Month: August 2021

The objective of Ind AS 101 is to ensure that an entity’s first Ind AS based financial statements, and interim financial reports for part of the period covered by those financial statements, contain high quality information that:

(A) Is transparent for users and comparable over all periods presented

(B) Provides a suitable starting point for accounting in accordance with Indian Accounting Standards.

(C) Can be generated at a cost that does not exceed the benefits.

First time adoption of Ind ASs would require change in various accounting policies. Paragraph 19 of Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors requires that any change in accounting policy arising out of initial application of an Ind AS is either given retrospective effect or accounted for in accordance with transitional provisions given in different standards. Presently, Ind ASs do not provide any transitional provisions. Retrospective application means applying a new accounting policy to transactions, other events and conditions as if that policy had always been applied. The change in accounting policy is applied retrospectively except to the extent it is impracticable to determine specific effect or cumulative effect of the change.

Since Ind ASs are a set of converged financial reporting standards (to IFRSs), transitional provisions of corresponding IFRSs are not included therein. In absence of a simplified transitional standard, all changes in accounting policies would have been given effect retrospectively causing hardship in the IFRS convergence and the process would have been very expensive. Ind AS 101 is in effect a standard that provides transitional provisions to the first-time adopter in respect of all Ind ASs.

The objective of this Ind AS is to ensure that an entity’s first Ind AS financial statements, and its interim financial reports for part of the period covered by those financial statements, contain high quality information that:

(a) Is transparent for users and comparable over all periods presented;

(b) Provides a suitable starting point for accounting in accordance with Indian Accounting Standards (Ind ASs)

(c) Can be generated at a cost that does not exceed the benefits.

This standard applies to the first Ind AS financial statements and each interim financial report if any. But this standard does not apply to changes in accounting policies for an organisation that already applies Ind AS, such changes are subject of requirements of Ind AS 8 or specific transitional requirements of other Ind AS.

• Implementation of Ind AS
• Selection of Accounting Policies
• Preparation of Opening Ind AS Balance sheet
• Presentation and disclosure in an entity’s in Ind AS Financial Statements and Interim Financial Reports.

Preparation of Opening Ind AS Balance Sheet

On the date of transition to Ind AS, an entity shall prepare and present an opening Ind AS Balance Sheet. This is the starting point for it’s accounting according to Ind AS subject to requirements of Ind AS. Except for restrictions spelt out in the AS, an entity must in its Opening Ind AS Balance sheet:

• Recognise all assets and liabilities for which recognition is required by Ind AS
• Derecognise items as assets and liabilities if Ind AS does not permit such recognition.
• If the Ind AS requires a particular asset, liability or component of equity to be recognised differently from its previous recognition under GAAP, then reclassify it.
• Apply Ind AS in measuring all recognised assets and liabilities.

Meaning of First time Adoption

Ind AS financial statements are the first annual financial statements in which the entity adopts Ind ASs, in accordance with Ind Ass notified under the Companies Act, 2013 and makes an explicit and unreserved statement in those financial statements of compliance with Ind ASs. Refer to Chapter 2 for Ind AS adoption timeline. Therefore, an entity shall include an unreserved statement in the “Basis of Preparation” section of Significant Accounting Policies about adoption of Ind ASs .

(A) Non-Current assets held for sale:

i) Are presented separately from other assets in the Balance Sheet.

Ii) As their classification will change.

Iii) The value will be principally recovered through sale transaction rather than through continuous use in operations of the entity.

(B) Results of Discontinuing Operations should be separately presented in the Statement of Profit and loss as it affects the ability of the entity to generate future cash flows.

The Ind AS requires:

• Assets that meet the criteria to be classified as held for sale to be measured at the lower of carrying amount and fair value less costs to sell, and depreciation on such assets to cease.
• Assets that meet the criteria to be classified as held for sale to be presented separately in the balance sheet.
• The results of discontinued operations to be presented separately in the statement of profit.

