Month: August 2021

The Standard shall be applied in accounting for construction contracts in the financial statements of contractors. 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.

The requirements of this Standard are usually applied separately to each construction contract. However, in certain circumstances, it is necessary to apply the Standard to the

separately identifiable components of a single contract or to a group of contracts together in order to reflect the substance of a contract or a group of contracts.

Contract revenue shall comprise:

(a) The initial amount of revenue agreed in the contract.

(b) variations in contract work, claims and incentive

Payments:

(i) To the extent that it is probable that they will result in revenue.

(ii) They are capable of being reliably measured. Contract revenue is measured at the fair value of the consideration received or receivable.

Contract costs shall comprise:

(a) Costs that relate directly to the specific contract

(b) Costs that are attributable to contract activity in general and can be allocated to the contract

(c) Such other costs as are specifically chargeable to the customer under the terms of the contract.

The Indian Accounting Standard 11 prescribes the accounting treatment of the revenues and costs associated with construction contracts. One of the primary assumptions of accounting is the matching concept. Under this concept, the revenues are matched with the costs in the period in which they are incurred. However, construction contracts are long-term in nature and hence, the revenue and costs are carried over from one accounting period to another. Hence, the need for this standard arose. This standard clearly explains the recognition of contract revenue and its expenses.

The standard defines the following:

Contract Revenue: Contract revenue comprises the initial amount of revenue agreed in the contract; and variations in contract work, claims, and incentive payments, to the extent that they may result in revenue. These need to be capable of being reliably measured.

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. It also includes agreements of real estate development to provide services together with construction material in order to perform the contractual obligation to deliver the real estate to the buyer. Construction of a specific asset as stated in the definition can be the building of a bridge, dam, pipeline, and much more. Construction of closely interrelated assets can be the construction of refineries.

Contract costs Contract costs shall consist of:

• Costs that are attributable to contract activity in general and can be allocated to the contract.
• Costs that relate directly to the specific contract.
• Such other costs as are specifically chargeable to the customer under the terms of the contract.

The outcome of a fixed price contract can be estimated reliably when:

• It is probable that the economic benefits associated with the contract will flow to the entity.
• Total contract revenue can be measured reliably.
• The contract costs attributable to the contract can be clearly identified and measured reliably so that actual contract costs incurred can be compared with prior estimates.
• The contract costs to complete the contract and the stage of contract completion at the end of the reporting period can be measured reliably.

Once the outcome of the contract can be estimated reliably the contract costs and revenue will be recognised as revenue and expenses by reference to the stage of completion of the contracting activity at the end of the reporting period. This method is called the percentage of completion method. The stage of completion can be determined by either of the following:

• By the completion of a physical proportion of the contract work.
• The proportion of the contract costs incurred till date to the estimated total contract costs Surveys.

When the outcome of a construction contract cannot be estimated reliably:

• Contract costs shall be recognised as an expense in the period in which they are incurred.
• Revenue shall be recognised only to the extent of contract costs incurred, which are probable and recoverable.

Recognition of expected losses

When it is probable that total contract costs will exceed total contract revenue, the expected loss shall be recognised as an expense immediately.

An entity shall disclose the amount recognised as contract revenue in the period, the method used to determine the contract revenue recognised and stage of completion of contracts in progress.

For the contracts in progress at the end of the period, an entity shall disclose the aggregate costs incurred and recognised profits to date, the amounts of retentions and advances received.

Appendix A of Ind AS 11 gives guidance on accounting by operators for public-to-private service concession arrangements. It sets out principles for recognition and measurement of the obligations and related rights in service concession arrangements. The Appendix prescribes that an operator shall not recognise the public service infrastructure (within the scope of this appendix) as its Property, Plant and Equipment because the contractual service arrangement does not convey the right to control the use of the infrastructure. It only gives operator the access to operate the infrastructure to provide public service on behalf of the grantor.

Recognition of contract revenue and expenses

When the outcome of a construction contract can be estimated reliably, contract revenue and contract costs associated with the construction contract shall be recognised as revenue and expenses respectively by reference to the stage of completion of the contract activity at the end of the reporting period.

When the outcome of a construction contract cannot be estimated reliably:

(a) Revenue shall be recognised only to the extent of contract costs incurred that it is probable will be recoverable.

(b) Contract costs shall be recognised as an expense in the period in which they are incurred.

