Month: August 2022

Management Notes

Impairment of Assets (IND AS 36), Objectives, Scope, Recognition, Measurement, Disclosures, Example

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Ind AS 36 prescribes the procedures an entity applies to ensure that its assets are carried at no more than their recoverable amount. An asset is carried at more than its recoverable amount if its carrying amount exceeds the amount to be recovered through use or sale of the asset, in which case the asset is impaired and the standard requires recognition of an impairment loss. The standard also specifies when an entity should reverse an impairment loss and prescribes disclosures required. It applies to most assets, though certain assets such as inventories, financial assets, and deferred tax assets, already covered by other standards, are excluded from its scope.

Objectives of Impairment of Assets (IND AS 36):

1. Ensuring Assets Are Not Carried Above Recoverable Amount

The primary objective of Ind AS 36 is to prescribe procedures that an entity applies to ensure its assets are carried at no more than their recoverable amount. This objective embodies the prudence principle, preventing entities from reporting assets on the balance sheet at values exceeding the genuine economic benefit expected to be recovered through their continued use or eventual sale. By establishing systematic impairment testing procedures, the standard protects users of financial statements from being misled by overstated asset values that no longer reflect true underlying economic worth, particularly during periods of adverse business conditions.

2. Defining Recoverable Amount and Establishing Testing Triggers

Ind AS 36 aims to define recoverable amount as the higher of an asset’s fair value less costs of disposal and its value in use, and to establish clear indicators and circumstances that trigger impairment testing. This objective ensures entities do not perform impairment assessments arbitrarily but instead respond systematically to internal and external indicators—such as significant declines in market value, adverse changes in the technological, market, or economic environment, or evidence of obsolescence—thereby ensuring impairment losses are identified and recognised in a timely manner rather than being deferred or overlooked during financial statement preparation.

3. Prescribing Recognition of Impairment Losses

A key objective of the standard is to prescribe when and how impairment losses should be recognised, requiring that when an asset’s carrying amount exceeds its recoverable amount, the asset is impaired, and the entity must reduce the carrying amount to recoverable amount, recognising the difference as an impairment loss in profit or loss (unless the asset is carried at revalued amount). This objective ensures consistent, timely recognition of value diminution across all reporting entities, preventing understatement of losses and ensuring financial statements faithfully represent the current economic condition of an entity’s asset base.

4. Facilitating Identification of Cash-Generating Units

Ind AS 36 seeks to provide guidance for identifying the cash-generating unit to which an asset belongs when an individual asset’s recoverable amount cannot be estimated because it does not generate cash inflows independently of other assets. This objective ensures a consistent, rational approach to grouping assets for impairment testing purposes, particularly relevant for goodwill and assets integrated within larger operational units. By establishing clear principles for identifying cash-generating units, the standard prevents inconsistent or arbitrary grouping practices that could otherwise obscure genuine impairment or artificially mask losses within a broader unit.

5. Prescribing Reversal of Impairment Losses

The standard aims to specify circumstances under which a previously recognised impairment loss should be reversed, requiring reversal when there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognised. This objective ensures that if conditions causing an earlier impairment no longer exist or have improved, the earlier conservative write-down is appropriately corrected, restoring the asset’s carrying amount up to what it would have been had no impairment occurred, net of depreciation, though goodwill impairment losses are never permitted to be reversed under this standard.

6. Prescribing Disclosures for Impairment and Reversals

Ind AS 36 seeks to prescribe comprehensive disclosures relating to impaired assets, enabling users of financial statements to understand the key assumptions used in determining recoverable amounts, the events and circumstances leading to recognition or reversal of impairment losses, and the amounts involved for each class of assets and reportable segments. This objective ensures transparency around impairment judgments, which often involve significant management estimation and discretion, allowing users to critically evaluate the reasonableness of impairment-related figures and assess the potential impact of changes in key assumptions on the entity’s reported financial position and performance.

Scope of Impairment of Assets (IND AS 36):

1. General Applicability to Most Assets

Ind AS 36 applies in accounting for the impairment of most assets, requiring entities to test assets for impairment whenever indicators of impairment exist, and in certain cases, at least annually regardless of indicators. It broadly covers assets such as property, plant and equipment, intangible assets, goodwill, investment property carried at cost, and investments in subsidiaries, associates, and joint ventures. This wide applicability ensures that the vast majority of an entity’s non-current, non-financial assets are subject to systematic impairment review, safeguarding against overstatement of asset values across virtually all major categories of long-term operating and investment assets.

2. Exclusion – Inventories

Ind AS 36 does not apply to inventories, since these are already governed by Ind AS 2, which requires inventories to be measured at the lower of cost and net realisable value. Since Ind AS 2 inherently incorporates a mechanism for writing down inventory values when their utility declines below cost, a separate impairment testing regime under Ind AS 36 would be redundant and potentially conflicting. This exclusion ensures inventories continue to follow their own specific, well-established valuation framework rather than being subjected to the broader recoverable amount concept applicable to other long-term assets.

3. Exclusion – Assets Arising from Construction Contracts

Assets arising from construction contracts are excluded from the scope of Ind AS 36, as their recognition and measurement now fall under Ind AS 115 (Revenue from Contracts with Customers), which governs contract assets arising from long-term construction and service arrangements. Since Ind AS 115 provides its own specific mechanism for recognising and measuring contract-related assets based on progress toward completion and expected consideration, applying the general impairment framework of Ind AS 36 would be inconsistent with the specialised revenue-based measurement principles already governing such assets under the relevant revenue recognition standard.

4. Exclusion – Deferred Tax Assets

Deferred tax assets are excluded from the scope of Ind AS 36, since their recognition and measurement are separately governed by Ind AS 12 (Income Taxes). Ind AS 12 already incorporates its own recognition criteria, requiring deferred tax assets to be recognised only to the extent it is probable that future taxable profit will be available against which the deductible temporary differences can be utilised. This built-in recoverability assessment under Ind AS 12 makes a separate impairment test under Ind AS 36 unnecessary and potentially duplicative for this specific category of asset.

5. Exclusion – Assets Arising from Employee Benefits

Assets arising from employee benefits, such as those relating to defined benefit plan surpluses, are excluded from the scope of Ind AS 36, since these are governed by Ind AS 19 (Employee Benefits). Ind AS 19 contains its own specific measurement principles, including the asset ceiling test, which limits recognition of any net defined benefit asset to the present value of economic benefits available in the form of refunds or reductions in future contributions. This specialised mechanism renders separate impairment testing under Ind AS 36 unnecessary for employee benefit-related assets.

6. Exclusion – Financial Assets within Scope of Ind AS 109

Financial assets falling within the scope of Ind AS 109 (Financial Instruments) are excluded from Ind AS 36, since impairment of such assets is governed by the expected credit loss model prescribed under Ind AS 109 itself. This specialised model requires forward-looking assessment of credit risk and expected losses over the life of financial instruments such as loans, receivables, and debt investments, which differs fundamentally from the recoverable amount approach used for non-financial assets. This exclusion ensures financial assets follow a measurement framework tailored specifically to credit risk considerations rather than physical or intangible asset impairment.

7. Exclusion – Investment Property Measured at Fair Value

Investment property measured at fair value in accordance with Ind AS 40 is excluded from the scope of Ind AS 36, since fair value measurement under Ind AS 40 already reflects current market conditions and inherently captures any decline in value through periodic fair value remeasurement recognised in profit or loss. Applying a separate impairment test would be redundant, as the fair value model continuously adjusts the carrying amount to reflect market-based recoverable value. However, investment property measured under the cost model remains within the scope of Ind AS 36 and is subject to its impairment testing requirements.

8. Exclusion – Biological Assets and Non-Current Assets Held for Sale

Biological assets related to agricultural activity, measured at fair value less costs to sell under Ind AS 41, are excluded from Ind AS 36, since fair value measurement already incorporates market-based value changes. Similarly, non-current assets (or disposal groups) classified as held for sale under Ind AS 105 are excluded, as these are measured at the lower of carrying amount and fair value less costs to sell under that standard’s specific provisions. Both exclusions avoid duplicative or conflicting measurement approaches, ensuring each asset category follows the single most appropriate standard governing its particular valuation circumstances.

Recognition of Impairment of Assets (IND AS 36):

1. Recognition of an Impairment Loss

An impairment loss is recognised whenever the recoverable amount of an asset is less than its carrying amount, with the carrying amount reduced to recoverable amount. This reduction is recognised immediately in profit or loss, unless the asset is carried at revalued amount in accordance with another standard (such as Ind AS 16), in which case the impairment loss is treated as a revaluation decrease under that standard. This recognition ensures that any diminution in an asset’s economic value, once identified through impairment testing, is transparently reflected in the entity’s financial statements without delay, upholding faithful representation.

2. Recognition Following Impairment Indicators

An entity is required to recognise an impairment loss only after assessing, at the end of each reporting period, whether there is any indication that an asset may be impaired, considering both external sources (such as significant declines in market value, adverse changes in technology, markets, or the economy) and internal sources (such as evidence of obsolescence, physical damage, or worse-than-expected economic performance). If any such indication exists, the entity must estimate the asset’s recoverable amount and recognise an impairment loss accordingly, ensuring impairment recognition is triggered by objective evidence rather than arbitrary or discretionary management judgment.

