	No
AS 28 Impairment of Assets	Yes	Yes	Yes
AS 29 Provisions, Contingent Liabilities and Contingent Assets	Yes	Partial	Partial

International Financial Reporting Standards:

The field of financial reporting in India has seen major changes in the last 5 years. As the trade increasingly moves beyond the national boundaries, the compliance and reporting requirements move too. Presenting the financial statements of an entity in accordance with the reporting requirements of every country it has a presence in, is becoming increasingly difficult.

What is IFRS?

The International Financial Reporting Standards (IFRS) are accounting standards that are issued by the International Accounting Standards Board (IASB)with the objective of providing a common accounting language to increase transparency in the presentation of financial information.

What is IASB?

The International Accounting Standards Board (IASB), is an independent body formed in 2001 with the sole responsibility of establishing the International Financial Reporting Standards (IFRS). It succeeded the International Accounting Standards Committee (IASC), which was earlier given the responsibility of establishing the international accounting standards. IASB is based in London. It has also provided the ‘Conceptual Framework for Financial Reporting’ issued in September 2010 which provides a conceptual understanding and the basis of the accounting practices under IFRS.

Components of Financial Statements under IFRS

A complete set of financial statements prepared in compliance with the IFRS would ideally comprise of the following:

A statement of financial position as at the end of the period – more commonly known to us as the ‘Balance sheet’.

A statement of profit and loss for the year and the statement of other comprehensive income – Other comprehensive income would include those items of income/expense that are not recognized in the profit and loss account to comply with the other relevant standards.

Both these statements may either be combined or shown separately.

A statement of changes in equity – This would include a reconciliation between amounts shown at the beginning and the end of the year.

A statement of cash flows for the period.

Notes to the financial statements – including a summary of significant accounting policies followed and other explanatory information.

The financial statements would sometimes also include a statement of the financial position of an earlier period in the following scenarios:

When an entity applies an accounting policy retrospectively;

When an entity retrospectively restated an item in its financial statements; or

When an entity reclassifies an item in its financial statements.

List of International Financial Reporting Standards (IFRS)

As already discussed, the Standards issued by the IASB are called IFRS. The predecessor body, IASC, had however already issued certain International Standards which are called International Accounting Standards (IAS). These IAS were issued by the IASC between 1973 and 2001. Both IAS and the IFRS continue to be in force. The standards are listed below:

Standard No.	Standard Title
IFRS 1	First-time Adoption of International Financial Reporting Standards
IFRS 2	Share-based Payment
IFRS 3	Business Combinations
IFRS 4	Insurance Contracts
IFRS 5	Non-current Assets Held for Sale and Discontinue Operations
IFRS 6	Exploration and Evaluation of Mineral Resources
IFRS 7	Financial Instruments: Disclosures
IFRS 8	Operating Segments
IFRS 9	Financial Instruments
IFRS 10	Consolidated Financial Statements
IFRS 11	Joint Arrangements
IFRS 12	Disclosure of Interests in Other Entities
IFRS 13	Fair Value Measurement
IFRS 14	Regulatory Deferral Accounts
IFRS 15	Revenue from Contracts with Customers
IFRS 16	Leases
IFRS 17	Insurance Contracts
IAS 1	Presentation of Financial Statements
IAS 2	Inventories
IAS 7	Statement of Cash Flows
IAS 8	Accounting Policies, Changes in Accounting Estimates and Errors
IAS 10	Events after the Reporting Period
IAS 11	Construction Contracts
IAS 12	Income Taxes
IAS 16	Property, Plant, and Equipment
IAS 17	Leases
IAS 18	Revenue
IAS 19	Employee Benefits
IAS 20	Accounting for Government Grants and Disclosure of Government Assistance
IAS 21	The Effects of Changes in Foreign Exchange Rates
IAS 23	Borrowing Costs
IAS 24	Related Party Disclosures
IAS 26	Accounting and Reporting by Retirement Benefit Plans
IAS 27	Separate Financial Statements
IAS 28	Investments in Associates and Joint Ventures
IAS 29	Financial Reporting in Hyperinflationary Economies
IAS 32	Financial Instruments: Presentation
IAS 33	Earnings per Share
IAS 34	Interim Financial Reporting
IAS 36	Impairment of Assets
IAS 37	Provisions, Contingent Liabilities, and Contingent Assets
IAS 38	Intangible Assets
IAS 39	Financial Instruments: Recognition and Measurement
IAS 40	Investment Property
IAS 41	Agriculture

1.2 Human Resource Accounting

It is concerned with the human resources of an enterprise. Accounting methods are applied to identify human resources and its evolution is done in money terms so that the society might judge the total work of the business enterprises including its non-human net assets. It is, therefore, an accounting for the people of the organisation. Unfortunately, no objectively verifiable measure has been developed for universal application. Human Resource Accounting: Human Resource Accounting means the accounting tor human being as now in an organisation human being is treated as an asset like other physical assets. t is recorded in the books like other assets. HRA deals with the measurement of costs on recruiting, selecting, hiring, training, placing and development of the employees in one side and on the other side it deals with the present economic value of the employees. For the determination of the value of human being, different methods are used under HRA.

1.3 Inflation Accounting and Responsibility Accounting Theoretical concept only

DEFINITION OF INFLATION ACCOUNTING:

A state in which the value of money is falling that is prices are rising.

A process of steadily rising prices resulting in diminishing purchasing power of a given nominal sum of money.

OBJECTIVES

The user or decision maker gets an information which shows the performance.

To facilitate the comparison of the performance of two different periods it is necessary that the figures are adjusted for inflation.

The monetary items, income & expenses do not show the correct purchasing power of money therefore, their values should be adjusted for inflation.

To ascertain the current value of assets.

TECHNIQUES OF INFLATION ACCOUNTING-

Replacement Cost Method of Dealing with Fixed.

Assets Only.

Writing up of Fixed Assets.

Replacement Cost Method (Covering Fixed Assets).

Present (Current) Value Accounting.

Continuously Contemporary Accounting.

Current Cost Accounting.

Current Purchasing Power Accounting.

Replacement Cost-Cum-Current Purchasing Power Accounting.

ADVANTAGES-

It enables the maintenance of capital intact which is essential in a limited liability business.

Profit/loss is determined by matching the cost & the revenue at current values which are comparable.

The assets are shown at real values uniformly instead of at distorted values.

Trade unions, employees, shareholders & public are not misled by giving an exaggerated profit figures.

By showing the current values of fixed assets it enables the establishment of realistic price for the company's shares.

DISADVANTAGES-

Depreciation being the process of distribution of original cost, charging anything in excess does not fit into the concept of depreciation.

Replacement cost is an indefinite figure coloured by future technological developments & the time period at which the asset will be scrapped.

Charging depreciation on replacement cost basis will be acceptable to income-tax authorities & hence there is no purpose in doing the exercise.

The calculations are so involved that an average shareholder will not be able to comprehend the financial stmt.

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