Tag: Business Organization

Recognition and identifying performance obligation

An entity should assess the goods or services promised in a contract and identify as a performance obligation each promise to transfer either:

• Good or service or
• A series of distinct goods or service that are similar and have the same pattern of transfer

Contract with the customer can include promises that are implied by an entity’s business practice apart from those explicitly stated in the contract. Performance obligation does not include activities undertaken an entity to execute the contract which does not result in a transfer of goods or services.

Distinct Goods or Services

Goods or services that are promised to a customer are distinct if both the conditions are met:

Distinct goods or services include the following:

Sale of goods produced by an entity

• Resale of goods produced by an entity
• Performing a contractually agreed-upon task
• Resale of rights to goods or services purchased by an entity
• Constructing, manufacturing or developing an asset on behalf of a customer etc

Goods or services (not distinct) can be combined with other goods or services and in some cases, an entity might account for all the goods or services in a contract as a single performance obligation.

Satisfaction of Performance Obligation

Revenue should be recognised when (or as) the entity satisfies a performance obligation by transferring a promised goods or services to a customer (customer obtains control). For each performance obligation, an entity should determine the following:

Goods and services are assets even when they are received and used momentarily. Control over an asset is the ability to direct the use of and obtain substantially all of the remaining benefits from the asset. To evaluate whether the customer has the control over an asset, the entity should consider any agreement or repurchase the asset.

 Measuring progress of satisfaction: Revenue Recognition

Each per performance obligation satisfied over time, revenue should be recognised by measuring the progress of complete satisfaction at the end of every reporting period. An entity should use the single method consistently for such measurement.

Two types of methods used are input method and output method which an entity should consider based on the nature of the goods or services. Following points to be noted:

• When applying method, excluding goods or services for which control is not transferred.
• Update the measure of progress to reflect any changes in the performance obligation outcome.
• Recognise revenue only if the entity can reasonably measure its progress, if not recognise only the cost incurred.

Measurement

An entity shall recognise the amount of allocated transaction price as revenue once a performance obligation is satisfied. Transaction price which can be fixed or variable amount is determined based on the terms of contract and entity’s customary practice.

a) Variable Consideration

If the consideration includes a variable amount, an entity should estimate the amount of consideration to which it will be entitled in exchange for transferring the promised goods or services to a customer. Estimation can be done using any of the two methods being:

The expected Value: The sum of probability-weighted amounts in a range of possible consideration

The Most Likely Amount: Single most likely outcome of the contract

b) Constraining estimates of Variable Consideration

In assessing the uncertainty related to variable consideration, an entity should consider both the likelihood and the magnitude of revenue reversal. Following are the factors that indicate the high probability of revenue reversal related to the amount of consideration:

• High susceptibility to factors outside entity’s control
• Uncertainty exists and it’s expected to resolve for a long time
• Entity’s experience has limited predictive value
• Has a large range of possible consideration amounts etc.

c) The existence of a significant financing component

In determining the transaction price, an entity should adjust the promised amount of consideration for the time value of money if significant financing components exist.

In assessing if a contract contains a significant financing component; an entity should consider the relevant facts including both of the following:

• Difference between the amount of promised consideration and the cash selling price of the goods or services.
• The combined effect of the prevailing interest rate in the market and expected length of time between when the transfer of goods or services and the time when the customer makes the payment.

d) Non-Cash Consideration

When customer promises to pay consideration other than in cash form, an entity should measure it at fair value. If fair value cannot be reasonably measured, then entity should measure the consideration indirectly by reference to the stand-alone selling price of the goods or service in exchange for consideration.

e) Consideration payable to Customer

Consideration payable to the customer includes cash amounts, credits or other items (voucher or coupon) and entity account it as a reduction of transaction price (revenue). An entity should recognise the reduction of revenue when (or as) either of the following events occurs:

• Recognises revenue for the transfer of related goods or service to the customer
• Pays or promises to pay the consideration