IAS 18 Revenue outlines the accounting requirements for when to recognise revenue from the sale of goods, rendering of services, and for interest, royalties and dividends. Revenue is measured at the fair value of the consideration received or receivable and recognised when prescribed conditions are met, which depend on the nature of the revenue.

The primary issue in accounting for revenue is determining when to recognise revenue. Revenue is recognised when it is probable that future economic benefits will flow to the entity and these benefits can be measured reliably. This Standard identifies the circumstances in which these criteria will be met and, therefore, revenue will be recognised. It also provides practical guidance on the application of these criteria.

Revenue is the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants.

Recognition of revenue

Recognition, as defined in the IASB Framework, means incorporating an item that meets the definition of revenue (above) in the income statement when it meets the following criteria:

• The amount of revenue can be measured with reliability.
• It is probable that any future economic benefit associated with the item of revenue will flow to the entity.

Measurement of revenue

Revenue should be measured at the fair value of the consideration received or receivable. [IAS 18.9] An exchange for goods or services of a similar nature and value is not regarded as a transaction that generates revenue. However, exchanges for dissimilar items are regarded as generating revenue. [IAS 18.12]

If the inflow of cash or cash equivalents is deferred, the fair value of the consideration receivable is less than the nominal amount of cash and cash equivalents to be received, and discounting is appropriate. This would occur, for instance, if the seller is providing interest-free credit to the buyer or is charging a below-market rate of interest. Interest must be imputed based on market rates. [IAS 18.11]

Sale of goods

Revenue arising from the sale of goods should be recognised when all of the following criteria have been satisfied: [IAS 18.14]

• The seller retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold.
• The seller has transferred to the buyer the significant risks and rewards of ownership.
• It is probable that the economic benefits associated with the transaction will flow to the seller.
• The costs incurred or to be incurred in respect of the transaction can be measured reliably.
• The amount of revenue can be measured reliably.

Rendering of services

For revenue arising from the rendering of services, provided that all of the following criteria are met, revenue should be recognised by reference to the stage of completion of the transaction at the balance sheet data (the percentage-of-completion method): [IAS 18.20]

When the outcome of a transaction involving the rendering of services can be estimated reliably, revenue associated with the transaction shall be recognised by reference to the stage of completion of the transaction at the end of the reporting period. The outcome of a transaction can be estimated reliably when all the following conditions are satisfied:

(a) The amount of revenue can be measured reliably.

(b) It is probable that the economic benefits associated with the transaction will flow to the entity.

(c) The stage of completion of the transaction at the end of the reporting period can be measured reliably; and (d) the costs incurred for the transaction and the costs to complete the transaction can be measured reliably.

• It is probable that the economic benefits will flow to the seller.
• The amount of revenue can be measured reliably.
• The costs incurred, or to be incurred, in respect of the transaction can be measured reliably.
• The stage of completion at the balance sheet date can be measured reliably.

Interest, Royalties, and Dividends

Revenue arising from the use by others of entity assets yielding interest and royalties shall be recognised when:

(a) The amount of the revenue can be measured reliably.

(b) It is probable that the economic benefits associated with the transaction will flow to the entity.

For interest, royalties and dividends, provided that it is probable that the economic benefits will flow to the enterprise and the amount of revenue can be measured reliably, revenue should be recognised as follows: [IAS 18.29-30]

• Royalties: on an accrual’s basis in accordance with the substance of the relevant agreement.
• Interest: using the effective interest method as set out in ias 39
• Dividends: when the shareholder’s right to receive payment is established.

Disclosure [IAS 18.35]

Accounting policy for recognising revenue amount of each of the following types of revenue:

• Sale of goods
• Rendering of services
• Interest
• Royalties
• Dividends
• Within each of the above categories, the amount of revenue from exchanges of goods or services

Government grants are assistance by government in the form of transfers of resources to an entity in return for past or future compliance with certain conditions relating to the operating activities of the entity. They exclude those forms of government assistance which cannot reasonably have a value placed upon them and transactions with government which cannot be distinguished from the normal trading transactions of the entity.

Government assistance is action by government designed to provide an economic benefit specific to an entity or range of entities qualifying under certain criteria. Government assistance for the purpose of this Standard does not include benefits provided only indirectly through action affecting general trading conditions, such as the provision of infrastructure in development areas or the imposition of trading constraints on competitors.

Objective of IAS 20

The objective of IAS 20 is to prescribe the accounting for, and disclosure of, government grants and other forms of government assistance.