An entity shall classify a non-current asset (or disposal group) as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use.

For this to be the case, the asset (or disposal group) must be available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets (or disposal groups) and its sale must be highly probable. Thus, an asset (or disposal group) cannot be classified as a non-current asset (or disposal group) held for sale, if the entity intends to sell it in a distant future.

For the sale to be highly probable, the appropriate level of management must be committed to a plan to sell the asset (or disposal group), and an active programme to locate a buyer and complete the plan must have been initiated. Further, the asset (or disposal group) must be actively marketed for sale at a price that   is reasonable in   relation to   its current fair value.

In addition, the sale should be expected to qualify for recognition as a completed sale within one year from the date of classification, except as permitted by paragraph 9 of the Standard, and actions required to  complete the plan should indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.

A discontinued operation is a component of an entity that either has been disposed of or is classified as held for sale and:

• Is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations.
• Represents a separate major line of business or geographical area of operations.
• Is a subsidiary acquired exclusively with a view to

A component of an entity comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity.  In other words, a component of an entity will have been   a cash-generating unit or a group of cash-generating units while being held for use.

An entity shall not classify as held for sale a non-current asset (or disposal group) that is to be abandoned.

Exception to the period of one year

• There must be sufficient evidences that the entity is still committed to it selling plan.
• The delay must have been caused by the events or circumstances which are beyond the control of the entity.

Measurement:

• Depreciation and amortization shall be immediately stopped from the moment the asset has been classified as held for sale.
• An entity should measure a non-current asset (or disposal group) classified as held for sale at the lower of it carrying amount and fair value less costs to sell.
• Interest and other expenses attributable to the liabilities of a disposal group classified as held for sale shall continue to be recognised.
• Non-current asset (or disposal group) classified as held for distribution are also measured on same line as non-current asset (or disposal group) classified as held for sale.
• When the sale is expected to occur beyond one year, the entity should measure the costs to sell at their present value. Any increase in the present value of the costs to sell that arises from the passage of time shall be presented in profit or loss as a financing cost.

Recognition Of Impairment Losses and Reversals:

• An entity should recognise a gain for any subsequent increase in fair value less costs to sell of an asset, but not in excess of the cumulative impairment loss that has been recognised either in accordance with this Ind AS or previously in accordance with Ind AS 36, Impairment of Assets.
• An entity should recognise an impairment loss for any initial or subsequent write-down of the asset (or disposal group) to fair value less costs to sell, to the extent that it has not been recognised in accordance with above.

Changes to Plan of Sale

1. If an entity has classified an asset (or disposal group) as held for sale, but the held for sale criteria no longer met, the entity should cease to classify the asset (or disposal group) as held for sale.
2. The entity shall measure a non-current asset that ceases to be classified as held for sale (or ceases to be included in a disposal group classified as held for sale) at the lower of: (a) its carrying amount before the asset (or disposal group) was classified as held for sale, adjusted for any depreciation, amortization or revaluations that would have been recognised had the asset (or disposal group) not been classified as held for sale; and (b) its recoverable amount at the date of the subsequent decision not to sell.

At present, a single universally accepted accounting theory does not exist in accounting. Instead, different theories have been proposed and continue to be proposed in the accounting literature.

(a) “Accounting Structure” Theory:

‘Accounting structure’ theory, known by different names such as classical theory, descriptive theory, traditional theory, attempt to explain current accounting practices and predict how accountants would react to certain situations or how they would report specific events.

This theory relates to the structure of the data collection process (accounting) and financial reporting. Thus, this theory is directly connected with accounting practices, i.e., what does exist or what accountants do.

