AS 1 to AS 10

AS 2 mandates that inventories should be valued at the lower of cost and net realizable value (NRV). This principle ensures that inventories are not carried at an amount in excess of their expected future economic benefits.

• Cost: Includes all costs of purchase, costs of conversion, and other costs incurred in bringing the inventories to their present location and condition.
• Net Realizable Value (NRV): Is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.
  Example: A company has inventory with a cost of ₹100 per unit. Due to market changes, the estimated selling price is ₹90, and estimated selling expenses are ₹5.
  NRV = ₹90 - ₹5 = ₹85.
  Since NRV (₹85) is lower than cost (₹100), the inventory should be valued at ₹85 per unit.

Materiality is a pervasive qualitative characteristic of financial statements and significantly influences the application and disclosure requirements across various Accounting Standards. Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements.

• AS 1 (Disclosure of Accounting Policies): Requires disclosure of significant accounting policies. Policies for immaterial items might not need detailed disclosure, or a simplified policy might suffice. The choice of accounting policies for material items is crucial.
• AS 4 (Contingencies and Events Occurring After the Balance Sheet Date): Non-adjusting events occurring after the balance sheet date are disclosed only if they are material. If an event is not material, no disclosure is required.
• AS 5 (Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies): Prior period items and changes in accounting policies are disclosed separately only if they are material. Immaterial errors or changes in estimates might be absorbed into current period results without separate disclosure.
• General Impact: Materiality guides the level of detail in financial statements. It prevents information overload by ensuring that only information relevant to users' decision-making is presented. While accounting standards provide specific rules, the principle of materiality allows for practical judgment in their application, ensuring that financial statements are both relevant and understandable.

AS 5 deals with net profit or loss for the period, prior period items, and changes in accounting policies.

• Prior Period Items: These are income or expense arising in the current period as a result of errors or omissions in the preparation of the financial statements of one or more prior periods. They are not expected to recur frequently.
  • Example: A significant error in calculating depreciation for the previous year, discovered in the current year.
• Change in Accounting Estimate: This is an adjustment of the carrying amount of an asset or liability, or the amount of the periodic consumption of an asset, resulting from the assessment of the present status of, and expected future benefits and obligations associated with, assets and liabilities. Changes in accounting estimates result from new information or new developments and, accordingly, are not corrections of errors.
  • Example: Changing the estimated useful life of an asset based on a reassessment of its physical condition or technological obsolescence.
    Difference: Prior period items correct errors from past periods, while changes in accounting estimates are prospective adjustments based on new information without implying an error in the past.
    Presentation of Prior Period Items: Prior period items should be disclosed in the statement of profit and loss separately from the current period's profit or loss, after 'Profit/Loss from ordinary activities'. Their nature and amount should be separately disclosed.

Prior period items are income or expenses which arise in the current period as a result of errors or omissions in the preparation of the financial statements of one or more prior periods. AS 5 requires that the nature and amount of prior period items be separately disclosed in the statement of profit and loss in a manner that their impact on the current profit or loss can be perceived.

AS 9 specifies the conditions for revenue recognition arising from the sale of goods. Revenue should be recognized when all the following conditions are met:

1. Transfer of Significant Risks and Rewards: The seller has transferred to the buyer the significant risks and rewards of ownership of the goods. This is usually accompanied by the transfer of legal title or possession.
2. No Continuing Managerial Involvement or Control: The seller retains no effective control over the goods to a degree usually associated with ownership, nor does the seller retain continuing managerial involvement to the extent that it effectively precludes the buyer from exercising full control over the goods.
3. Measurable Revenue: The amount of revenue can be reliably measured.
4. Probable Economic Benefits: It is probable that the economic benefits associated with the transaction will flow to the enterprise.
5. Measurable Costs: The costs incurred or to be incurred in respect of the transaction can be reliably measured.
   If any of these conditions are not met, revenue recognition should be deferred.

AS 1 requires that all significant accounting policies adopted in the preparation and presentation of financial statements should be disclosed. Such disclosure should form part of the financial statements, and any change in policy that has a material effect must be disclosed along with the financial impact.

AS 1 identifies three fundamental accounting assumptions: Going Concern, Consistency, and Accrual.

• Going Concern: Assumes the enterprise will continue in operation for the foreseeable future.
• Consistency: Assumes accounting policies are consistent from one period to another.
• Accrual: Assumes revenues and costs are accrued, i.e., recognized as they are earned or incurred, not as cash is received or paid.
  If these assumptions are followed, no specific disclosure is required. However, if any of these fundamental accounting assumptions are not followed, the fact should be disclosed, along with the reasons. For example, if an entity is no longer a going concern, this must be explicitly stated.

AS 3 classifies cash flows into three main categories:

• Operating Activities: Principal revenue-generating activities of the enterprise and other activities that are not investing or financing activities.
  • Examples: Cash receipts from sale of goods, cash payments to suppliers for raw materials, cash payments to employees, cash receipts/payments of income tax (unless specifically identified with investing/financing).
• Investing Activities: Acquisition and disposal of long-term assets and other investments not included in cash equivalents.
  • Examples: Cash payments to acquire Property, Plant & Equipment (PPE), cash receipts from sale of PPE, cash payments to acquire shares/debt instruments of other entities, cash receipts from sale of such instruments.
• Financing Activities: Activities that result in changes in the size and composition of the owner's capital and borrowings of the enterprise.
  • Examples: Cash proceeds from issuing shares, cash payments for share buybacks, cash proceeds from issuing debentures/loans, cash repayments of debentures/loans, cash payments of dividends.