Scope

IAS 20 applies to all government grants and other forms of government assistance. [IAS 20.1] However, it does not cover government assistance that is provided in the form of benefits in determining taxable income. It does not cover government grants covered by IAS 41 Agriculture, either. [IAS 20.2] The benefit of a government loan at a below-market rate of interest is treated as a government grant. [IAS 20.10A]

Accounting for grants

A government grant is recognised only when there is reasonable assurance that (a) the entity will comply with any conditions attached to the grant and (b) the grant will be received. [IAS 20.7]

The grant is recognised as income over the period necessary to match them with the related costs, for which they are intended to compensate, on a systematic basis. [IAS 20.12]

Non-monetary grants, such as land or other resources, are usually accounted for at fair value, although recording both the asset and the grant at a nominal amount is also permitted. [IAS 20.23]

Even if there are no conditions attached to the assistance specifically relating to the operating activities of the entity (other than the requirement to operate in certain regions or industry sectors), such grants should not be credited to equity. [SIC-10]

A grant receivable as compensation for costs already incurred or for immediate financial support, with no future related costs, should be recognised as income in the period in which it is receivable. [IAS 20.20]

A grant relating to assets may be presented in one of two ways: [IAS 20.24]

• As deferred income
• By deducting the grant from the asset’s carrying amount.

A government grant that becomes receivable as compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to the entity  with no future related costs shall  be recognised in profit  or loss of the period in which it becomes receivable.

Grants related to assets are government grants whose primary condition is that an entity qualifying for them should purchase, construct or otherwise acquire long-term assets. Subsidiary conditions may also be attached restricting the type or location of the assets or the periods during which they  are to be acquired or held.

Government grants related to assets, including non-monetary grants at fair value, shall be presented in the balance sheet by setting up the grant as deferred income.

Grants related to income are government grants other than those related to assets. Grants related to income are presented as part of profit or loss, either separately or under a general heading such as ‘Other income’; alternatively, they are deducted in reporting the related expenses.

A government grant that becomes repayable shall be accounted for as a change in accounting estimate (Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors). Repayment of a grant related to income shall be applied first against any unamortised deferred credi t recognised in respect of the grant. To the extent that the repayment exceeds any such deferred credit, or when no deferred credit exists, the repayment shall be recognised immediately in profit or loss. Repayment of a grant related to an asset shall be recognised by reducing the deferred income balance by the amount repayable.

The following matters shall be disclosed:

• The nature and extent of government grants recognised in the financial statements and an indication of other forms of government assistance from which the entity has directly benefited.
• The accounting policy adopted for government grants, including the methods of presentation adopted in the financial statements.
• Unfulfilled conditions and other contingencies attaching to government assistance that has been

The treatment of such borrowing cost is prescribed under Ind AS 23, AS 16 under IGAAP, and IAS 23 under IFRS. The objective of this article is to prescribe the treatment of borrowing cost as prescribed under Ind AS 23 along with highlighting the differences between AS 16 and IAS 23.

Core Principle

• Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset.
• Other borrowing costs are recognised as an expense

⇑ Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset.

⇓ Other borrowing costs are recognised as an expense.

Borrowing Cost

Borrowing costs are defined as interest and other costs that an entity incurs in connection with the borrowing of funds.

Borrowing costs may include:

• Finance charges in respect of finance leases recognised in accordance with Ind AS 17 Leases.
• Interest expense calculated using the effective interest method as described in Ind AS 39 Financial Instruments.
• Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs.

Need and Objective

Entities has to borrow funds in order to acquire, build and install PPE and these assets take time to make them usable or saleable, therefore the entity incur the interest (cost on borrowings) to acquire and build these assets .The objective of this standard is to prescribe the treatment of borrowing cost (interest +other cost) in accounting, whether the cost of borrowing should be included in the cost of assets or not. Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset. Other borrowing costs are recognized as an expense.

Scope

• This standard is applied in accounting for borrowing cost.
• It does not deal with the actual or imputed cost of equity, including preferred capital not classified as a liability. For example: Dividend paid on equity shares, cost of issuance of equity, cost on Irredeemable preference share capital will not be included as borrowing cost within the purview of this standard.
• This standard is not required to apply on borrowing cost directly attributable to the acquisition, construction or production of:
• Qualifying asset measured at fair value {For example: A biological asset Ind AS 41}.
• Inventories that are manufactured, or otherwise produced, in large quantities on a repetitive basis.

