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  3. What are Notes to Accounts? • Notes to accounts are the explanation of the management about the items in the financial statements

  4. What are Accounting PoliciesSpecific accounting principles and the method applying those principles adopted by the enterprises in preparation and presentation of the financial statements

  5. Examples of Accounting Policies • Methods of deprecation • Valuation of inventories • Revenue recognition • Amortization

  6. Need for disclosure of Accounting policies • For proper and better understanding of financial statement. • All significant accounting policies should be disclosed at one place.

  7. Fundamental Accounting Assumptions • Going Concern • Consistency • Accrual Assumption as regards fundamental accounting assumption

  8. Selection of Accounting Policies • Prudence • Substance over form • Materiality

  9. Change in Accounting Policies • Adoption of different accounting policies is required by statute • For compliance with accounting standard • It is considered that change would result in more appropriate presentation of financial statement


  11. Objective The objective of this accounting standard prescribing the criteria for certain items in the profit and loss account so that comparability of the financial statement can be enhanced

  12. Components of net profit • Profit or loss from ordinary activities • Extra-ordinary items Ordinary activities are defined as any activities, which are undertaken by an enterprise as part of its business and incidental to main business

  13. Profit/loss from ordinary activities When items of income and expenditure from ordinary activities are of such size and nature that their disclosure is relevant to explain the performance of the enterprises for the period

  14. These items are not “Extra-ordinary items” • The write down of inventories • Restructuring cost or reversal of provision • Profit or loss on disposal of fixed assets

  15. These items are not “Extra-ordinary items” • Profit or loss on disposal of long-term investment • Litigation settlements • Reversal of provisions • Legislative charge having long-term retrospective application

  16. Extra-ordinary items Extraordinary items are income or expenses that arise from transactions that are clearly distinct from ordinary activities

  17. Example Extra-ordinary items • Loss due to earthquakes • Attachment of property • Govt. grants becoming refundable • Govt. grants for giving immediate financial support with no further cost

  18. Example Extra-ordinary items • Govt. grant receivable as compensation for expenses or losses incurred in previous accounting period.

  19. Prior Period Items Prior period items are income or expense, which arise in current period as a result of error or omission in the preparation of financial statement of one or more prior periods

  20. Disclosure of Prior Period Items Should be separately disclosed in the statement of profit loss in manner that their impact on current profit or loss an be perceived

  21. Examples of Prior Period Items • Error in calculation in providing expenditure or income • Omission to account for income or expenditure • Non-provision of travelling expenses

  22. Examples of Prior Period Items • Non-provision for salary • Applying incorrect rate of depreciation • Treating operating lease as finance lease • Capitalisation f borrowing cost on working capital

  23. Change in Accounting Estimate • Estimation of provision of sundry debtors • Estimation of provision of any liabilities • Computing income tax provision • Estimating the useful life of fixed assets

  24. Effect of Change in Accounting Estimate • If an estimate pertains to ordinary activities classified as ordinary activities • If estimates pertains to extraordinary items classified as extraordinary


  26. Depreciation is loss of value of an asset It is a measure of wearing out, consumption or other loss of value of depreciable asset arising from use and passes of time

  27. Depreciable Assets • Are expected to be used for more than one accounting period • Have a limited useful life • Are held for use in production of goods & services

  28. Applicability of AS • Except the followings: • Forests, Plantations • Wasting assets, Minerals & Natural Gas • Expenditure on research & development • Goodwill • Live Stock – Cattle, Animal husbandry

  29. Calculation of depreciation • Historical cost or other amount in place of historical cost • Estimate useful life of depreciable assets • Estimated residual/scrap value

  30. Cost of Depreciable Asset • Increase/decrease in long-term liability • Price adjustments • Changes in duties • Revaluation of depreciable assets • Other similar reasons

  31. Estimated useful life of Depreciable Asset • Pre-determined by legal or contractual limits • Depends upon the number of shifts for which the asset is to be used • Repair & maintenance policy • Other similar reasons

  32. Estimated useful life of Depreciable Asset • Technological obsolescence • Innovation/improvements • Legal or other restrictions

  33. Estimated residual /scrap value of depreciable asset It is estimated value of depreciable assets at the end of its useful life

  34. Depreciable amount Historical Cost Less Residual Value

  35. Method of Depreciation • Straight Line Method (SLM) • Written Down Value Method (WDVM)

  36. Selection of appropriate method • Type of assets • Nature of the use of such asset • Circumstances prevailing in the business • A combination of more than one method may be used

  37. Change in depreciation method • For compliance of statute • For compliance of accounting standards • For more appropriate presentation of the financial statement

  38. Procedure to be followed in case of change in depreciation method Change of depreciation method should be treated as change in accounting policy and its effect should be quantified and disclosed

  39. Change in estimated useful life Should be allocated over the revised remaining useful life of assets

  40. Change in historical cost Provided prospectively over the remaining useful life of the assets

  41. Change in historical cost due to revaluation Estimate of the remaining useful lives of the such assets

  42. Depreciation charge on addition/extension to an existing asset • Addition/extension is an integral part of existing asset • Remaining useful life of the asset

  43. Depreciation charge on addition/extension to an existing asset • Addition/extension is not an integral part of existing assets • Estimated useful life of • additional assets • Depreciable asset is disposed of, discarded, demolished or destroyed

  44. Disclosure • Total cost of each class of assets • Total depreciation • Accumulated depreciation • Depreciation method

  45. Disclosure • Depreciation rate, useful life of assets, if they are different than the rate specified in governing statute • A change in method of depreciation • Effect of the revaluation

  46. Significant differences with IAS/IFRS & US GAAP • AS-6 allows the depreciation on revalued value however, US GAAP prohibits revaluation. IAS-16 allows fair value accounting.

  47. Significant differences with IAS/IFRS & US GAAP • Change in depreciation method under AS-16 & US GAAP is treated as a change in accounting policy; whereas IAS-16, change in estimate.


  49. Fixed Assets • Held with intention of being used for the purpose of producing or providing goods and services • Not held for sale in the normal course of business • Expected to be used for more than one accounting period

  50. Applicability • Not applicable to :- • Forests, plantations and similar regenerative natural resources • Wasting assets like, minerals, oils & natural gas. • Expenditure on real estate development • Live stock