SOURCES OF ACCOUNTING REGULATIONS

2. SOURCES OF ACCOUNTING REGULATIONS • Companies Legislation : Companies Act 1956(Companies Amendment Act 2002) • Stock Exchange Listing Requirement (SEBI Amendment Act 2002) • Accounting Standards

3. Arthur Anderson PWC KPMG Ernest & Young Enron, WorldCom, Global Crossing, Dynegy, Merck TYCO, Satyam XEROX AOL AUDITORS HALL OF SHAME

4. INDIAN GAAP • Consists of a set of various pronouncements issued by different regulatory authorities • Predominantly controlled by the ICAI

5. ACCOUNTING STANDARDS NEEDS • To harmonise the diverse accounting policies and practices • To achieve uniformity in the presentation of financial statements

6. ACCOUNTING STANDARD BOARD • To formulate Accounting Standards • To propagate the AS & persuade the concerned parties to adopt • To issue guidance notes on AS & give clarification • To periodically review the AS

7. SCOPE & STATUS • ASs do not override the Law • Initial years: ASs are recommendatory • 29 Standards are now mandatory, • 3 - Recommended

8. PROCEDURE • ASB decides a broad area to be standardised • Formation of study group • Preparation of preliminary draft • ASB issues Exposure Draft • AS is issued under the authority of ICAI

9. STANDARDcontains • A statement of concepts & principles relevant to the standard • Explanation of terms to be used in Standards • Presentation & disclosure requirements relevant thereto • Date from which the Standard is proposed to be effective

10. IASB • Apr, 2001: IASB replaced IASC(1973) • IASC issued a total of 68 Exposure Drafts & 41 IAS(1973 to 2001) • IASB publishes its standards called IFRS (International Financial Reporting Standards)

11. IFRS IFRS 1:First-time adoption of International Financial Reporting Standards 2:Share-based Payments 3:Business Combinations 4:Insurance Contracts 5:Non-current Assets Held for Sale & Discontinued Operations 6:Exploration for & Evaluation of Mineral Assets 7:Financial Instruments : Disclosure 8: Operating Segments

12. ASB & IASB • Achievements • Failures

13. IASB • EU & Australia: Adopted IFRS from 2005 • Canada: To replace its GAAP with IFRS from 2011 • China & Japan: Undertaken convergence projects with IASB • US: FASB & IASB to eliminate differences

14. USA • FASB • SEC • SOX Act - 2002

15. Sarbanes Oxly Act, 2002 • Public Company Accounting Oversight Board (PCAOB) established • to oversee audits of public companies that are subject to US security laws • to establish auditing, quality control, ethics, independence and other standards relating to the preparation of audit reports • 3 of the 5 PCAOB members cannot be and must not be CPA.

16. Sarbanes Oxly Act, 2002 • PCAOB requires the CEO and CFO of each issuer to certify in each periodic report to the SEC • appropriateness of the financial statements and disclosures • that they fairly present, in all material respects, the operational and financial condition of an issuer.

17. Sarbanes Oxly Act, 2002 • PCAOB requires the SEC to conduct a study of off-balance sheet transactions and use of spend-purpose-entities and reports to Congress its recommendations. • Section 404: Increases Corporate management’s responsibility for assessing its effectiveness of internal control over financial reporting. • Regulatory focus of SOX on auditors and corporate management.

18. Corporate Governance: INDIA • Naresh Chandra Committee formed immediately upon SOX for amendment of Companies Act. • Followed by Narayan Murthy Committee • Based on Narayan Murthy Committee’s recommendation • Revised Clause 49 issued on 29th October, 2004 effective 1.4.2005

19. Corporate Governance • Mandatory Provision - Audit Committee • Comprising of at least 3 directors and two-third being independent directors. • All members shall be financially literate (ability to read financial statements) and at least one member shall have accounting or related financial management expertise (experience in the area or professional qualification).

20. CorporateGovernance • At least 4 meetings a year and not more than 4 months shall elapse between 2 meetings. • Audit Committee to mandatorily review : • M. D. & A. (Management Discussion & Analysis) of financial conditions and results • Statement of significant related party transactions • Management letters / letters of internal control weaknesses issued by statutory auditors. • Internal audit reports relating to internal control weaknesses • Appointment, removal, terms of remuneration of Chief Internal Auditors.

21. ACCOUNTING STANDARDS

22. AS-1: DISCLOSURE OF ACCOUNTING POLICIES PURPOSE • To promote better understanding • To facilitate meaningful comparison WHY AS-1 • Considerable variations exist • P/L & state of affairs can be significantly affected by AP

23. FUNDAMENTAL ACCOUNTING ASSUMPTIONS • Going concern • Consistency • Accrual

24. ACCOUNTING POLICIES • Specific accounting principles and methods in the preparation & presentation of Fin. Sts. • No single list of AP which is applicable to all circumstances

25. AREAS HAVING DIFFERENT APs • Methods of depreciation, depletion & amortisation • Treatment of expenditure during construction • Translation of foreign currency items • Valuation of Inventories • Treatment of Goodwill • Valuation of Investment • Treatment of retirement benefits • Recognition of profit on long-term contracts • Valuation of FA • Treatment of Contingent liabilities No exhaustive list of APs

26. CONSIDERATIONS IN THE SELECTION OF APs • Primary consideration: Fin. Sts. Should represent true and fair view of the state of affairs • Other considerations: Prudence Substance over form Materiality

27. AS-1 • 24. All significant accounting policies adopted in the preparation and presentation of Financial Statement should be disclosed. • 25. The Disclosure of significant APs should form part of the Financial Statements and should be disclosed in one place.