Allocation of Transaction Price to Performance Obligation

Entity should allocate the transaction price to each performance obligation identified in a contract on a relative stand-alone selling price basis (It is the price at which an entity would sell a promised good or service separately to a customer). If this price is directly not available, it should be estimated using methods such as:

The adjusted market assessment approach

• Expected cost plus margin approach
• Residual approach
• Contract Cost

Incremental cost of obtaining a contract with a customer – Entity should recognise as an asset if the entity expects to recover those costs. These are expenses which an entity would not have incurred if the contract had not been obtained (eg. sales commission)

Cost to fulfil a contract: Entity should recognise an asset from the cost incurred to fulfil a contract if those costs:

• Relate directly to a contract that an entity can specifically identify
• Generate or enhance resources of the entity used in satisfying the performance obligation in future.
• Is expected to recover

Objective To prescribe accounting for: i. Provision ii. Contingent liabilities iii. Contingent Assets iv. Provision for restructuring cost III. Scope This standard shall may be used all entities in accounting for: i. Provisions ii. Contingent liabilities iii. Contingent Assets. Except for those covered by specific other standards like

1. Ind AS -12 Income Taxes
2. Ind AS 116-Leases
3. IndAS -19 Employee Benefits
4. IndAS -104 Insurance Contracts
5. IndAS-103 Business Combinations
6. Revenue from contracts with customers –Ind AS 115
7. Ind AS-19 Financial Instruments

Factors affecting Measurement of Provisions

1. Measured at Best Estimate of the expenditure required to settle the present legal or constructive obligation as a result of past obligating event.
2. Management should really incorporate all available information in their estimates and they must not forget about
3. Risks and uncertainties
4. Time value of money

Some probable future events

Obligating event

• A present obligation (legal or constructive) has arisen as a result of a past event (the obligating event),
• Payment is probable (‘more likely than not’), and
• The amount can be estimated reliably.

An obligating event is an event that creates a legal or constructive obligation and, therefore, results in an entity having no realistic alternative but to settle the obligation.

A constructive obligation arises if past practice creates a valid expectation on the part of a third party, for example, a retail store that has a long-standing policy of allowing customers to return merchandise within, say, a 30-day period.

A possible obligation (a contingent liability) is disclosed but not accrued. However, disclosure is not required if payment is remote.

In rare cases, for example in a lawsuit, it may not be clear whether an entity has a present obligation. In those cases, a past event is deemed to give rise to a present obligation if, taking account of all available evidence, it is more likely than not that a present obligation exists at the balance sheet date. A provision should be recognised for that present obligation if the other recognition criteria described above are met. If it is more likely than not that no present obligation exists, the entity should disclose a contingent liability, unless the possibility of an outflow of resources is remote.

Legal obligation

Legal Obligation is also referred to as the legal duty. Legal Obligation is generated through the contract or law. Also, it requires an individual to conform their actions to a specific standard.

A provision is recognised as contamination occurs for any legal obligations of clean up, or for constructive obligations if the company’s published policy is to clean up even if there is no legal requirement to do so (past event is the contamination and public expectation created by the company’s policy).

Constructive obligation

A provision is a liability of uncertain timing or amount. The liability may be a legal obligation or a constructive obligation. A constructive obligation arises from the entity’s actions, through which it has indicated to others that it will accept certain responsibilities, and as a result has created an expectation that it will discharge those responsibilities. Examples of provisions may include: warranty obligations; legal or constructive obligations to clean up contaminated land or restore facilities; and obligations caused by a retailer’s policy to make refunds to customers.

An entity recognises a provision if it is probable that an outflow of cash or other economic resources will be required to settle the provision. If an outflow is not probable, the item is treated as a contingent liability.

A provision is measured at the amount that the entity would rationally pay to settle the obligation at the end of the reporting period or to transfer it to a third party at that time. Risks and uncertainties are taken into account in measuring a provision. A provision is discounted to its present value.

Contingent Liability

No need to recognize it. Whereas, the entity should disclose in the financial statements.

