ACCOUNTANT STANDARDS ISSUED BY ICAI WITH REFERENCE TO ITS RELEVANCE TO BANKERS IN ANALYSIS AND INTERPRESENTATION OF FINANCIAL STATEMENTS AND CRITICAL DATA Presented By : CA Pranav Shah Meaning of Accounting Standards Accounting Standards relate to the codification of generally accepted accounting principles These are the norms of accounting policies and practices by way of codes or guidelines to direct as to how the items which go to make up the financial statements should be dealt with in accounts and presented in the annual accounts The main purpose of standards is to provide information to the users as to the basis on which the accounts have been prepared Disclosure of accounting policies enables the users to interpret the reported information Standards may consist of detailed rules to be adopted for accounting treatment of various items before the presentation of financial statements List of Accounting Standards : Disclosure of Accounting Policies AS-1 Valuation of Inventories AS-2 Cash flow Statement AS-3 Contingencies & events occurred after the Balance Sheet Date AS-4 Depreciation Accounting AS-6 Revenue Recognition AS-9 Fixed Assets AS-10 Accounting for the effects of changes in Foreign Exchange Rates AS-11 Accounting for Investments AS-13 Related Parties Disclosure AS-18 Earning per Share AS-20 Accounting for taxes of Income AS-22 Provisions Contingent Liabilities & Contingent Assets AS-29 AS-1: Disclosure of Accounting Policies Significant Accounting Policies followed in preparation of accounts be disclosed at one place along with the financial statements Any change & financial impact of such change of Accounting Policies should be disclosed If Fundamental Assumptions (going Concern, consistency & accrual ) are not followed , the fact must be disclosed Accounting policies adopted by the enterprise should represent true & Fair view of the state of affairs of the financial statements Reference of Annual Report of Micro inks Ltd.for financial year Dec.2006 Financial Statement have been prepared under Historical cost convention on an accrual basis & in accordance with the generally accepted accounting policies issued by ICAI referring to in Sec 211 (3C) of the companies Act ,1956 BANKER’S CONCERN :AS -1 The impact of any change in Accounting Policies shall effect on the profitability of the company It should be construed with reference to the existing policies & new policies adopted by the company & how far it is justified & acceptable to bank For e.g Change in valuation method from Weighted Average to FIFO may have impact on the profitability AS-2 : Valuation of Inventories Valued at the lower of cost & Net realisable value It is Sum of the Cost of purchase, cost of conversion & other cost This AS is not applicable to Construction Contract, Service providers ,Financial Instruments & Livestock Determination of costa) Specific Identification method for determining cost of inventories means directly linking the cost with specific item of inventories b) Specific Identification method for determining cost of inventories when not applicable then use FIFO and Weighted average method Reference of Annual Report of Micro inks Ltd for financial yearDec.2006 The finished & semi finished inventories are valued at lower of cost on absorption basis & Net realisable value Raw material & packing material are valued at lower of cost & Net realisable value However ,materials & other items held for use in production of finished goods are not written down below cost if the product in which they will be incorporated are expected to be sold at or above cost Cost is determined on a transactional weighted average basis, net of CENVET benefits availed by the companies Damaged , unserviceable & inert stocks are depreciated Excise duty & custom duty payable on goods held in the bonded warehouse are provided in valuation of inventories Consumables & other spares, tools , etc are valued at lower of cost( transactional weighted average cost ,net of CENVAT benefits availed by the companies) & net realisable value 10 AS-13 : Accounting for Investment It is assets held for earning income by way of dividend , interest & rentals, for capital appreciation or for other benefits Cost of Investment include acquisition charges , e.g brokerage , fees and duties Investment readily realisable & held not more than a year are classified as current assets Current investment disclosed at lower of cost & fair value Long term investment disclosed at cost 29 Reference of Annual Report of Micro inks Ltd for financial year Dec.2006 Long term investments are stated at the cost, less provision , if any , for diminution in value other than temporary Current Investments are stated at cost & fair value whichever is lower 30 BANKER’S CONCERN : AS - 13 If no provision is made for diminution on the value of investment then to that extant profit of the company would be shown on higher side therefore while apprising the proposal the profitability of the company may be recalculated 31 AS-18 : Related Party Disclosures Parties are considered to be related if, any time during reporting period, one party has ability to control or exercise significant influence over the other party in making financial and /or operating decisions Name of the related party & nature of related party relationship must be disclosed even there is no transactions but control exist 32 BANKER’S CONCERN : AS - 18 In case of AS 18 bankers would be able to know whether the disclosure to the bank regarding group concerns / Sister concerns have been truly made or not & whether to include or exclude such group concerns book debt while calculating drawing power 33 AS-20 : Earning Per Share It is financial ratio that gives the information regarding earning available to each equity share It shows market price of a share Applicable to enterprise whose shares are listed in Stock exchange These are of types – basic EPS & Diluted EPS They must be shown in the profit & loss statement even if negative Basic EPS calculated by dividing net P/L for the period attributable to equity shareholders by weighted average of equity shares outstanding during the year Diluted EPS calculated as net P/L for the period attributable to equity shareholders by weighted average of shares are adjusted for the effects of dilutive potential equity share 34 AS-22 : Accounting for taxes on income There are two types of tax Current tax & the deferred Tax Current tax measured at the amount expected to be paid to ( recovered from ) the taxation authorities , using the applicable tax rates & tax laws Deferred tax assets & liabilities should be measured using the applicable tax rates & tax laws that have been enacted by the Balance Sheet date 35 Both the current & Deferred tax, assets & liabilities are shown distinguish from each other Nature of evidence supporting the recognition of Deferred tax assets should be disclosed, if an enterprise has unabsorbed depreciation or carry forward of losses under tax laws 36 Reference of Annual Report of Micro inks Ltd for financial year Dec.2006 Provision for current tax based on taxable profit for the months period upto Dec 31,2006 The actual liability will be determined on the basis of the results for the period April ,2006 to March 31, 2007.in accordance with Income Tax Act ,1961 Provision for Fringe Benefit Tax is made in accordance with provisions of Income Tax Act , 1961 Deferred tax is recognised , on timing difference , being the difference between taxable income & accounting income that originate in one period and are capable of reversal in one or more subsequent periods 37 Deferred tax Assets in respect of unabsorbed & carrying forward losses are recognised if there is virtual certainty that there will be sufficient future taxable income available to realise such losses 38 BANKER’S CONCERN : AS -22 The deferred tax liability which is a liability entry passed by way of notional entry to bring the Indian Accounting Standard in harmony with International Accounting Standard & to eliminate the time difference between Income Tax Act & Companies Act 39 AS-29 : Provisions ,Contingent liabilities & contingent Assets Provision is a liability , which can be measured by using a substantial degree of estimation Contingent liabilities is a possible obligation that arises from past event & existence of which will be confirmed only by the occurrence or non occurrence of one or more uncertain future events Contingent liabilities are not recognised in the P/L account & disclosed in notes to the accounts 40 Reference of Annual Report of Micro inks Ltd for financial year Dec.2006 A provision is recognised when the company has a present legal or constructive obligation as a result of past event & it is probable that a outflow of resources will be required to settle the obligation Provisions ( excluding retirement benefits ) are not discounted to its present value & are determined based on best estimate require to settle the obligation at the Balance Sheet date 41 BANKER’S CONCERN : AS -29 Whether all the provisions have been made in books of accounts & whether they have been correctly recorded The impact of contingent liability on the future cashflows of the company 42 THANKS YOU 43