28. 26. • Any change in the APs which has a material effect should be disclosed. • The amount by which any item in the Financial Statement is affected by such change should be disclosed. • Where such amount is notascertainable wholly or in part, the fact should be disclosed

29. 27. • If the fundamental accounting assumptions (i.e.,3) are followed- Specific disclosure is not required. • If not followed- The fact should be disclosed.

30. AS- 2 RevisedMandatory: 01.04.1999 VALUATION OF INVENTORIES OBJECTIVE: Determination of the value at which inventories are carried in the Financial Statement

31. Inventories are assets • Held for sale in the ordinary course of business. • In the process of production for such sale, or • In the form of materials or supplies to be consumed in the production process or in the rendering of services.

32. Inventories encompass: • Goods purchased and held for resale • Computer software held for resale • Land and other property held for resale • Finished goods, Work-in-progress, Materials, Maintenance Supplies, Consumables & Loose tools. Inventories do not include • Machinery spares

33. AS 2 will not apply to: • WIP under construction contracts • WIP of service provider • Shares, debentures and other financial instruments • Producer inventories of live stock, agricultural and forest products and mineral oils, ores and gases

34. MEASUREMENT OF INVENTORIES Inventories should be valued at the lower of cost and net realisable value COST The cost of inventories should comprise (1) Cost of purchase (2) Cost of conversion (3) Other cost incured in bringing the inventories to there present location and condition Exclusion from the cost of inventory: Abnormal amounts, Storage cost, administrative overhead, selling & distribution overhead

35. COST FORMULA (1)Specific identification of cost Items not ordinarily interchangeable Goods & Services for specific projects (2) FIFO or Weighted Average cost TECHNIQUES FOR MEASUREMENT OF COST (1)Standard Cost (2) Retail Method

36. NET REALISABLE VALUE (Estimated selling price less Estimated cost of completion) • Damaged • Wholly or partially obsolete • Selling prices have declined • Increase in estimated cost of completion

37. CASH FLOW STATEMENTAS 3 Revised Objective: Shows the historical changes in cash and cash equivalents during the period from operating, investing & financing activities. • Cash • C.E. • Activities

38. Benefits • Shows the ability to generate cash & cash equivalent • Shows the need to utilise these cash flows • Helps to assess liquidity & solvency • Indicate the amount, timing & certainty of future cash flows • Shows relationship between profit & net cash flows • Useful in checking accuracy of past assessment

39. Cash Flow Statement Cash flow from operating activities ------------ Cash flow from investing activities ------------ Cash flow from financing activities ------------ _______________________________________________ Net cash increase (decrease) in cash & cash eq. ------------ Cash &cash eq. at the beginning of the period ------------ _______________________________________________ Cash & cash eq. at the end of the Period ------------

40. AS-4: CONTINGENCIES AND EVENTS OCCURING AFTER THE BALANCE SHEET DATE Deals with: • Contingencies • Events occurring after the Balance Sheet date

41. AS-4 does not apply: • Liabilities of life assurance and general insurance • Obligation under retirement benefit plans • Commitments arising from long-term lease contracts

42. Contingencies refers to- • Existing conditions or situation. • Result of which is not known on the balance sheet date. • Result of which would be known only happening or non-happening of certain events in future. • Result may be either gain or loss.

43. Examples of Contingencies: • Collectibility of recoverable/debtors • Litigation, claims and assessments for recovery of assets.

44. Events after Balance Sheet date: • Events which occur between the balance sheet date and date on which financial statements are approved by competent authority. • The events are significant event and may be favourable and unfavourable.

45. DISCLOSURE • If material contingent loss is not provided for, its nature and an estimate of financial effect should be disclosed by way of note. • If estimate of financial effect can not be made, the fact should be disclosed.

46. AS 5-Net profit or loss for the period, prior period items & change in accounting policies OBJECTIVE: • To prescribe the criteria for certain items in the P&L a/c to enhance comparability • To suggest the accounting treatment & presentations of the items not relating to the period. • To deal with the change in accounting policy, accounting estimates & extraordinary items

47. COMPONENTS OF NET PROFIT • P&L from ordinary activities • Extraordinary items To be disclosed on the face of statement of P&L account

48. DISCLOSE SEPARATELY : If Relevant • Write down of inventory to NRV or reversal of such write down • Restructuring cost • Profit or loss on disposal of F.A. • Profit or loss on disposal of long term investment • Litigation settlements • Reversal of provisions

49. EXTRAORDINARY ITEMS • Clearly distinct from ordinary activities • Not occurring frequently or regularly • Nature and amount : Disclosed separately in P&L account

50. PRIOR PERIOD ITEM • Incomes or expenses arising in current period as a result of error or omission in the preparation of Financial Statements of one or more prior periods • Nature and amount : Disclosed separately in P&L • Ex. Salary A/C Dr. Prior period expense (Salary) Dr. To Bank A/C Note: Payment of prior period expense by court order