The principal contributors to the accounting structure theory are identified chronologically as follows:

• William A. Paton, Accounting Theory with Special Reference to Corporate Enterprise (1922).
• Henry Rand Hatfield, Accounting; Its Principles and Problems (1927).
• Henry W. Sweeney, Stabilized Accounting (1936).
• Stephen Gilman, Accounting Concepts of Profit (1939).
• A. Paton and A. C. Littleton, An Introduction to Corporate Accounting Standards (1940).
• C. Littleton, Structure of Accounting Theory (1953).
• Maurice Moonitz, the Basic Postulates of Accounting (1961).
• Robert R. Sterling and Richard E. Flaherty, “The Role of Liquidity in Exchange Valuation,”
• Accounting Review (July 1971).
• Robert R. Sterling, John O. Tollefson, and Richard E. Flaherty,
• “Exchange Valuation: An Empirical Test,” Accounting Review (Oct. 1972).
• Yuji Ijiri, Theory of Accounting Measurement (1973).

This theory, basically concerned with observing the mechanical tasks which accountants traditionally perform, is based on the assumption that the objective of financial statement is associated with the stewardship concept of the management role, and the necessity of providing the owners of businesses with information relating to the manner in which their assets (resources) have been managed.

In this view, company directors occupy a position of responsibility and trust in regard to shareholders, and the discharge of these obligations requires the publication of annual financial reports to shareholders. Ijiri explains traditional accounting practice; however, he does place emphasis on the historical cost system.

Sterling advises “to observe accountants’ actions and rationalise these actions by subsuming them under generalized principles.” Theories explaining traditional accounting practice are desirable to obtain greater insight into current accounting practices, permit a more precise evaluation of traditional theory and an evaluation of existing practices that do not correspond to traditional theory.

Such theories relating to the structure of accounting can be tested for internal logical consistency, or they can be tested to see whether or not they actually can predict what accountants do.

Limitations:

(1) The ‘accounting structure’ theory concentrates on accounting practices and the behaviour of practising accountants. The accounting practice begins with observable occurrences (transactions), translates them into symbolic form (money values) and makes them inputs (e.g., sales, costs) into the formal accounting system where they are manipulated into outputs (financial statements).

Accounting practices followed in this way may not reflect the real business situation and real world phenomena. The traditional theory is not concerned with judging the usefulness of the output of accounting practice, but concentrates upon judging the means of manipulation of input into output.

(2) Inconsistencies in traditional theory have given rise to alternative accepted principles and procedures which give significantly divergent reported results. Accrual accounting results in allocations which provide a variety of alternative accounting methods for each major event e.g., LIFO and FIFO valuations of stock and different accountants may prefer different methods depending upon how they are affected. Moreover, the traditional approach is inconsistent with theories developed in related disciplines. For example, the historical cost concept of valuation is externally inconsistent with current value concepts.

Finally, good theory should provide for research to assist advances in knowledge. The conventional approach tends to inhibit change, and by concentrating upon generally accepted accounting principles makes the relationship between theory and practice a circular one.

(b) “Interpretational” Theory:

Truly speaking, ‘accounting structure’ and ‘interpretational’ theories are part of the classical accounting theory (model). The principal writers under ‘accounting structure’ such as Hatfield, Littleton, Paton and Littleton, Sterling and Ijiri are mainly positivist, inductive writers, concerned with traditional accounting practice in terms of historical cost system, with some deviations such as the lower of cost or market.

Accounting practices under accounting structure theory are the result of recording business events as they take place. Such practices lack application of judgement and consequences. Interpretational theory attempts to give some meaning to accounting practice.

The theory based on “accounting structure” only, although logically formulated, does not require meaningful interpretation of accounting practices and analysis of accounting activities.

Interpretational theory emphasises on giving interpretations and meaning as accounting practices are followed. This theory provides a suitable basis for evaluating accounting practices, resolving accounting issues and making accounting propositions.

The principle writers in interpretational theory are the following:

• John B. Canning, The Economics of Accountancy (1929).
• Sidney S. Alexander, Income Measurement in a Dynamic Economy (1950).
• Edgar O. Edwards and Philip W. Bell, The Theory and Measurement of Business Income (1961).
• Robert T. Sprouse and Maurice Moonitz, A Tentative Set of Board Accounting Principles for Business Enterprises (1962).