A contingent Liability is

1. Possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity.
2. A present obligation that arises from past events but is not recognized because:
3. it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation.
4. the amount of the obligation cannot be measured with sufficient reliability.

Contingent Asset

No need to recognize it. Whereas, the entity should disclose in the financial statements.

Contingent Asset is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of entity.

Provisions

A provision is a liability of uncertain timing or amount. The liability may be a legal obligation or a constructive obligation. A constructive obligation arises from the entity’s actions, through which it has indicated to others that it will accept certain responsibilities, and as a result has created an expectation that it will discharge those responsibilities. Examples of provisions may include: warranty obligations; legal or constructive obligations to clean up contaminated land or restore facilities; and obligations caused by a retailer’s policy to make refunds to customers.

An entity recognises a provision if it is probable that an outflow of cash or other economic resources will be required to settle the provision. If an outflow is not probable, the item is treated as a contingent liability.

A provision is measured at the amount that the entity would rationally pay to settle the obligation at the end of the reporting period or to transfer it to a third party at that time. Risks and uncertainties are taken into account in measuring a provision. A provision is discounted to its present value.

IAS 37 elaborates on the application of the recognition and measurement requirements for three specific cases:

• Future operating losses; a provision cannot be recognised because there is no obligation at the end of the reporting period;
• An onerous contract gives rise to a provision; and
• A provision for restructuring costs is recognised only when the entity has a constructive obligation because the main features of the detailed restructuring plan have been announced to those affected by it.

Contingent Liabilities

Contingent liabilities are possible obligations whose existence will be confirmed by uncertain future events that are not wholly within the control of the entity. An example is litigation against the entity when it is uncertain whether the entity has committed an act of wrongdoing and when it is not probable that settlement will be needed.

Contingent liabilities also include obligations that are not recognised because their amount cannot be measured reliably or because settlement is not probable. Contingent liabilities do not include provisions for which it is certain that the entity has a present obligation that is more likely than not to lead to an outflow of cash or other economic resources, even though the amount or timing is uncertain.

A contingent liability is not recognised in the statement of financial position. However, unless the possibility of an outflow of economic resources is remote, a contingent liability is disclosed in the notes.

Contingent assets

Contingent assets are possible assets whose existence will be confirmed by the occurrence or non-occurrence of uncertain future events that are not wholly within the control of the entity. Contingent assets are not recognised, but they are disclosed when it is more likely than not that an inflow of benefits will occur. However, when the inflow of benefits is virtually certain an asset is recognised in the statement of financial position, because that asset is no longer considered to be contingent.

The Objective of Ind AS 36 is to ensure that assets are carried at not more than at recoverable value. The standard also specifies when an entity should reverse an impairment loss and provide disclosures while preparing and presenting the financial statements.

This standard shall not apply to:

• Inventories
• Contracts that are recognized in accordance with Ind AS 115
• Deferred Tax Assets
• Financial Assets
• Non Current Assets classified for sale in accordance with Ind AS 105
• Biological Assets related to agricultural activity
• Assets arising from the employee benefits.

Therefore, IAS 36 applies to (among other assets):

• Land
• Buildings
• Machinery and equipment
• Investment property carried at cost
• Intangible assets
• Goodwill
• Investments in subsidiaries, associates, and joint ventures carried at cost
• Assets carried at revalued amounts under IAS 16 and IAS 38

Impairment loss

Impairment Loss = Recoverable Value – Carrying Amount

Recoverable amount of an asset is less than it carrying amount, the carrying amount of the asset shall be reduced to its recoverable amount. That reduction is an impairment loss.

If recoverable amount is more than carrying amount of an asset, then no impairment loss will be recognized. Recoverable amount shall be higher of the following:

• Fair Value less cost of disposal
• Value in use

Fair Value less cost of disposal

Costs of disposal are deducted while determining the fair value less cost of disposal. Examples of such costs are:

• Legal costs
• Stamp duty and similar taxes
• Costs of removing the assets
• Incremental costs for bringing the assets into the conditions for its sale
• Other costs

Value in use.