Borrowing costs are interest and other costs that an entity incurs in connection with the borrowing of funds. It may include:

• Interest expense calculated using the effective interest method as described in Ind AS 109, Financial Instruments.
• Interest in respect of lease liabilities recognised in accordance with Ind AS 116, Leases.
• Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs.

Borrowing costs

Borrowing costs are interest and other costs that an entity incurs in connection with the borrowing of funds

Qualifying asset

It is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale, Examples:

• Manufacturing plants
• Inventories
• Power generation facilities
• Investment properties
• Intangible assets

Treatment of Borrowing Cost

1) If the borrowing cost incurred is directly attributable to the acquisition, construction or production of qualifying asset, then it should be capitalised as part of the cost of the asset.

2) Otherwise, it should be expensed in the profit or loss.

3) Note: In case of hyperinflationary economy, part of borrowing cost which compensates for the inflation during the same period should be expensed in profit of loss.

Substantial Period of Time

It is based on facts and circumstances of each case. Ordinarily Substantial period =A Period of 12 months.

Borrowing cost eligible for capitalisation

Borrowing cost which is directly attributable to the acquisition, construction or production of a qualifying asset is capitalised. A borrowing cost is said to be directly attributable if it can be avoided when the expenditure on qualifying asset is not made.

Specific borrowing

When an entity borrows funds specifically for the purpose of obtaining a particular qualifying asset, the borrowing costs that directly relate to that qualifying asset can be readily identified.

The amount of borrowing costs eligible for capitalization is the actual borrowing costs incurred on those funds during the period reduced by any investment income earned on the temporary investment of idle funds.

General borrowing

In case of general borrowings, it may be difficult to identify a direct relationship between particular borrowings and a qualifying asset and to determine the borrowings that could otherwise have been avoided.

Rate of Capitalisation

Total general borrowing cost for the period / Weighted average total general borrowings

Expenditure to which the capitalisation rate is applied:

Cessation of capitalisation

• Borrowing cost is not being incurred.
• Substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete.

Measurement

It depends on the following

1. Funds Borrowed Specifically
2. Funds Borrowed Generally.

Funds Borrowed Specifically

Amount of Borrowing Cost eligible for Capitalization =Actual interest plus related expenses Incurred less Investment Income from Excess idle Borrowings.

Funds Borrowed Generally

• Amount of Borrowing cost eligible for Capitalization =Amount of Qualifying Asset × Weighted Average Capitalization Rate
• Weighted Average Capitalization Rate=Total borrowing Cost/Total average outstanding ×100.
• Amount of Borrowing cost capitalized cannot exceed the amount of borrowing cost incurred during that period.

Cash on hand, demand deposits, investment only when it has a short maturity of, say, three months or less from the date of acquisition.

Bank borrowings are generally considered to be financing activities. However, where bank overdrafts which are repayable on demand are included in cash and cash equivalents. (Under AS – 3, the same is not treated as part of cash and cash equivalents).

Investing activities:

Cash flows from investing activities represent expenditures have been made for resources intended to generate future income and cash flows. Only expenditures that result in a recognized asset in the balance sheet are eligible for classification as investing activities. (AS 3 does not prescribe any such requirement.)

Operating activities:

Cash flows from operating activities -> indicator -> sufficient cash flows to repay loans, pay dividends and make new investments without external sources of financing.

Financing activities:

The separate disclosure of cash flows arising from financing activities is important because it is useful in predicting claims on future cash flows by providers of capital to the entity.

Reporting cash flows from operating activities:

An entity shall report cash flows from operating activities using either:

(a) the direct method: Major classes of gross cash receipts and gross cash payments are disclosed.

(b) the indirect method: Profit or loss from statement of profit of loss is adjusted for the effects:

• Transactions of a non-cash nature (e.g., undistributed profit of associates in consolidated financial statements)
• Any deferrals or accruals of past or future operating cash receipts or payments
• Items of income or expense associated with investing or financing cash flows.

Foreign currency cash flows:

• Cash flows of a foreign subsidiary shall be translated at the exchange rates between functional currency and foreign currency.
• Record cash flows (those cash flows which arise from transactions in foreign currency) in functional currency.
• Exchange rate at the date of cash flows shall be applied. Ind AS 21 permits the use of exchange rate that approximates the actual rate.
• Unrealised gains and losses arising from changes in foreign currency exchange rates are not cash flows. However, the effect of exchange rate changes on cash and cash equivalents is reported in the statement of cash flows in order to reconcile cash and cash equivalents at the beginning and the end of the period. This amount is presented separately from cash flows from operating, investing and financing activities.