3. Mandatory Annual Testing Regardless of Indicators

Certain assets require impairment testing at least annually, irrespective of whether any indication of impairment exists, given their inherent susceptibility to value fluctuation or difficulty in reliable annual valuation. These include intangible assets with indefinite useful lives, intangible assets not yet available for use, and goodwill acquired in a business combination. This recognition requirement ensures that assets particularly prone to overstatement, or those lacking a systematic amortisation charge to naturally reduce carrying value over time, are subject to rigorous, mandatory scrutiny each year rather than relying solely on the general indicator-based assessment applicable to other assets.

4. Recognition of Impairment Loss for a Cash-Generating Unit

When an impairment loss is recognised for a cash-generating unit, it is allocated first to reduce the carrying amount of any goodwill allocated to that unit, and then to the other assets of the unit on a pro-rata basis based on the carrying amount of each asset, subject to certain limits. No individual asset within the unit is reduced below the highest of its fair value less costs of disposal, its value in use (if determinable), and zero. This recognition sequencing ensures goodwill, being the least identifiable and most residual asset, absorbs impairment losses before more tangible, specifically identifiable assets.

5. Recognition of Impairment Loss for Goodwill

Goodwill acquired in a business combination is, for impairment testing purposes, allocated to each of the acquirer’s cash-generating units expected to benefit from the synergies of the combination, and tested for impairment as part of that unit at least annually. If the recoverable amount of the cash-generating unit (including goodwill) is less than its carrying amount, an impairment loss is recognised, first reducing goodwill’s carrying amount. Since goodwill does not generate independent cash flows and cannot be tested in isolation, its impairment is inherently linked to the performance of the broader cash-generating unit to which it relates.

6. Non–Reversal of Impairment Loss for Goodwill

An impairment loss recognised for goodwill is never reversed in a subsequent period, regardless of any improvement in the recoverable amount of the cash-generating unit to which the goodwill relates. This restriction exists because increases in recoverable amount subsequent to recognition of an impairment loss for goodwill are more likely to reflect an increase in internally generated goodwill, rather than a genuine reversal of the impairment recognised on the originally acquired goodwill. This recognition rule prevents entities from artificially inflating reported goodwill through recognition of internally generated value that does not qualify for balance sheet recognition under Ind AS 38.

Measurement of Impairment of Assets (IND AS 36):

1. Measuring Recoverable Amount

The recoverable amount of an asset or cash-generating unit is measured as the higher of its fair value less costs of disposal and its value in use. If either amount exceeds the asset’s carrying amount, the asset is not impaired and it is unnecessary to calculate the other amount. This “higher of” approach reflects the rational economic choice available to the entity either selling the asset to realise fair value less disposal costs, or continuing to use it to generate value in use ensuring recoverable amount always represents the more advantageous of these two realistic recovery avenues available to management.

2. Measurement of Fair Value Less Costs of Disposal

Fair value less costs of disposal is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date, less the incremental costs directly attributable to the disposal of the asset. Costs of disposal include legal costs, stamp duty, costs of removing the asset, and direct incremental costs to bring the asset into condition for sale, but exclude finance costs and income tax expense. Where an active market or binding sale agreement exists, these provide the most reliable basis; otherwise, estimation techniques based on comparable market transactions are used.

3. Measurement of Value in Use

Value in use is the present value of the future cash flows expected to be derived from an asset or cash-generating unit, calculated by estimating future cash inflows and outflows from continuing use and ultimate disposal, and applying an appropriate discount rate to those future cash flows. This measurement reflects estimates of future cash flows, expectations about possible variations in amount or timing, the time value of money, the price for bearing uncertainty inherent in the asset, and other factors market participants would consider. It captures the asset’s worth specifically to the entity through continued operational use rather than sale.

4. Elements Reflected in Value in Use Calculations

Cash flow projections used in measuring value in use should be based on reasonable and supportable assumptions, reflecting management’s best estimate of economic conditions over the remaining useful life of the asset, with greater weight given to external evidence. Projections should be based on the most recent financial budgets or forecasts approved by management, typically covering a maximum period of five years, unless a longer period can be justified, with extrapolation beyond this using a steady or declining growth rate. Cash flows must exclude financing activities and income tax receipts or payments, focusing purely on pre-tax operating cash flows.

5. Discount Rate Used in Value in Use

The discount rate applied in calculating value in use must be a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the asset for which future cash flow estimates have not been adjusted. This rate should not reflect risks for which future cash flow estimates have already been adjusted, avoiding double-counting of risk. Entities typically start with the entity’s weighted average cost of capital, incremental borrowing rate, or other market borrowing rates, adjusting to reflect the specific risks associated with the particular asset or cash-generating unit under review.

6. Measurement of Recoverable Amount for Cash-Generating Units

When it is not possible to estimate the recoverable amount of an individual asset because it does not generate cash inflows largely independent of other assets, the recoverable amount is determined for the cash-generating unit to which the asset belongs. A cash-generating unit is the smallest identifiable group of assets that generates cash inflows largely independent of cash inflows from other assets or groups of assets. This measurement approach ensures impairment testing remains meaningful even for assets that only contribute to value generation collectively, such as individual machines within an integrated production line.

7. Measurement and Allocation of Corporate Assets

Corporate assets, such as head office buildings or a research centre, do not generate independent cash inflows and their carrying amount cannot be fully attributed to a single cash-generating unit. For impairment testing, such assets are identified, and if a reasonable and consistent basis of allocation exists, they are allocated to cash-generating units on that basis; otherwise, the smallest group of cash-generating units to which a reasonable allocation basis can be identified is tested by comparing its carrying amount (including the allocated corporate asset) with its recoverable amount, ensuring corporate assets are not excluded from impairment assessment entirely.

8. Measurement of Reversal of Impairment Loss

When measuring the reversal of a previously recognised impairment loss for an asset other than goodwill, the increased carrying amount attributable to the reversal must not exceed the carrying amount that would have been determined (net of depreciation or amortisation) had no impairment loss been recognised in prior years. This measurement ceiling ensures the reversal does not effectively create a revaluation above historical cost-based carrying value, maintaining consistency with the cost model’s inherent limits. The reversal is recognised immediately in profit or loss, unless the asset is carried at revalued amount, in which case it is treated as a revaluation increase.

Disclosures of Impairment of Assets (IND AS 36):

1. Impairment Losses and Reversals Recognised During the Period

For each class of assets, the financial statements must disclose the amount of impairment losses recognised in profit or loss during the period and the line item(s) in which those losses are included, along with the amount of any reversals of impairment losses recognised in profit or loss and the corresponding line item(s). This disclosure enables users to identify the magnitude and location of impairment-related charges and reversals within the statement of profit and loss, distinguishing these from ordinary operating costs and supporting clearer assessment of underlying, sustainable operating performance separate from asset value adjustments.

2. Impairment Losses and Reversals Recognised in Other Comprehensive Income

The entity must disclose the amount of impairment losses on revalued assets recognised in other comprehensive income during the period, and the amount of any reversals of impairment losses on revalued assets recognised in other comprehensive income. Since impairment losses and reversals on revalued assets bypass profit or loss and are instead recognised directly against the revaluation surplus in equity, this separate disclosure ensures users are not misled into overlooking impairment-related movements that do not appear within the statement of profit and loss but nonetheless materially affect the entity’s reported equity and comprehensive income for the period.

3. Disclosures by Class of Assets

For each class of assets, an entity must disclose the events and circumstances that led to the recognition or reversal of the impairment loss. This qualitative disclosure provides users with context beyond the mere quantitative impact, helping them understand whether the impairment arose from external market factors, internal operational issues, technological obsolescence, or other specific circumstances. Such narrative explanation is essential for users seeking to assess whether the underlying causes of impairment are likely to persist, recur, or reverse in future periods, thereby supporting more informed evaluation of the entity’s future earnings potential and asset quality.

4. Disclosures for Individual Material Impairment Losses

For an individual asset (including goodwill) or a cash-generating unit for which an impairment loss has been recognised or reversed during the period, and which is material to the financial statements as a whole, an entity must disclose the events and circumstances leading to the loss or reversal, the amount involved, the nature of the asset (or, for a cash-generating unit, a description of the unit), and the reportable segment to which it belongs. This granular, item-specific disclosure ensures particularly significant impairment events receive appropriately detailed transparency rather than being aggregated and obscured within broader class-level totals.

5. Basis for Determining Recoverable Amount

For material individual impairment losses or reversals, an entity must disclose whether recoverable amount is fair value less costs of disposal or value in use, and if fair value less costs of disposal, the level of the fair value hierarchy (as per Ind AS 113) used, the valuation technique applied, and key assumptions used in measuring fair value. If value in use is used, the discount rate applied in the current and previous estimate (if relevant) must be disclosed. This disclosure allows users to assess the reliability and reasonableness of the methodology and assumptions underlying reported impairment figures.

6. Aggregate Disclosures When Individual Items Are Not Material

When impairment losses recognised (or reversed) during the period are individually not material but are significant in aggregate to the financial statements as a whole, an entity must disclose the main classes of assets affected and the main events and circumstances leading to recognition of these impairment losses and reversals. This aggregate-level disclosure ensures that collectively significant impairment activity is not entirely omitted from financial statements merely because no single item individually crosses the materiality threshold, preserving overall transparency regarding the cumulative impact of asset value declines across the entity’s operations during the reporting period.

7. Key Assumptions Used in Estimating Recoverable Amounts

For each cash-generating unit (or group of units) for which the carrying amount of goodwill or intangible assets with indefinite useful lives allocated to it is significant in comparison with the entity’s total carrying amount of such assets, disclosures include the carrying amount of goodwill and indefinite-life intangibles allocated, the basis on which recoverable amount has been determined (value in use or fair value less costs of disposal), key assumptions used in cash flow projections (such as growth rates and discount rates), and a description of management’s approach to determining values assigned to each key assumption.