AS 2 mandates that inventories should be valued at the lower of cost and net realizable value (NRV). Cost comprises all costs of purchase, costs of conversion, and other costs incurred in bringing the inventories to their present location and condition. Cost formulas like FIFO or Weighted Average should be used.

An item of PPE is recognized as an asset if it is probable that future economic benefits associated with the item will flow to the enterprise and the cost of the item can be measured reliably. It should be initially measured at cost.

Under AS 3, cash flows during the period must be classified as operating, investing, and financing activities. Operating activities are the principal revenue-producing activities. Investing activities relate to the acquisition and disposal of long-term assets. Financing activities result in changes in the size and composition of the owners' capital and borrowings.

AS 7 prescribes the accounting treatment for construction contracts. The 'percentage of completion method' is used when the outcome of a construction contract can be estimated reliably.

• Method: Under this method, contract revenue and contract costs associated with the construction contract are recognized as revenue and expenses respectively by reference to the stage of completion of the contract activity at the reporting date. This allows for the recognition of profit or loss attributable to the proportion of work completed.
• Stage of Completion: This is often determined by:
  • The proportion that contract costs incurred for work performed to date bear to the estimated total contract costs.
  • Surveys of work performed.
  • Completion of a physical proportion of the contract work.
• Appropriateness: The percentage of completion method is considered appropriate when the outcome of a construction contract can be estimated reliably. This reliability typically requires:
  • Total contract revenue can be measured reliably.
  • It is probable that the economic benefits associated with the contract will flow to the enterprise.
  • Both the contract costs to complete the contract and the stage of contract completion at the end of the reporting period can be measured reliably.
  • The contract costs attributable to the contract can be clearly identified and measured reliably.
    If the outcome cannot be estimated reliably, the 'cost recovery method' (recognize revenue only to the extent of costs incurred that are probable of recovery) is used.

AS 10 deals with Property, Plant and Equipment.

• Initial Recognition: An item of PPE should be recognized as an asset if, and only if:
  1. It is probable that future economic benefits associated with the item will flow to the enterprise.
  2. The cost of the item can be measured reliably.
     The cost of an item of PPE comprises:
  • Its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates.
  • Any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management (e.g., site preparation, initial delivery and handling, installation and assembly, professional fees).
  • The initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, for which an enterprise incurs an obligation either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period.
• Subsequent Expenditures: Subsequent expenditures related to an item of PPE that has already been recognized should be added to the carrying amount of the asset when it is probable that future economic benefits, in excess of the originally assessed standard of performance of the existing asset, will flow to the enterprise. Examples include modifications that extend the asset's useful life, increase its capacity, or improve its quality of output. All other subsequent expenditures (e.g., for repairs and maintenance) should be recognized as an expense in the statement of profit and loss in the period in which they are incurred.

AS 4 deals with events occurring after the balance sheet date, which are those significant events, both favourable and unfavourable, that occur between the balance sheet date and the date on which the financial statements are approved by the Board of Directors.

• Adjusting Events: These are events that provide further evidence of conditions that existed at the balance sheet date. The financial statements must be adjusted to reflect these events.
  • Example: The settlement of a court case after the balance sheet date that confirms an obligation which existed at the balance sheet date. If the amount of the obligation was previously estimated, the estimate should be adjusted.
• Non-Adjusting Events: These are events that are indicative of conditions that arose after the balance sheet date. The financial statements are not adjusted for these events. However, if they are material, their nature and an estimate of their financial effect (or a statement that such an estimate cannot be made) should be disclosed in the notes to accounts.
  • Example: The destruction of a major production plant by fire after the balance sheet date. This event arose after the balance sheet date, so the assets are not written down in the balance sheet, but the event should be disclosed.

Accounting Standard (AS) 6, 'Depreciation Accounting', has been withdrawn by the Institute of Chartered Accountants of India (ICAI) with effect from April 1, 2016. Its principles and requirements have been subsumed and integrated into the revised Accounting Standard (AS) 10, 'Property, Plant and Equipment'.
Under the revised AS 10:

• Depreciable Amount: The depreciable amount of an asset should be allocated on a systematic basis over its useful life.
• Useful Life: The useful life of an asset is defined as either the period over which an asset is expected to be available for use by an enterprise, or the number of production or similar units expected to be obtained from the asset by an enterprise.
• Depreciation Methods: A variety of depreciation methods can be used to allocate the depreciable amount of an asset on a systematic basis over its useful life. These include the straight-line method, the diminishing balance method, and the unit of production method. The method used should reflect the pattern in which the asset's future economic benefits are expected to be consumed by the enterprise.
• Review: The residual value and the useful life of an asset should be reviewed at least at each financial year-end and, if expectations differ from previous estimates, the change(s) should be accounted for as a change in an accounting estimate in accordance with AS 5.
  In essence, all aspects of depreciation accounting previously covered by AS 6 are now part of AS 10, ensuring a comprehensive treatment of PPE.