It shall be calculated on the following basis:

• Estimated Future Cash Flow
• Discount Rate

Indications of impairment [IAS 36.12]

External Sources:

• Market value declines
• Negative changes in technology, markets, economy, or laws
• Increases in market interest rates
• Net assets of the company higher than market capitalisation

Internal Sources:

• Obsolescence or physical damage
• Asset is idle, part of a restructuring or held for disposal
• Worse economic performance than expected
• For investments in subsidiaries, joint ventures or associates, the carrying amount is higher than the carrying amount of the investee’s assets, or a dividend exceeds the total comprehensive income of the investee.

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.

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.

“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.

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.

Phase I

Mandatory applicability of IND AS to all companies from 1st April 2016, provided: 

• It is a listed or unlisted company
• Its Net worth is greater than or equal to Rs. 500 crore*

*Net worth shall be checked for the previous three Financial Years (2013-14, 2014-15, and 2015-16). 

Phase II

Mandatory applicability of IND AS to all companies from 1st April 2017, provided:

• It is a listed company or is in the process of being listed (as on 31.03.2016)
• Its Net worth is greater than or equal to Rs. 250 crore but less than Rs. 500 crore (for any of the below mentioned periods).

Net worth shall be checked for the previous four Financial Years (2014-14, 2014-15, 2015-16, and 2016-17)

Phase III

Mandatory applicability of IND AS to all Banks, NBFCs, and Insurance companies from 1st April 2018, whose:

• Net worth is more than or equal to INR 500 crore with effect from 1st April 2018.

IRDA (Insurance Regulatory and Development Authority) of India shall notify the separate set of IND AS for Banks & Insurance Companies with effect from 1st April 2018. NBFCs include core investment companies, stock brokers, venture capitalists, etc. Net Worth shall be checked for the past 3 financial years (2015-16, 2016-17, and 2017-18)

Phase IV

All NBFCs whose Net worth is more than or equal to INR 250 crore but less than INR 500 crore shall have IND AS mandatorily applicable to them with effect from 1st April 2019.

Ind AS Compliances

1) Once the Ind AS becomes applicable, whether due to voluntary adoption or otherwise, the companies shall adhere to the compliances of Ind AS applicable to them. The financial statements under the Companies Act, 2013 are governed by Schedule III. There are 3 divisions in Schedule III:

• Division-I: Applicable to companies to whom accounting standards are applicable.
• Division-II: Applicable to companies to whom Ind AS compliance are applicable
• Division-III: Applicable to Non-Banking Financial Companies to whom Ind AS are applicable.

2) All the companies (excluding banks, NBFCs and insurance companies) preparing financial statements as per Ind AS shall do so in accordance with the Division-II of Schedule-III (also known as the Ind AS Schedule-III) as well as the Guidance Note on Division-II of Schedule-III of the Companies Act, 2013 (also known as Ind AS Guidance Note). In the case of NBFCs, Division-III shall become applicable.

However, companies referred to in Section 129(1) of the Companies Act, 2013 are not required to comply with the requirements of Ind AS Schedule III. This includes an insurance company, banking company, or company engaged in the generation or supply of electricity for which the form for presentation of financial statements has been specified under any other act that governs such class of companies.

However, in the case of companies engaged in the generation and supply of electricity, the Electricity Act, 2003 has not specified any format for the presentation of Financial Statements. Therefore, Ind AS Schedule-III can be followed by such companies till any other format is being prescribed by the relevant act.

3) The listed companies shall follow the guidelines issued by way of a circular by SEBI that prescribes the format for publishing quarterly, half-yearly, and annual financial results that are guided by the provisions of Ind AS and Ind AS Schedule-III. The companies may make suitable modifications.

4) The components of financial statements prepared in accordance with Ind AS compliance include:

• Balance Sheet
• Statement of Profit & Loss
• Statement of Cash Flows
• Statement of Changes in Equity
• Notes

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.