8. Sensitivity Analysis Disclosures

Where a reasonably possible change in a key assumption used to determine recoverable amount would cause the carrying amount of a cash-generating unit to exceed its recoverable amount, an entity must disclose the amount by which recoverable amount exceeds carrying amount, the value assigned to the key assumption, and the amount by which that value must change (after incorporating any consequential effects) for recoverable amount to equal carrying amount. This sensitivity disclosure is critical for alerting users to cash-generating units operating close to impairment thresholds, where relatively modest changes in key assumptions could trigger significant future impairment charges.

Example of Impairment of Assets (IND AS 36):

A company has a machine with a carrying amount of ₹10,00,000. Due to technological changes, the company estimates its fair value less costs of disposal at ₹7,50,000 and value in use at ₹8,00,000.

Under Ind AS 36, the recoverable amount is the higher of fair value less costs of disposal and value in use.

Particulars Amount
Carrying amount of machine ₹10,00,000
Fair value less costs of disposal ₹7,50,000
Value in use ₹8,00,000
Recoverable Amount ₹8,00,000
Impairment Loss ₹2,00,000

Calculation:

Recoverable Amount = Higher of ₹7,50,000 and ₹8,00,000 = ₹8,00,000

Impairment Loss = ₹10,00,000 − ₹8,00,000 = ₹2,00,000

Journal Entry

Particulars Debit Credit
Impairment Loss A/c Dr. ₹2,00,000
To Accumulated Impairment Loss A/c ₹2,00,000

Therefore, the machine will be shown in the Balance Sheet at its revised carrying amount of ₹8,00,000.

Management Notes

Investment Property (Ind AS 40), Concepts, Meaning, Definitions, Objectives, Scope, Recognition, Measurement, Transfer Disclosure Requirements and Importance

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Investment Property is property (land or a building, or part of a building, or both) held by an entity to earn rentals, for capital appreciation, or both, rather than for use in the production or supply of goods or services, administrative purposes, or sale in the ordinary course of business. Ind AS 40 prescribes the accounting treatment for investment property and the related disclosure requirements. The standard helps distinguish investment property from owner-occupied property and inventories, ensuring consistent recognition, measurement, and presentation in financial statements.

Meaning of Investment Property

Investment property refers to land, buildings, or parts of buildings that are held to earn rental income, for long-term capital appreciation, or for both purposes. Unlike owner-occupied property, investment property is not used in the production of goods or services or for administrative functions. Similarly, it is not held for sale in the ordinary course of business. Examples include office buildings leased to tenants, land held for future appreciation, and commercial properties rented to others. Proper classification under Ind AS 40 ensures accurate accounting treatment and helps users of financial statements understand the purpose of such properties.

Definitions under Ind AS 40 – Investment Property

  • Investment Property

Investment property is land, a building, or part of a building held by the owner or by the lessee as a right-of-use asset to earn rentals, for capital appreciation, or both. It is not used in the production or supply of goods or services, for administrative purposes, or held for sale in the ordinary course of business. Examples include office buildings leased to tenants, land held for future value appreciation, and commercial properties rented out. Investment property generates independent cash flows and is accounted for under Ind AS 40, ensuring consistent recognition, measurement, and disclosure in financial statements.

  • Owner-Occupied Property

Owner-occupied property refers to property held by an entity for use in the production or supply of goods or services or for administrative purposes. Such property is not intended to earn rental income or capital appreciation. Examples include factories, office buildings occupied by the entity, warehouses used for business operations, and administrative offices. These properties are accounted for under Ind AS 16, Property, Plant and Equipment, rather than Ind AS 40. The distinction between owner-occupied property and investment property is essential because each category follows different accounting principles and disclosure requirements.

  • Fair Value

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Under Ind AS 40, although investment property is subsequently measured using the cost model, entities are required to disclose its fair value whenever it can be measured reliably. Fair value reflects current market conditions and provides users of financial statements with relevant information about the property’s economic worth. It supports better investment decisions and enhances transparency in financial reporting.

  • Carrying Amount

The carrying amount is the amount at which an investment property is recognised in the balance sheet after deducting accumulated depreciation and accumulated impairment losses. It represents the book value of the property in the financial statements. Under Ind AS 40, investment property is carried using the cost model in accordance with Ind AS 16. The carrying amount changes over time due to depreciation, impairment, additions, or disposals. This value helps stakeholders understand the recorded worth of investment property at the reporting date.

  • Capital Appreciation

Capital appreciation refers to the increase in the market value of a property over time. Investment property is often held with the expectation that its value will rise, allowing the owner to earn profit upon sale. Land located in developing commercial areas is a common example of property held for capital appreciation. Under Ind AS 40, properties held primarily for this purpose qualify as investment property. Recognising capital appreciation as a purpose of holding property helps distinguish investment property from owner-occupied property or inventory.

Objectives of Ind AS 40 – Investment Property

  • To Prescribe Accounting Treatment for Investment Property

The primary objective of Ind AS 40 is to prescribe the accounting treatment for investment property. It establishes principles for recognising, measuring, presenting, and disclosing properties held to earn rental income or for capital appreciation. The standard ensures that investment property is accounted for consistently across different entities. By providing a structured accounting framework, it helps organisations maintain accurate financial records and present reliable financial information. This objective improves the quality of financial reporting and enables stakeholders to understand the value and performance of investment properties more effectively and make informed financial decisions confidently.

  • To Distinguish Investment Property from Other Properties

Ind AS 40 aims to clearly distinguish investment property from owner-occupied property and inventory. Investment property is held to earn rentals or for capital appreciation, whereas owner-occupied property is used in business operations, and inventory is held for sale. This distinction ensures that each category of property is accounted for under the appropriate accounting standard. Proper classification prevents accounting errors and improves consistency in financial reporting. It enables users of financial statements to understand the purpose for which a property is held and evaluate an entity’s assets more accurately and effectively.

  • To Ensure Consistent Recognition of Investment Property

Another objective of Ind AS 40 is to provide uniform recognition criteria for investment property. The standard requires investment property to be recognised as an asset only when future economic benefits are likely to flow to the entity and its cost can be measured reliably. These recognition conditions prevent inappropriate recording of assets and ensure that only qualifying properties appear in financial statements. Consistent recognition improves the reliability and credibility of accounting information. It also provides stakeholders with confidence that reported investment properties represent genuine economic resources capable of generating future benefits.

  • To Provide Proper Measurement Principles

Ind AS 40 aims to establish appropriate measurement principles for investment property. It requires investment property to be initially measured at cost, including purchase price and directly attributable expenses. After initial recognition, entities follow the cost model in accordance with Ind AS 16 while also disclosing fair value information. These measurement requirements ensure that investment properties are recorded at realistic values throughout their useful life. Proper measurement enhances comparability between financial statements and provides users with reliable information regarding the carrying amount and economic value of investment properties owned by the entity.

  • To Enhance Transparency through Disclosures

An important objective of Ind AS 40 is to improve transparency by prescribing detailed disclosure requirements. Entities must disclose accounting policies, carrying amounts, depreciation methods, fair value information, restrictions on ownership, and contractual obligations relating to investment property. These disclosures enable investors, creditors, regulators, and other stakeholders to understand the financial significance of investment properties. Comprehensive reporting improves confidence in financial statements and supports better decision-making. Transparent disclosures also promote accountability and allow users to compare investment property information across different organisations with greater ease and accuracy.

  • To Improve Comparability of Financial Statements

Ind AS 40 seeks to improve comparability among financial statements by establishing uniform accounting principles for investment property. When all entities follow the same recognition, measurement, and disclosure requirements, users can compare financial information across companies more effectively. This comparability is especially valuable for investors, lenders, analysts, and regulatory authorities who evaluate the financial performance of different organisations. Consistent accounting treatment reduces confusion, enhances the credibility of financial reports, and supports informed investment and lending decisions in both domestic and international business environments with greater confidence.

  • To Support Better Financial Decision-Making

Ind AS 40 aims to provide useful financial information that supports sound economic decision-making. Accurate accounting and disclosure of investment property enable management, investors, creditors, and other stakeholders to assess the profitability, financial position, and future earning potential of an entity. Reliable information regarding rental income, capital appreciation, and property values assists users in evaluating investment opportunities and business performance. This objective strengthens financial planning, improves resource allocation, and promotes effective management of investment property, ultimately contributing to sustainable business growth and long-term organisational success.

  • To Align Indian Accounting with International Standards

One of the major objectives of Ind AS 40 is to align Indian accounting practices with International Financial Reporting Standards (IFRS). By adopting globally accepted principles for investment property accounting, the standard improves the quality, consistency, and credibility of financial reporting in India. This alignment facilitates international comparisons, enhances investor confidence, and attracts foreign investment. It also supports Indian companies operating in global markets by ensuring that their financial statements are prepared using internationally recognised accounting practices. Consequently, Ind AS 40 contributes to greater transparency, competitiveness, and global acceptance of Indian businesses.

Scope of Ind AS 40 – Investment Property

  • Investment Property Held to Earn Rentals

The scope of Ind AS 40 includes investment properties held to earn rental income. Such properties are not used by the owner for manufacturing, administration, or business operations. Instead, they are leased to tenants to generate regular income. Examples include office buildings, shopping complexes, warehouses, and residential apartments rented to third parties. The standard prescribes the accounting treatment for these properties, including recognition, measurement, and disclosure. This ensures that rental-generating properties are accounted for consistently and their financial impact is accurately reflected in the entity’s financial statements for users and stakeholders.