The above writers in interpretational theory are more analysts and explicators than advocates and preachers. They analyse and assess what accountants do and seek to do, they undertake to explain a phenomenon to accountants, and help in understanding the implications of using accounting concepts in the real business situation. For example, Sprouse and Moonitz suggest that the assets valuations should be made in terms of their future services.

In “accounting structure” theory, accounting concepts are un-interpreted and do not reflect any meaning except actual data resulting from following specific accounting procedures. Asset valuations, for example, are the result of following a specific method of inventory valuation and depreciation.

Similarly, specific rules are followed for the measurement of these revenues and expenses. Interpretational theory gives meaningful interpretations to these concepts and rules and evaluate alternative accounting procedures in terms of these interpretations and meanings. For example, it can be said that FIFO is the most appropriate if objective is to measure current value of inventories.

In this case, selection of FIFO in interpretational theory is made with a view to suggest specific result and interpretation. It is argued that empirical enquiry should be made to determine whether information users attach the same interpretations and meanings which are intended by producers of information.

Items of information vary as to degree of interpretation; some items by nature reflect higher degree of interpretation and some items are subject to many interpretations. For example, the item cash in balance sheet is fairly well understood by users to mean what prepares intend it to mean.

On the contrary, the items like deferred expenses and goodwill may not reflect any specific interpretation. The role of interpretational theories is to build a correspondence between the interpretations of producers and users as to accounting information.

This theory attempts to find ways to improve the meaning and interpretations of accounting information in terms of experiences about human behaviour and information processing capacity.

‘Accounting structure’ and interpretational theories both are known as classical accounting models. The writers (mentioned above) under both the theories are, in every sense, reformers. Interpretational theorists differ from ‘accounting structure’ theorists more in degree than in kind; the former are motivated less by missionary zeal than by a desire to analyse, criticize, and suggest, and are primarily deductivists.

Many of the prominent interpretational theorists advocate current cost or values. It is said that interpretational theorists may have observed the behaviour of investors and other economic decision makers and concluded with a validated hypothesis that such decisions-makers seek current value, not historical cost, information.

In spite of the difference in emphasis of ‘traditional’ and ‘interpretational’ theorists, broadly, both are concerned with designing financial reports that communicate relevant information to users of accounting information.

(c) “Decision-Usefulness” Theory:

The decision-usefulness theory emphasises the relevance of the information communicated to decision making and on the individual and group behaviour caused by the communication of information.

Accounting is assumed to be action-oriented its purpose is to influence action, that is, behaviour; directly through the informational content of the message conveyed and indirectly through the behaviour of preparers of accounting reports.

The focus is on the relevance of information being communicated to decision-makers and the behaviour of different individuals or groups as a result of the presentation of accounting information. The most important users of accounting reports presented to those outside the firm are generally considered to include investors, creditors, customers, and government authorities.

However, decision usefulness can also take into consideration the effect of external reports on the decisions of management and the feedback effect on the actions of accountants and auditors. Since accounting is considered to be a behavioural process, this theory applies behavioural science to accounting.

Due to this, decision-usefulness theory is sometimes referred to as behavioural theory also. In the broader perspective, decision-usefulness studies analyses behaviour of users of information. A behavioural theory attempts to measure, and evaluate the economic, psychological and sociological effects of alternative accounting procedures and modes of financial reporting.

In adopting the decision usefulness theory or approach, two major aspects or questions must be addressed.

First, who are the users of financial statements? Obviously, there are many users. It is helpful to categorize them into broad groups, such as investors, lenders, managers, employees, customers, governments, regulatory authorities, suppliers etc. These groups are called constituencies of accounting.

Second, what are the decision models or problems of financial statement users? By understanding these decision models preparers will be in a better position to meet the information needs of the various constituencies. Financial statements can then be prepared with these information needs in mind and in this way financial statements will lead to improved decision making and are made more useful.