Change in ownership (no such concept under AS 3):

Cash flows from obtaining / losing control in businesses (including subsidiary) shall be presented separately and classified as Investing activity and disclose the following:

• Total amount of consideration
• Portion of consideration consisting of cash and cash equivalents
• Amount of cash and cash equivalent over which control is obtained / lost
• Assets and liabilities (other than cash and cash equivalent) over which control is obtained / lost summarised in each major category.
• Cash paid / received as consideration is reported net of cash and cash equivalents acquired / disposed on account of such transaction.
• Cash flow effects of losing control are not deducted from those of obtaining control.
• Cash flows arising from changes in ownership in subsidiary that do not result in a loss of control shall be classified as cash flows from financing activities, unless subsidiary is held by investment entity.

Non-cash Transactions:

Many investing and financing activities do not impact cash flows although they do affect the capital and asset structure of an entity. These shall be excluded from the statement of cash flows. Examples:

• Acquisition of assets by means of a finance lease;
• Conversion of debt to equity.
• Issue of bonus shares
• Conversion of term loan into equity shares.

Changes in liabilities arising from financing activities (It was an amendment in Ind AS 7 and this provision was not there in AS 3):

An entity shall provide the following disclosures to evaluate changes in liabilities arising from financing activities including both changes arising from cash flows and non-cash changes:

• Changes from financing cash flows.
• Changes arising from obtaining or losing control of subsidiaries or other businesses.
• The effect of changes in foreign exchange rates.
• Changes in fair values.
• Other changes.

An entity shall disclose information to enable users of its financial statements to evaluate the nature and financial effects of the business activities in which it engages and the economic environments in which it operates.

Applicability

• Companies to which Ind AS are not applicable but voluntarily opts to disclose Segment information, in that case entity has two options: either comply with all the requirements of this Ind AS or provide selective disclosures without using the term Segment Information.
• Applicable to all companies to which Ind ASs notified under Companies Act apply.
• If a financial report contains both Parent’s consolidated financial statement and Parent’s standalone financial statement, Segment Information is required only in Parent’s consolidated financial statement.

The Standard requires an entity to report financial and descriptive information about its reportable segments. Reportable segments are operating segments or aggregations of operating segments that meet specified criteria. Operating segments are components of an entity about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Generally, financial information is required to be reported on the same basis as is used internally for evaluating operating segment performance and deciding how to allocate resources to operating segments.

The Standard requires an entity to report a measure of operating segment profit or loss and of segment assets. It also requires an entity to report a measure of segment liabilities and particular income and expense items if such measures are regularly provided to the chief operating decision maker. It requires reconciliations of total reportable segment revenues, total profit or loss, total assets, liabilities and other amounts disclosed for reportable segments to corresponding amounts in the entity’s financial statements

The Standard requires an entity to report information about the revenues derived from its products or services (or groups of similar products and services), about the countries in which it earns revenues and holds assets, and about major customers, regardless of whether that information is used by management in making operating decisions. However, the Standard does not require an entity to report information that is not prepared for internal use if the necessary information is not available and the cost to develop it would be excessive.

The Standard also requires an entity to give descriptive information about the way the operating segments were determined, the products and services provided by the segments, differences between the measurements used in reporting segment information and those used in the entity’s financial statements, and changes in the measurement of segment amounts from period to period.

Operating Segments (Para 5)

An Operating Segment is a component of an entity that satisfies all of the following conditions:

• Whose operating results are regularly reviewed by entity’s chief operating decision maker to make decisions about resources allocation to the segment and assess its performance.
• That engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same entity).
• For which discrete financial information is available.

Reportable Segments

Aggregation Criteria

Two or more Operating Segments may be aggregated into a single operating segment if the segments have similar economic characteristics and segments are similar in each of the following respects:

• The nature of the products and services;
• The nature of the production processes;
• The type or class of customer for their products and services;
• The methods used to distribute their products or provide their services; and
• If applicable, the nature of the regulatory environment, for e.g., banking, insurance or public utilities.

Quantitative Thresholds

Operating Segment’s Reported revenue (External customers sale + Intersegment sale) >=10% of combined revenue (internal + external) of all operating segments

OR

Operating Segment’s Reported profit/loss >=Greater of A) or B)

A) Combined reported PROFIT of all PROFITABLE operating segments

B) Combined reported LOSS of all operating segments reported LOSS

OR

Operating Segment’s Assets >=10% of combined assets of all operating assets

Operating Segments that do not meet any of the quantitative thresholds may be considered reportable, if management believes that segment information would be useful to users of the financial statement.