  • Investment Property Held for Capital Appreciation

Ind AS 40 also applies to properties held for capital appreciation. These are properties acquired with the expectation that their market value will increase over time rather than being used in business operations. Examples include vacant land held for future value appreciation and buildings retained for long-term investment. Such properties qualify as investment property because they are intended to generate future economic benefits through appreciation in value. The standard provides guidance on recognising and measuring these assets, ensuring that they are properly classified and reported in financial statements with consistency and transparency.

  • Property Held for Both Rentals and Capital Appreciation

The scope of Ind AS 40 includes properties held for both earning rental income and capital appreciation. Many commercial buildings generate regular rental income while simultaneously increasing in market value over time. Such dual-purpose properties qualify as investment property under the standard. Ind AS 40 provides accounting guidance for recognising, measuring, and disclosing these properties in financial statements. This ensures that organisations account for all economic benefits arising from the property. Proper classification also helps users understand the investment nature of the property and its contribution to the entity’s financial performance.

  • Property Interest Held by a Lessee

Ind AS 40 also covers property interests held by a lessee as a right-of-use asset under Ind AS 116, provided the property meets the definition of investment property. If the lessee holds the property primarily to earn rentals or for capital appreciation, it falls within the scope of Ind AS 40. The right-of-use asset is accounted for in the same manner as owned investment property. This provision ensures consistency in accounting treatment regardless of whether the property is owned or leased and promotes uniform financial reporting among different entities.

  • Recognition and Measurement of Investment Property

The scope of Ind AS 40 includes the recognition and measurement of investment property. The standard specifies that investment property should be recognised when future economic benefits are expected to flow to the entity and the cost can be measured reliably. Initially, the property is measured at cost, including directly attributable expenses. Subsequently, the cost model prescribed under Ind AS 16 is followed. These provisions ensure that investment properties are recorded accurately and consistently, enabling stakeholders to rely on the financial information presented by the entity in its financial statements.

  • Transfer of Investment Property

Ind AS 40 includes guidance on transfers to or from investment property when there is a change in the property’s use. A transfer is permitted only when there is evidence of such change, such as commencement of owner occupation, beginning of development for sale, or leasing to another party. The transfer is accounted for according to the accounting standard applicable to the property’s new classification. This provision ensures that property is always classified according to its actual use and maintains consistency in financial reporting and asset presentation.

  • Disclosure Requirements

The scope of Ind AS 40 extends to disclosure requirements relating to investment property. Entities must disclose accounting policies, carrying amount, depreciation methods, useful life, restrictions on title, contractual obligations, and the fair value of investment property. These disclosures provide users of financial statements with detailed information about the nature, value, and performance of investment properties. Comprehensive disclosure enhances transparency, comparability, and reliability of financial reporting. It also enables investors, lenders, regulators, and other stakeholders to evaluate the financial position of the entity more effectively.

  • Exclusions from the Scope of Ind AS 40

Ind AS 40 excludes certain properties from its scope because they are governed by other accounting standards. These include owner-occupied property covered under Ind AS 16, inventories such as property held for sale covered under Ind AS 2, biological assets related to agricultural activities, and mineral rights. The exclusion ensures that each category of property is accounted for under the most appropriate accounting standard. This avoids duplication, maintains consistency in accounting practices, and improves the clarity and accuracy of financial reporting across different types of assets.

Recognition of Investment Property (Ind AS 40)

  • Recognition Criteria

Under Ind AS 40, an investment property is recognised as an asset only when it is probable that the future economic benefits associated with the property will flow to the entity. Additionally, the cost of the property must be measured reliably. Both conditions must be satisfied before recognition. This ensures that only genuine investment properties are recorded in the financial statements. Proper recognition improves the accuracy of accounting records and provides users with reliable information regarding the entity’s investment assets and their expected contribution to future income and financial performance.

  • Probability of Future Economic Benefits

Investment property is recognised when it is expected to generate future economic benefits for the entity. These benefits may arise through rental income, capital appreciation, or both. Before recognising the property, management must assess whether the expected benefits are likely to occur based on available evidence. If future benefits are uncertain, the property should not be recognised as an investment property. This requirement ensures that only assets capable of providing economic value are included in the financial statements, thereby improving the reliability and relevance of financial reporting.

  • Reliable Measurement of Cost

Another essential requirement for recognition is that the cost of the investment property can be measured reliably. The cost generally includes the purchase price, import duties, non-refundable taxes, legal fees, registration charges, brokerage, and other directly attributable expenses incurred to acquire the property. If the acquisition cost cannot be determined with reasonable accuracy, recognition is not permitted. Reliable measurement ensures that investment property is initially recorded at its correct value and provides a dependable basis for subsequent accounting and financial reporting.

  • Initial Recognition at Cost

When an investment property satisfies the recognition criteria, it is initially recognised at cost. The cost includes the purchase price and all directly attributable expenses necessary to bring the property to its intended condition. Examples include legal charges, stamp duty, registration fees, professional fees, and transfer taxes. Administrative costs and abnormal wastage are generally excluded from the cost. Initial recognition at cost ensures consistency in accounting practices and provides an objective basis for measuring investment property in the financial statements.

  • Recognition of Self-Constructed Investment Property

Ind AS 40 also applies to self-constructed investment property. Such property is recognised as an investment property when construction is completed and the property is ready for its intended use of earning rentals or capital appreciation. During the construction period, the property is accounted for under Ind AS 16. Once construction is complete and the property meets the definition of investment property, it is transferred to Ind AS 40. This treatment ensures that self-constructed investment properties receive appropriate accounting treatment at every stage of development.

  • Subsequent Expenditure Recognition

After initial recognition, expenditure incurred on an investment property is recognised as part of the carrying amount only when it is probable that the expenditure will generate additional future economic benefits beyond the originally assessed performance. Examples include major renovations or improvements that increase the property’s value or income-generating capacity. Routine repairs and maintenance expenses are recognised in the Statement of Profit and Loss as incurred. This distinction ensures that only capital expenditures are added to the property’s carrying amount, while normal maintenance costs are treated as current expenses.

  • Recognition of Property Acquired Through Exchange

Investment property acquired in exchange for another asset is recognised when the exchange has commercial substance and the fair value of either the asset received or the asset given up can be measured reliably. The cost of the acquired property is generally measured at fair value unless specific exceptions apply. This recognition principle ensures that exchanged investment properties are recorded at values that reflect their economic significance. It promotes fairness, consistency, and comparability in accounting for non-cash acquisition transactions under Ind AS 40.

  • Importance of Proper Recognition

Proper recognition of investment property is essential for presenting a true and fair view of an entity’s financial position. It ensures that only qualifying properties are included in the financial statements and that they are measured using appropriate accounting principles. Correct recognition enhances the reliability, transparency, and comparability of financial reports. It also assists management, investors, creditors, and regulators in evaluating the entity’s investment activities, future earning potential, and overall financial performance. Proper recognition forms the foundation for accurate measurement, disclosure, and decision-making under Ind AS 40.

Measurement of Investment Property (Ind AS 40)

  • Initial Measurement at Cost

Under Ind AS 40, investment property is initially measured at cost. The cost includes the purchase price and all directly attributable expenses necessary to acquire the property and make it ready for its intended use. Such expenses include legal fees, registration charges, stamp duty, brokerage, transfer taxes, and professional fees. Any trade discounts or rebates are deducted from the purchase price. Measuring investment property at cost ensures objective and reliable initial recognition. This approach provides a consistent basis for accounting and forms the starting point for subsequent measurement in accordance with the provisions of Ind AS 40.

  • Components Included in Cost

The cost of investment property includes all expenditures directly related to its acquisition. These include the purchase price, legal and professional fees, property transfer taxes, registration charges, brokerage, and other expenses necessary to complete the purchase. If the property requires preparation before use, directly attributable costs are also included. However, administrative expenses, general overheads, and abnormal wastage are excluded from the cost. Including only relevant expenditures ensures that the carrying amount accurately reflects the actual investment made by the entity and provides a reliable basis for financial reporting.

  • Expenditure Excluded from Cost

Certain expenditures are specifically excluded from the cost of investment property under Ind AS 40. These include start-up costs, administrative expenses, operating losses incurred before the property reaches its intended use, and abnormal waste of materials, labour, or resources. Routine maintenance and repair costs are also excluded because they do not increase the future economic benefits of the property. Such expenses are recognised in the Statement of Profit and Loss as incurred. Excluding these items prevents overstatement of asset values and ensures that only capital expenditures are included in the property’s carrying amount.

  • Subsequent Measurement Using the Cost Model

After initial recognition, Ind AS 40 requires entities to measure investment property using the cost model prescribed under Ind AS 16. Under this model, the investment property is carried at cost less accumulated depreciation and accumulated impairment losses. Depreciation is charged systematically over the property’s useful life, while impairment losses are recognised whenever the carrying amount exceeds the recoverable amount. The cost model ensures consistency in financial reporting and provides users with reliable information regarding the book value of investment properties held by the entity.

  • Fair Value Disclosure

Although Ind AS 40 requires subsequent measurement using the cost model, entities must disclose the fair value of investment property in the notes to the financial statements whenever it can be measured reliably. Fair value represents the current market value of the property between knowledgeable and willing parties in an orderly transaction. Disclosure of fair value provides users with additional information about the economic worth of investment property. This enhances transparency and helps investors, lenders, and other stakeholders assess the potential value of the entity’s property investments.