Accounting theory may also be used to explain existing practices to obtain a better understanding of them. But the most important goal of accounting theory should be to provide a coherent set of logical principles that form the general frame of reference for the evaluation and development of sound accounting practices.

Accounting theory is that branch of accounting which consists of the systematic statement of principles and methodology. However, theory cannot be divorced from practice. The theory underlies practices, explains and attempts to predict them. There is not and cannot be any basic contradiction between theory and facts.

A theory is an explanation. However, every explanation is not a theory in the scientific meaning of the word. The objective of accounting theory is to explain and predict accounting practice. Explanation provides reasons for observed practice. For example, an accounting theory should explain why certain firms use LIFO method of inventory rather than the FIFO method.

Prediction of accounting practices means that the theory can also predict unobserved accounting phenomena. Unobserved phenomena are not necessarily future phenomena; they include phenomena that have occurred but on which systematic evidence has not been collected.

It is significant to observe that accounting theory may be based on empirical evidence and practices as well as accounting theory may be formulated using hypothetical and speculative interpretations.

(1) Accounting theory has a great amount of influence on accounting and reporting practices and thus serves the informational requirements of the external users.

In fact, accounting theory provides a framework for:

(i) Evaluating current financial accounting practice and

(ii) Developing new practice.

(2) Secondly, accounting theory literature is useful to accounting policy makers who are interested in making the accounting information useful. The researches, empirical evidence and investigation can be used and incorporated by the policy makers in formulating accounting policies. Theories are helpful as they apprise policy makers of the underlying issues and clarify the trade-offs implicit in various theory approaches.

An external auditor performs an audit, in accordance with specific laws or rules, of the financial statements of a company, government entity, other legal entity, or organization, and is independent of the entity being audited. Users of these entities’ financial information, such as investors, government agencies, and the general public, rely on the external auditor to present an unbiased and independent audit report.

The manner of appointment, the qualifications, and the format of reporting by an external auditor are defined by statute, which varies according to jurisdiction. External auditors must be members of one of the recognised professional accountancy bodies. External auditors normally address their reports to the shareholders of a corporation. In the United States, certified public accountants are the only authorized non-governmental external auditors who may perform audits and attestations on an entity’s financial statements and provide reports on such audits for public review. In the UK, Canada and other Commonwealth nations Chartered Accountants and Certified General Accountants have served in that role.

For public companies listed on stock exchanges in the United States, the Sarbanes-Oxley Act (SOX) has imposed stringent requirements on external auditors in their evaluation of internal controls and financial reporting. In many countries external auditors of nationalized commercial entities are appointed by an independent government body such as the Comptroller and Auditor General. Securities and Exchange Commissions may also impose specific requirements and roles on external auditors, including strict rules to establish independence.

The objectives of an external audit are to determine:

• Whether the client’s accounting records have been prepared in accordance with the applicable accounting framework.
• The accuracy and completeness of the client’s accounting records.
• Whether the client’s financial statements present fairly its results and financial position.

Difference from internal auditor

Internal auditors who are members of a professional organization would be subject to the same code of ethics and professional code of conduct as applicable to external auditors. They differ, however, primarily in their relationship to the entities they audit. Internal auditors, though generally independent of the activities they audit, are part of the organization they audit, and report to management. Typically, internal auditors are employees of the entity, though in some cases the function may be outsourced. The internal auditor’s primary responsibility is appraising an entity’s risk management strategy and practices, management (including IT) control frameworks and governance processes. They are also responsible for the internal control procedures of an organization and the prevention of fraud.

If an external auditor detects fraud, it is their responsibility to bring it to the management’s attention and consider withdrawing from the engagement if management does not take appropriate actions. Normally, external auditors review the entity’s information technology control procedures when assessing its overall internal controls. They must also investigate any material issues raised by inquiries from professional or regulatory authorities, such as the local taxing authority.