Para 14: Operating Segments that do not meet quantitative thresholds

Indian Accounting standard 8 is intended to enhance the reliability and relevance of an organization’s financial statements. It also aims to make them more comparable over time within the entity and also with financial statements of other entities.

Accounting policies, estimates and correction of errors play a major role in the presentation of financial statements. That is why Ind AS 1 state that an entity cannot rectify inappropriate accounting policies either by disclosure of the accounting policies used or by notes or explanatory material. If there is any change in accounting policies, that needs to be dealt with due diligence and not just by mere note or explanation.

Accounting Policies

Accounting policies are the specific principles, bases, conventions, rules and practices applied in preparing and presenting financial statements.

Bases are the methods in which accounting principles may be applied to financial transactions. Eg. Method used to depreciate assets.

Principles are the guidelines which must be followed when reporting financial transactions.

Conventions consists of practices that arise from the practical application of accounting principles and is designed to help accountants vercome practical problems that arise while reporting financial transactions.

Practices are the ways by which its accounting policies are implemented and adhered to on a routine basis.

Rules are the golden rules of debit and credit of accounting.

This standard prescribes the guidelines for selecting and modifying accounting policies, together with the accounting treatment and disclosure of changes in accounting policies, changes in accounting estimates and corrections of error. To understand the standard, we must first understand the following terms:

• Accounting principles are the specific principles, rules, bases, conventions and practices followed by an organization in preparing and presenting financial statements.

Example of accounting principle is the accrual and matching concept which requires the entity to record the expenses and income in the period in which it is incurred. Accounting principles form the very basis of accounting for transactions and presenting them.

• A change in accounting estimate is a modification of the carrying amount of a liability or an asset or the life of the asset, that results from the evaluation of the current status of, and expected future advantages and obligations linked with, assets and liabilities. Changes in accounting estimates arise due to new findings or new developments and, hence, are not corrections of errors.

Changes in Accounting Estimates

Accounting estimates are the estimations used by management to recognize amounts in the financial statements where precise values cannot be determined.

A change in accounting estimate is an adjustment of the carrying amount of an asset or a liability, or the amount of the periodic consumption of an asset (depreciation), that results from the assessment of the present status of, and expected future benefits and obligations associated with, assets and liabilities.

• Changes in accounting estimates result from new information or new developments and accordingly are not corrections of errors.

Example of a change in accounting estimate is the change in depreciation owing to change in the estimation of the useful life of the asset.

• Prior period errors are omissions from, and misstatements in, the entity’s financial statements for one or more prior period refers to such errors that have occurred due to failure to use or misuse relevant information that was available when the statements were approved for the issue and could have been taken into account then.

Such errors include the outcomes of mathematical mistakes, errors in applying accounting policies, oversights or misinterpretations of facts, and fraud.

Ind AS specifically applies to a transaction, other event or condition if it applies then, the accounting policy or policies to be applied shall be determined by applying Ind AS If the Ind AS does not apply then the management shall use its judgement in formulating and applying an accounting policy that results in information that is relevant to the economic decision-making needs of users; and reliable, in that the financial statements:

• Reflect the economic substance of transactions, other events and conditions, and not merely the legal form.
• Represent accurately the financial position, financial performance and cash flows of the entity.
• Are neutral, ie free from bias.
• Are complete in all material respects.
• Are prudent.

Error Treatment

Errors can arise in respect of the identification, measurement, presentation or disclosure of elements of financial statements. An entity shall rectify material prior period errors retrospectively unless impracticable, after the finding of errors in the first set of financial statements:

(a) for the prior periods presented in which the error occurred by restating the comparative amounts; or

(b) if the error occurred before the earliest prior period presented, restating the opening balances of assets, liabilities and equity for the earliest prior period presented. The standard also prescribes disclosure requirements in the case of changes in accounting policy, estimates and prior period errors.

Prior Period Errors

Prior period errors are omissions from, and misstatements in, the entity’s financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information that:

a) Was available when financial statement for those periods were approved for issue, and

b) Could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those financial statement.

Such errors include:

a) The effects of mathematical mistakes,

b) Mistakes in applying accounting policies,

c) Oversights or misinterpretations of facts, and

d) Fraud.

Change in Accounting estimates Versus prior period errors