  • Measurement After Capital Expenditure

When significant improvements or additions are made to an investment property, the expenditure is added to the carrying amount only if it is probable that additional future economic benefits will flow to the entity. Examples include major structural improvements, extensions, or renovations that increase rental income or market value. Expenditure on routine repairs and maintenance is not capitalised but is recognised as an expense. This distinction ensures that only expenditures enhancing the property’s future benefits affect its carrying amount, resulting in accurate measurement and financial reporting.

  • Measurement of Self-Constructed Investment Property

For self-constructed investment property, the property is measured according to Ind AS 16 during the construction phase. All directly attributable construction costs are accumulated until the property is completed. Once construction is finished and the property is ready for earning rentals or capital appreciation, it is classified as investment property under Ind AS 40. The completed property’s cost becomes its initial carrying amount. This treatment ensures consistency in accounting and accurately reflects the investment made by the entity in developing the property.

  • Importance of Proper Measurement

Proper measurement of investment property is essential for presenting reliable and meaningful financial statements. Accurate measurement ensures that investment properties are neither overstated nor understated, providing a true and fair view of the entity’s financial position. It helps management assess investment performance and supports informed decision-making by investors, creditors, and regulators. Consistent application of the measurement principles under Ind AS 40 improves comparability between organisations and strengthens confidence in financial reporting. Proper measurement also forms the basis for depreciation, impairment assessment, disclosure, and overall compliance with accounting standards.

Transfer of Investment Property (Ind AS 40)

A transfer of investment property refers to the reclassification of a property to or from investment property when there is a change in its use. Under Ind AS 40, a transfer is permitted only when there is clear evidence that the purpose for which the property is held has changed. A mere change in management’s intention is not sufficient to justify a transfer. The transfer ensures that the property is accounted for under the appropriate accounting standard based on its current use. Proper classification improves the accuracy, consistency, and reliability of financial reporting and asset presentation.

  • Transfer from Investment Property to Owner-Occupied Property

An investment property is transferred to owner-occupied property when the owner starts using the property for business operations or administrative purposes. This change is evidenced by the commencement of owner occupation. Once transferred, the property is accounted for under Ind AS 16 (Property, Plant and Equipment). The carrying amount of the property on the date of transfer becomes its deemed cost under Ind AS 16. This treatment ensures that the property is measured and depreciated according to the accounting requirements applicable to owner-occupied assets from the date of the change in use.

  • Transfer from Owner-Occupied Property to Investment Property

A property is transferred from owner-occupied property to investment property when the owner stops using it for business purposes and begins holding it to earn rental income or for capital appreciation. The change must be supported by clear evidence, such as leasing the property to another party. Before the transfer, the property is accounted for under Ind AS 16. After the transfer, it is classified as investment property and measured according to the cost model under Ind AS 40. This ensures correct classification and consistent financial reporting.

  • Transfer from Inventory to Investment Property

A property held as inventory may be transferred to investment property when it is no longer intended for sale in the ordinary course of business but is instead held to earn rentals or for capital appreciation. For example, an unsold apartment retained by a real estate developer and leased to tenants qualifies as investment property. The transfer is recognised only when there is evidence of the change in use. After the transfer, the property is accounted for under Ind AS 40. This ensures that the property’s accounting treatment reflects its revised purpose and expected economic benefits.

  • Transfer from Investment Property to Inventory

Investment property is transferred to inventory when the entity decides to sell the property in the ordinary course of business and begins development or preparation for sale. This transfer is recognised only when there is evidence of the change in use, such as the commencement of redevelopment for sale. After the transfer, the property is accounted for under Ind AS 2 (Inventories). The carrying amount of the investment property becomes the deemed cost of inventory. This treatment ensures appropriate accounting based on the property’s new business purpose and classification.

  • Evidence Required for Transfer

Ind AS 40 requires objective evidence of a change in use before any transfer of investment property is recognised. Examples of such evidence include the commencement of owner occupation, leasing the property to another party, beginning redevelopment for sale, or ending owner occupation. A simple intention or future plan to change the property’s use is insufficient. The requirement for objective evidence prevents arbitrary reclassification of assets and ensures that transfers are based on actual events. This improves consistency, transparency, and reliability in financial reporting.

  • Accounting Treatment of Transfers

The accounting treatment for transfers depends on the new classification of the property. When transferred to owner-occupied property, Ind AS 16 becomes applicable. When transferred to inventory, Ind AS 2 applies. Similarly, transfers from these categories to investment property are recognised based on the carrying amount at the date of transfer. No gain or loss arises merely because of the transfer itself. The property continues to be measured according to the accounting principles of its new classification. This ensures continuity, consistency, and proper presentation in financial statements.

  • Importance of Proper Transfer

Proper transfer of investment property is essential to ensure that assets are classified according to their actual use. Correct classification enables the application of the appropriate accounting standard and improves the reliability of financial statements. It also prevents manipulation of financial results through improper reclassification of assets. Accurate transfer accounting helps investors, creditors, regulators, and management understand the true purpose and value of the property. Consequently, proper transfer under Ind AS 40 enhances transparency, comparability, and compliance with accounting standards while supporting informed financial decision-making.

Disclosure Requirements under Ind AS 40 – Investment Property

  • Disclosure of Accounting Policy

Ind AS 40 requires an entity to disclose the accounting policies adopted for investment property. The financial statements should clearly explain the basis used for recognising, measuring, depreciating, and presenting investment property. Users of financial statements should understand how the entity has applied the requirements of Ind AS 40. Disclosure of accounting policies promotes consistency and transparency in financial reporting. It also enables investors, creditors, and other stakeholders to compare the accounting practices of different organisations and make informed economic decisions based on reliable financial information.

  • Disclosure of Carrying Amount

An entity must disclose the carrying amount of investment property at the reporting date. The carrying amount represents the cost of the property after deducting accumulated depreciation and accumulated impairment losses. This disclosure helps users understand the book value of the investment property included in the balance sheet. It also provides information about the entity’s investment in property and its contribution to the overall financial position. Proper disclosure of the carrying amount enhances transparency and supports effective analysis of financial statements by stakeholders.

  • Disclosure of Depreciation Information

Ind AS 40 requires entities to disclose the depreciation method used for investment property, its useful life or depreciation rate, and the depreciation expense recognised during the accounting period. These disclosures help users understand how the property’s cost is allocated over its useful life. Information about depreciation enables stakeholders to assess the remaining value and future earning potential of investment property. Proper disclosure also improves comparability between entities by providing a clear explanation of the depreciation policies applied in financial reporting.

  • Disclosure of Fair Value

Although investment property is measured using the cost model under Ind AS 40, the entity must disclose the fair value of the investment property whenever it can be measured reliably. Fair value represents the market value of the property on the reporting date. This disclosure provides users with additional information about the current economic worth of investment property beyond its carrying amount. Fair value disclosure improves transparency, supports investment decisions, and enables stakeholders to compare the market value of investment properties with their book values.

  • Disclosure of Rental Income and Direct Operating Expenses

Entities should disclose the rental income earned from investment property during the reporting period. They should also disclose direct operating expenses incurred on investment property that generated rental income and those that did not generate rental income. These disclosures help users evaluate the profitability and efficiency of investment properties. Information regarding income and expenses enables investors and management to assess the financial performance of property investments and make better economic decisions based on accurate and comprehensive financial data.

  • Disclosure of Restrictions and Contractual Obligations

Ind AS 40 requires disclosure of restrictions on the realisability of investment property or on the remittance of rental income and disposal proceeds. Entities must also disclose contractual obligations to purchase, construct, develop, repair, or maintain investment property. These disclosures provide important information regarding legal or financial commitments associated with investment property. They help users understand any limitations affecting the property’s use or disposal and assess the entity’s future obligations related to investment property investments.

  • Disclosure of Changes in Carrying Amount

The standard requires entities to disclose a reconciliation of the carrying amount of investment property at the beginning and end of the reporting period. This reconciliation includes additions, disposals, transfers, depreciation, impairment losses, impairment reversals, and other changes. Such disclosures allow users to understand how the carrying amount has changed during the year. It enhances transparency by explaining the movements in investment property balances and enables stakeholders to evaluate the entity’s investment activities more effectively.

  • Importance of Disclosure Requirements

Disclosure requirements under Ind AS 40 improve the transparency, reliability, and comparability of financial statements. They provide detailed information about the recognition, measurement, valuation, depreciation, fair value, rental income, expenses, and changes in investment property. These disclosures help investors, creditors, regulators, and management understand the financial impact of investment properties on the entity. Proper disclosure also ensures compliance with accounting standards, strengthens stakeholder confidence, and supports informed economic decision-making based on complete and accurate financial information.

Importance of Ind AS 40 – Investment Property

  • Ensures Proper Accounting of Investment Property

Ind AS 40 is important because it provides clear guidelines for accounting for investment property. It explains how properties held for rental income or capital appreciation should be recognised, measured, transferred, and disclosed in financial statements. Without a common accounting framework, organisations may follow different practices, leading to inconsistency and confusion. The standard ensures that investment properties are recorded accurately and presented fairly. This improves the reliability of financial statements and helps stakeholders understand the actual value and purpose of investment property owned by an entity in a consistent and transparent manner.

  • Improves Accuracy of Financial Reporting

Ind AS 40 enhances the accuracy of financial reporting by providing uniform principles for recognising and measuring investment property. It ensures that investment properties are recorded at appropriate values and that depreciation, impairment, and disclosures are applied consistently. Accurate financial reporting reduces the possibility of errors, overstatement, or understatement of assets. Reliable financial information helps investors, creditors, regulators, and management evaluate the financial position and performance of an organisation. As a result, financial statements become more trustworthy and useful for making informed economic and business decisions by all stakeholders.

  • Distinguishes Investment Property from Other Assets

One of the major importance of Ind AS 40 is that it clearly distinguishes investment property from owner-occupied property and inventory. Investment property is held for earning rentals or capital appreciation, whereas owner-occupied property is used for business operations, and inventory is held for sale. This clear distinction ensures that each type of property is accounted for under the appropriate accounting standard. Proper classification improves the quality of financial statements, avoids accounting errors, and enables users to understand the purpose of each property owned by the entity more accurately and effectively.

  • Promotes Consistency and Comparability

Ind AS 40 promotes consistency and comparability in financial reporting by prescribing uniform accounting principles for investment property. When all entities follow the same recognition, measurement, and disclosure requirements, users can compare financial statements of different organisations with confidence. Consistent accounting practices improve the credibility of financial information and reduce confusion arising from different accounting methods. Investors, lenders, analysts, and regulators benefit from comparable financial reports, enabling them to evaluate business performance, investment opportunities, and financial stability more effectively across different industries and reporting periods.

  • Supports Better Investment Decisions

Ind AS 40 provides reliable information about investment property, helping investors and other stakeholders make informed decisions. Accurate disclosure of carrying amount, fair value, rental income, depreciation, and impairment allows users to assess the profitability and future earning potential of property investments. Investors can compare organisations based on the quality and performance of their investment properties. Reliable accounting information reduces uncertainty and strengthens confidence in investment decisions. Thus, Ind AS 40 plays a significant role in improving financial analysis and supporting sound investment and business planning activities.

  • Enhances Transparency Through Disclosures

Ind AS 40 requires detailed disclosures relating to investment property, including accounting policies, carrying amount, depreciation methods, fair value, rental income, expenses, and changes during the reporting period. These disclosures provide stakeholders with a complete understanding of the entity’s investment property activities. Transparent reporting improves confidence in financial statements and helps investors, creditors, and regulators evaluate the financial impact of investment properties. Enhanced transparency also strengthens corporate accountability and ensures that organisations provide complete and meaningful information to users of financial statements for effective decision-making.

  • Facilitates Compliance with International Standards

Ind AS 40 aligns Indian accounting practices with internationally accepted accounting principles relating to investment property. This alignment improves the global comparability of financial statements prepared by Indian companies. International investors and multinational organisations can easily understand and compare financial information prepared under Ind AS. Compliance with globally recognised standards increases the credibility of Indian businesses, encourages foreign investment, and supports international business expansion. It also enhances the reputation of Indian financial reporting by ensuring consistency with modern global accounting practices and professional standards.

  • Strengthens Stakeholder Confidence

Ind AS 40 strengthens the confidence of investors, creditors, regulators, shareholders, and other stakeholders by ensuring reliable accounting and transparent reporting of investment property. Accurate recognition, measurement, transfer, and disclosure reduce the risk of misleading financial information. Stakeholders gain a better understanding of the entity’s property investments, rental income, and future growth potential. This confidence improves business relationships, facilitates access to finance, and supports long-term organisational development. Consequently, Ind AS 40 contributes significantly to maintaining trust, accountability, and high-quality financial reporting in the corporate sector.

Management Notes

Concepts of Capital and Capital maintenance

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A financial concept of capital is adopted by most entities in preparing their financial statements. Under a financial concept of capital, such as invested money or invested purchasing power, capital is synonymous with the net assets or equity of the entity. Under a physical concept of capital, such as operating capability, capital is regarded as the productive capacity of the entity based on, for example, units of output per day.

The selection of the appropriate concept of capital by an entity should be based on the needs of the users of its financial statements. Thus, a financial concept of capital should be adopted if the users of financial statements are primarily concerned with the maintenance of nominal invested capital or the purchasing power of invested capital.

If, however, the main concern of users is with the operating capability of the entity, a physical concept of capital should be used. The concept chosen indicates the goal to be attained in determining profit, even though there may be some measurement difficulties in making the concept operational.

Concepts of capital maintenance and the determination of profit

The capital maintenance concept states that the business net worth is said to have been maintained if net assets at the end of the period are equal to or more than net assets at the beginning of the accounting period keeping aside any withdrawal during the said period. In other words, it states that the company must book net income only when it has recovered its capital or the cost, i.e., an adequate amount of capital has been maintained.

Financial capital maintenance. Under this concept a profit is earned only if the financial (or money) amount of the net assets at the end of the period exceeds the financial (or money) amount of net assets at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period. Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.

All the inflows such as the sale of stock to shareholders, the addition of capital from owners, and payment of dividends to shareholders payment of bonus to shareholders are excluded. The two measurement units of financial capital maintenance theory are constant purchasing power units and nominal monetary units.

Financial capital maintenance is affected only by the entire amount of funds available at the starting of the year and the funds available at the end of the year. Therefore, this concept is least concerned with any other capital assets transaction undertaken during the financial year.

Physical capital maintenance. Under this concept a profit is earned only if the physical productive capacity (or operating capability) of the entity (or the resources or funds needed to achieve that capacity) at the end of the period exceeds the physical productive capacity at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period.

This method books profit only when the physical production capacity of the business at the end of the year is more than or equal to the physical production capacity of the business at the beginning of the year except any amount adjusted towards any amount paid to owners during the year or any amount raised by the owner. The main use of this method is for checking and maintaining the operational business capacity.

Capital Maintenance and Inflation

Inflation is the increase in any product/service cost or decrease in purchasing capacity. When the inflation rate is high, which has occurred in a short duration of time can affect the business’s ability to determine if it has achieved capital maintenance or not accurately. Due to inflation, the purchase price of assets gets increased accordingly, the value of the company’s net assets also increases. But the increase due to this inflation misrepresents the original value of the company’s assets.

Capital maintenance is distorted at the time of inflation as the pressure of inflation will increase the net assets even if their original value is unchanged. Due to this reason, at the time of inflammation, the companies must adjust the value of their assets to determine whether they have achieved capital maintenance. This is very important if the business operates in a hyperinflationary  economy.

Management Notes

Measurement of the elements of financial statements

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Financial position

The financial position of an enterprise is primarily provided in a balance sheet. The main purpose of financial statements is to provide financial information to the users to assist them in their economic decisions. The financial statements basically present the financial information in such form that it is not only understandable but also useable. That is why financial statements present the financial effects of different business events that also includes business transactions.

In order to enhance the quality of information in financial statements, business transactions are grouped in different classes or categories on the basis of their economic characteristics. The broad classes or categories are called elements of financial statements.

The elements of a balance sheet or the elements that measure the financial position are as follows:

Asset: An asset is a resource:

  • Controlled by the enterprise as a result of past events, and
  • From which future economic benefits are expected to flow to the enterprise.

Liability: A liability is a present obligation of the enterprise arising from the past events, the settlement of which is expected to result in an outflow from the enterprise’ resources, i.e., assets.

Equity: Equity is the residual interest in the assets of the enterprise after deducting all the liabilities. Equity is also known as owner’s equity.

Financial performance

The financial performance of an enterprise is primarily provided in an income statement or profit and loss account. The elements of an income statement or the elements that measure the financial performance are as follows:

Income:

  • Increases in economic benefit during an accounting period in the form of inflows or enhancements of assets, or
  • Decrease of liabilities that result in increases in equity.

However, it does not include the contributions made by the equity participants, i.e., proprietor, partners and shareholders.

Expenses:

Expenses are:

  • Decreases in economic benefits during an accounting period in the form of outflows, or
  • Depletions of assets or incurrences of liabilities that result in decreases in equity.

Measurement of the Elements of Financial Statements

According to the Framework of IAS, the term ‘measurement’ has been defined in the following words:

“Measurement is the process of determining the monetary amounts at which the elements of the financial statements are to be recognised and carried in the balance sheet and income statement.”

There are a number of measurement basis that are employed in different degrees and in varying combinations in financial statements. They are listed below:

  • Historical cost: Historical cost is the most common measurement basis adopted by enterprises in preparing their financial statements. This is usually combined with other measurement basis, such as current cost basis, realisable basis, etc., which are discussed later in this section. Under historical cost measurement basis, assets are originally recorded at their costs or purchasing price or the fair value of the consideration given to acquire them at the time of their acquisition. Liabilities are recorded at the amount of proceeds received in exchange for the obligation.
  • Current cost: Under current cost basis, assets are carried at the amount of cash that would have to be paid if the same or an equivalent asset was acquired currently. Liabilities are carried at the undiscounted amount of cash that would be required to settle the obligations currently.
  • Realisable value: Assets are carried at the amount of cash that could currently be obtained by selling the asset in an orderly disposal. Liabilities are carried at their settlement values; that is, the undiscounted amount of cash expected to be paid or satisfy the liabilities in the normal course of business.
  • Present value: Assets are carried at the present discounted value of the future net cash inflows that the item is expected to generate in the normal course of business. Liabilities are carried at the presented discounted value of the future net cash outflows that are expected to be required to settle the liabilities in the normal course of business.
Management Notes

Recognition of the elements of financial statements

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“Recognised” means reported on, or incorporated in amounts reported on, the face of the financial statements of the entity (whether or not further disclosure of the item is made in notes thereto).

Reporting of information about assets, liabilities, equity, revenues and expenses in financial reports may be by way of recognition and/or by disclosure in notes in the financial report. An item may be recognised as an element either singly or in combination with other items. For example, a particular asset may be recognised by incorporation in the carrying amount of a class of assets reported in the statement of financial position. In addition, where assets and liabilities have been set off against each other, or where revenues and expenses have been netted off, in the presentation of those items in financial statements, those elements would nonetheless have been recognised. The manner in which recognised elements should be presented in financial statements, including the circumstances in which they may be set off or netted off, are matters of display which are beyond the scope of this Statement. Inclusion of an element only in notes in the financial report does not constitute recognition.

The main elements of financial statements are as follows:

Assets. These are items of economic benefit that are expected to yield benefits in future periods. Examples are accounts receivable, inventory, and fixed assets.

Criteria for Recognition of Assets 38 39 40 An asset should be recognised in the statement of financial position when and only when:

  • It is probable that the future economic benefits embodied in the asset will eventuate.
  • The asset possesses a cost or other value that can be measured reliably.

Liabilities. These are legally binding obligations payable to another entity or individual. Examples are accounts payable, taxes payable, and wages payable.

Criteria for Recognition of Liabilities 65 66 67 68 69 A liability should be recognised in the statement of financial position when and only when:

  • It is probable that the future sacrifice of economic benefits will be required.
  • The amount of the liability can be measured reliably.

Revenue. This is an increase in assets or decrease in liabilities caused by the provision of services or products to customers. It is a quantification of the gross activity generated by a business. Examples are product sales and service sales.

A revenue should be recognised in the operating statement, in the determination of the result for the reporting period, when and only when:

  • It is probable that the inflow or other enhancement or saving in outflows of future economic benefits has occurred.
  • The inflow or other enhancement or saving in outflows of future economic benefits can be measured reliably.

Equity. This is the amount invested in a business by its owners, plus any remaining retained earnings.

Recognition of Equity Since equity is the residual interest in the assets of an entity and the amount assigned to equity will always correspond to the excess of the amounts assigned to its assets over the amounts assigned to its liabilities, the criteria for the recognition of assets and liabilities provide the criteria for the recognition of equity.

If the aggregate amount assigned to an entity’s liabilities exceeds the aggregate amount assigned to its assets there would be no amount recognised as equity.  What would be reported is a deficiency of reported assets compared with reported liabilities.  As with the reported amount of equity, the reported amount of any deficiency would depend on the bases on which the entity’s assets and liabilities are recognised and measured. It is possible for the reported liabilities of an entity to exceed its reported assets and for the ownership group or, where there is an absence of an ownership group, some other party or parties with residual rights, to have an interest of some value in the entity. For example, assets may exist but not have been recognised, or a measurement basis may have been adopted which does not report the current value of the reported assets and liabilities. Notwithstanding this, the existence of legal restrictions, for example, may inhibit the ability of an entity that reports a deficiency to make distributions to owners.

Expenses. This is the reduction in value of an asset as it is used to generate revenue. Examples are interest expense, compensation expense, and utilities expense.

An expense should be recognised in the operating statement, in the determination of the result for the reporting period, when and only when:

  • It is probable that the consumption or loss of future economic benefits resulting in a reduction in assets and/or an increase in liabilities has occurred.
  • The consumption or loss of future economic benefits can be measured reliably.
Management Notes

Users of financial statements

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Customers

When a customer is considering which supplier to select for a major contract, it wants to review their financial statements first, in order to judge the financial ability of a supplier to remain in business long enough to provide the goods or services mandated in the contract.

Company Management

The management team needs to understand the profitability, liquidity, and cash flows of the organization every month, so that it can make operational and financing decisions about the business.

Competitors

Entities competing against a business will attempt to gain access to its financial statements, in order to evaluate its financial condition. The knowledge they gain could alter their competitive strategies.

Governments

A government in whose jurisdiction a company is located will request financial statements in order to determine whether the business paid the appropriate amount of taxes.

Investment Analysts

Outside analysts want to see financial statements in order to decide whether they should recommend the company’s securities to their clients.

Investors

Investors will likely require financial statements to be provided, since they are the owners of the business and want to understand the performance of their investment.

Debenture Holders

The debenture holders are interested in the short-term as well as the long-term solvency position of the company. They have to get their interest payments periodically and at the end the return of the principal amount.

Rating Agencies

A credit rating agency will need to review the financial statements in order to give a credit rating to the company as a whole or to its securities.

Employees

A company may elect to provide its financial statements to employees, along with a detailed explanation of what the documents contain. This can be used to increase the level of employee involvement in and understanding of the business.

Suppliers

Suppliers will require financial statements in order to decide whether it is safe to extend credit to a company.

Prospective Investors

Prospective Investors are interested in the future prospects and financial strength of the company.

Unions

A union needs the financial statements in order to evaluate the ability of a business to pay compensation and benefits to the union members that it represents.

Shareholders

Divorce between ownership and management and broad-based ownership of capital due to dispersal of shareholdings have made shareholders take more interest in the financial statements with a view to ascertaining the profitability and financial strength of the company.

Management Notes

Applicability of Ind AS in India

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Indian Accounting Standards (Ind AS) are accounting standards prescribed by the Ministry of Corporate Affairs (MCA) under the Companies Act, 2013. They are largely converged with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB). Ind AS aims to improve the comparability, transparency and reliability of financial statements prepared by Indian companies. Their applicability in India is mainly based on the nature of the entity, listing status and specified financial criteria. The implementation of Ind AS has been carried out in phases to ensure a systematic transition from existing Accounting Standards.

Applicability of Ind AS in India:

1. Regulatory Framework and Notification

Ind AS in India are notified by the Ministry of Corporate Affairs (MCA) under Section 133 of the Companies Act, 2013, read with the Companies (Indian Accounting Standards) Rules, 2015, after consultation with the National Financial Reporting Authority (NFRA). These rules prescribe which classes of companies must adopt Ind AS and from which financial year, based on criteria such as listing status and net worth. Once notified, compliance is mandatory and enforceable under company law, overriding earlier Accounting Standards (AS) for applicable entities. The framework ensures phased, structured convergence with IFRS rather than a one-time blanket transition across all Indian companies.

2. Phase I – Mandatory from 1 April 2016

Ind AS became mandatory from 1 April 2016 (with comparatives for FY 2015-16) for: (a) companies whose equity or debt securities are listed or in the process of listing on any stock exchange in India or outside India, having net worth of ₹500 crore or more; and (b) unlisted companies having net worth of ₹500 crore or more. Holding, subsidiary, joint venture, or associate companies of the above entities also fell within this phase, irrespective of their individual net worth, ensuring consistency in group-level financial reporting from the very first phase of implementation.

3. Phase II – Mandatory from 1 April 2017

From 1 April 2017 (with comparatives for FY 2016-17), Ind AS became applicable to: (a) all listed companies (or companies in the process of listing) not covered in Phase I; and (b) unlisted companies having net worth of ₹250 crore or more but less than ₹500 crore. As before, holding, subsidiary, joint venture, and associate companies of entities covered under this phase were also brought within its ambit, regardless of their standalone net worth. This phase significantly widened the coverage of Ind AS beyond large-cap companies to include a broader base of listed and mid-sized unlisted companies.

4. Net Worth Computation

Net worth is computed in accordance with Section 2(57) of the Companies Act, 2013, based on the audited standalone financial statements as at 31 March 2014, or the first audited financial statements for periods ending after that date for companies incorporated later. It is calculated using the aggregate value of paid-up share capital and all reserves created out of profits and securities premium, reduced by accumulated losses, deferred expenditure, and miscellaneous expenditure not written off. Once a company meets the threshold and adopts Ind AS, it must continue applying Ind AS for all subsequent years, even if net worth later falls below the threshold.

5. Applicability to Banking, Insurance, and NBFC Sectors

Scheduled commercial banks, insurers, and NBFCs follow a separate roadmap prescribed by their respective regulators (RBI, IRDAI) in coordination with MCA, rather than the general Phase I/II criteria. NBFCs (listed or unlisted) with net worth of ₹500 crore or more adopted Ind AS from 1 April 2018, while other NBFCs meeting lower thresholds followed from 1 April 2019, along with their holding, subsidiary, associate, and joint venture companies. RBI deferred Ind AS implementation for banks pending regulatory and legislative amendments, so banks continue to report under RBI-prescribed formats until further notification, despite MCA’s Ind AS roadmap.

6. Companies Exempted from Ind AS

Certain classes of companies are exempted from mandatory Ind AS application and continue to follow existing Accounting Standards (AS). These include companies whose securities are listed or to be listed on SME exchanges, insurance companies, banking companies (until separately notified), and NBFCs not meeting prescribed thresholds. Additionally, companies not falling under any of the specified net worth or listing criteria under Phase I or Phase II remain outside mandatory Ind AS applicability. Such companies may, however, choose to voluntarily adopt Ind AS, subject to conditions, since voluntary adoption is permitted under the rules for entities not otherwise mandatorily covered.

7. Voluntary Adoption of Ind AS

Companies not meeting the mandatory thresholds may voluntarily adopt Ind AS for accounting periods beginning on or after 1 April 2015, with comparatives for the preceding year. Once a company opts for voluntary adoption and prepares financial statements as per Ind AS, such adoption becomes irrevocable — the company cannot revert to the earlier Accounting Standards (AS) framework in subsequent years. This irrevocability ensures consistency and comparability of financial statements over time, preventing companies from switching back and forth between frameworks opportunistically. Voluntary adoption is often chosen by companies anticipating future listing, group reporting alignment, or improved investor perception.

8. Applicability to Holding, Subsidiary, Associate, and Joint Venture Companies

Once a company falls under the mandatory Ind AS criteria in Phase I or Phase II, all its holding, subsidiary, associate, and joint venture companies are also required to adopt Ind AS from the same date, irrespective of whether they individually meet the net worth or listing thresholds. This “group-wide” applicability ensures uniformity in accounting frameworks across the corporate group, facilitating consistent consolidation and comparability of financial statements. It prevents a situation where a parent company reports under Ind AS while its subsidiaries continue under the earlier AS framework, which would otherwise complicate consolidated financial reporting significantly.

Management Notes

Benefits and Limitations of Accounting Standards

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Benefits of Accounting Standards

Accounting Standards are the ruling authority in the world of accounting. It makes sure that the information provided to potential investors is not misleading in any way. Let us take a look at the benefits of AS.

Improves Reliability of Financial Statements

There are many stakeholders of a company and they rely on the financial statements for their information. Many of these stakeholders base their decisions on the data provided by these financial statements. Then there are also potential investors who make their investment decisions based on such financial statements.

So, it is essential these statements present a true and fair picture of the financial situation of the company. The Accounting Standards (AS) ensure this. They make sure the statements are reliable and trustworthy.

Attains Uniformity in Accounting

Accounting Standards provides rules for standard treatment and recording of transactions. They even have a standard format for financial statements. These are steps in achieving uniformity in accounting methods.

Prevents Frauds and Accounting Manipulations

Accounting Standards (AS) lay down the accounting principles and methodologies that all entities must follow. One outcome of this is that the management of an entity cannot manipulate with financial data. Following these standards is not optional, it is compulsory.

As described above, there is a set format of the financial statement no one can manipulate or commit fraud in the whole accounting process. Therefore, the accounting standard has already reduced the chances of manipulation and fraud and made the accounting system more effective and reliable.

So, these standards make it difficult for the management to misrepresent any financial information. It even makes it harder for them to commit any frauds.

Comparability

This is another major objective of accounting standards. Since all entities of the country follow the same set of standards their financial accounts become comparable to some extent. The users of the financial statements can analyze and compare the financial performances of various companies before taking any decisions.

Also, two statements of the same company from different years can be compared. This will show the growth curve of the company to the users.

Assists Auditors

Now the accounting standards lay down all the accounting policies, rules, regulations, etc in a written format. These policies have to be followed. So if an auditor checks that the policies have been correctly followed he can be assured that the financial statements are true and fair.

Determining Managerial Accountability

The accounting standards help measure the performance of the management of an entity. It can help measure the management’s ability to increase profitability, maintain the solvency of the firm, and other such important financial duties of the management.

Management also must wisely choose their accounting policies. Constant changes in the accounting policies lead to confusion for the user of these financial statements. Also, the principle of consistency and comparability are lost.

Disadvantages of Accounting Standards

Compromise the standard: Sometimes, the accounting standard is compromised due to lobbying or government pressure. This is because the government or powerful authority wants to give advantages only to the big powerful companies. Therefore, standards are compromised and cannot be relied on.

Rigid or inflexible: The policies are already made and have to be followed by the entity at any cost; thus, making the financial statement is rigid no one can change it according to their convenience. The format is already set, which has to be followed. Thus, it lacks flexibility.

Cost is high for maintenance: The cost is high for maintaining the books of account according to the format set by the accounting standard. The detailed paperwork and the use of standard equipment also increase the cost of maintaining books of accounts.

Time-consuming process: The whole process of following accounting standards takes time as every note and schedule according to the format must be produced by the user and has to go through a lengthy, time-consuming process.

Scope is restricted: Accounting standard has to be framed according to the rules set presently in the nation. They cannot override the statute. Thus, the scope for providing policies gets restricted.

Difficulty in choosing the alternative: There are many methods to record the transaction in the books of account; thus, it becomes difficult to choose which method to adopt and what not to. And also, sometimes, due to restrictions on the method of choice, the entity has to forgo its best convenient method and adopt the secondary method of recording transactions.

Management Notes

Need for Convergence Towards Global Standards

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The convergence of accounting standards refers to the goal of establishing a single set of accounting standards that will be used internationally. Convergence in some form has been taking place for several decades, and efforts today include projects that aim to reduce the differences between accounting standards.

Convergence is driven by several factors, including the belief that having a single set of accounting requirements would increase the comparability of different entities’ accounting numbers, which will contribute to the flow of international investment and benefit a variety of stakeholders. Criticisms of convergence include its cost and pace, and the idea that the link between convergence and comparability may not be strong.

Need for Convergence

  • To make the financial statements reliable, comparable & transparent.
  • To ensure a general understanding of best accounting practices.
  • To standardize financial accounting & reporting across the globe.
  • To eliminate information barriers for users of financial statements.
  • To promote foreign Investment & spur Industrial growth.

Benefits of Convergence

Beneficial to Investors

Convergence is a boon for investors who wish to invest in foreign markets or economies. It makes it much easier for them to study and compare the financial statements of foreign companies. Since the financial statements are made using the same set of standards it is also easier for the investors to understand and analyze them.

Beneficial to the Economy

If the accounting standards are converged it will promote international business and increase the influx of capital into the country. This will help India’s economy grow and expand. International investing will also mean more capital for domestic companies as well.

Beneficial to the Industry

With globally accepted standards the industry can also surge ahead. So convergence is important for the industry as well. It will allow the industry to lower the cost of foreign capital. If companies are not burned by adopting two different sets of standards it will allow them easier entry into the market.

Cost Saving

Firstly it will exempt companies from maintaining separate accounting books according to separate standards. This will save a lot of work hours and money for the finance department. And also planning and executing auditing will also become easier.

It will be especially helpful for those companies that have subsidiaries in many countries. And the cost of capital will also reduce since capital would be more accessible and easily available.

More Transparency

Convergence will benefit the users of the financial statements as well. It will make it easier for them to understand the financial statements. And this will generate better transparency and raise the confidence of the investors to invest funds.

Challenges

Changes in Indian regulation: Current regulations governing the financial regulation would need a complete overhaul to implement the IFRS standards. The Companies Act 1956, SEBI act 1992, IT Act 1962 etc. will have to be amended to bring them in line with IFRS regulations. These legal hurdles is a major constraint in the path of IFRS convergence.

Training & Awareness: Many do not know the IFRS standards & lack of knowledge & awareness makes it a difficult task of implementation. Finance professionals will have to be adequately trained and then the standards can be implemented consistently and uniformly in right spirit.

Fair Value system of measurement: The IFRS considers the fair value system of asset measurement and the Indian GAAP recognizes historical system. This divergence of system would create volatility and subjectivity in financial statements. This would lead to different results for performance & earnings of the Company.

Small & Medium businesses: The SME sector in India is comparatively larger than other Countries. The cost of convergence far outweigh the advantages of convergence for these small businesses. The dearth of resource and skills in financial knowledge adds up to the problem of implementation in this sector. In addition, SME’s cannot be ignored, considering the role they play in the Indian economy.

IT systems: Financial accounting software and tools used for reporting would have to be completely changed resulting in substantial investment in IT infrastructure for Indian Companies. Indian companies are habitually reluctant when any proposal involves cost, time & effort.

Management Notes

Process of Formulation of Accounting Standards in India

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Procedure for Issuing an Accounting Standard

Broadly, the following procedure is adopted for formulating Accounting Standards:

(i) The ASB determines the broad areas in which Accounting Standards need to be formulated and the priority in regard to the selection thereof.

(ii) In the preparation of Accounting Standards, the ASB will be assisted by Study Groups constituted to consider specific subjects.

(iii) The draft of the proposed standard will normally include the following:

  • Objective of the Standard,
  • Scope of the Standard,
  • Definitions of the terms used in the Standard,
  • Recognition and measurement principles, wherever applicable,
  • Presentation and disclosure requirements.

(iv) The ASB will consider the preliminary draft prepared by the Study Group and if any revision of the draft is required on the basis of deliberations, the ASB will make the same.

(v) The Exposure Draft of the proposed Standard will be issued for comments by the members of the Institute and the public. The Exposure Draft will specifically be sent to specified bodies (as listed above), stock exchanges, and other interest groups, as appropriate.

(vi) After taking into consideration the comments received, the draft of the proposed Standard will be finalised by the ASB and submitted to the Council of the ICAI.

(vii) The Council of the ICAI will consider the final draft of the proposed Standard, and if found necessary, modify the same in consultation with the ASB. The Accounting Standard on the relevant subject will then be issued by the ICAI.

(viii) For a substantive revision of an Accounting Standard, the procedure followed for formulation of a new Accounting Standard, as detailed above, will be followed.

(ix) Subsequent to issuance of an Accounting Standard, some aspect(s) may require revision which are not substantive in nature. For this purpose, the ICAI may make limited revision to an Accounting Standard. The procedure followed for the limited revision will substantially be the same as that to be followed for formulation of an Accounting Standard, ensuring that sufficient opportunity is given to various interest groups and general public to react to the proposal for limited revision.

Compliance with the Accounting Standards:

While discharging their attest functions, it will be duty of the members of the Institute to ensure that the Accounting Standards are implemented in the presentation of financial statements covered by their audit reports.

In the event of any deviation from the Standards, it will also be their duty to make adequate disclosures in their reports so that the users of such statements may be aware of such deviations.

In the initial years, the Standards will be recommendatory in character and the Institute will give wide publicity among the users and educate members about the utility of Accounting Standards and the need for compliance with the above disclosure requirements. Once an awareness about these requirements Is ensured, steps will be taken, in course of time, to enforce compliance with the accounting standards.

The adoption of Accounting Standards in our country and disclosure of the extent to which they have not been observed will, over the years, have an important effect, with consequential improvement in the quality of presentation of financial statements.

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