CHAPTER 28 ADVANCED ACCOUNTING BOOSTER BATCH BY CA P S BENIWAL SIR

CHAPTER 28 INTRODUCTION OF AS & IND AS AND FRAMEWORK

INTRODUCTION OF AS & IND AS
1. Accounting Standards: are written policy documents issued by expert accounting body or by
government or other regulatory body covering the aspects
 recognition,
 measurement,
 presentation and
 disclosure
of accounting transactions in the financial statements.
Accounting Standards are “Principle Based” and not ruled based.

Regulatory Framework of Accounting Standards in India

A) Company AS Rule 2021: Companies are classified into only two levels, viz., (i) Non-SMC
Companies and (ii) Small and Medium Companies, for brevity referred to as SMCs.
(i) Small and Medium Companies (SMC’s)
a) The equity or debt securities of the company are not listed or not in the process of listing
on any stock exchange, whether in India or outside India.
b) The company is not a bank or financial institution or insurance company.
c) The company’s turnover (excluding other income) does not exceed Rs. 250 crores in the
immediately preceding accounting year.
d) The company does not have borrowing (including public deposits) exceeding Rs. 50
crores at any time during the immediately preceding accounting year, and
e) The company is not a holding company or subsidiary of a non-SMC company.
(ii) Non- SMC’s:- Company other than SMC’s
B) Accounting Standard pronouncements by ICAI
Level I: Enterprise
(a) Entities whose securities are listed or are in the process of listing on any stock exchange,
whether in India or outside India.
(b) Banks (including co-operative banks), financial institutions or entities carrying on insurance
business.
(c) All entities engaged in commercial, industrial or business activities, whose turnover
(excluding other income) exceeds rupees Rs. 250 crore in the immediately preceding
accounting year.
(d) All entities engaged in commercial, industrial or business activities having borrowings
(including public deposits) in excess of Rs. 50 crore at any time during the immediately
preceding accounting year.
(e) Holding and subsidiary entities of any one of the above.
Level II : Enterprises
a) All entities engaged in commercial, industrial or business activities, whose turnover
(excluding other income) exceeds Rs. 50 crore but does not exceed Rs. 250 crore in the
immediately preceding accounting year.

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 INTRODUCTION OF AS & IND AS AND FRAMEWORK CHAPTER 28

b) All entities engaged in commercial, industrial or business activities having borrowings

(including public deposits) in excess of Rs. 10 crore but not in excess of Rs. 50 crore at any
time during the immediately preceding accounting year.
c) Holding and subsidiary entities of any one of the above.

Level III Entities:

(a) All entities engaged in commercial, industrial or business activities, whose turnover
(excluding other income) exceeds rupees 10 crore but does not exceed rupees 50 crore in
the immediately preceding accounting year.
(b) All entities engaged in commercial, industrial or business activities having borrowings
(including public deposits) in excess of rupees 2 crore but does not exceed rupees 10 crore
at any time during the immediately preceding accounting year.
(c) Holding and subsidiary entities of any one of the above.

Level IV: Enterprises: Other than Level I Enterprise, Level II Enterprise and Level III Enterprise.

Exemptions or Relaxations from Accounting Standards:

(i) For SMCs as defined in the Notification
Full Exemption (Not applicable on AS) 3,17
Partial Exemption on AS 15
Disclosure Exemption on AS 19,20,28,29
Applicable AS only when any transaction taken place or reporting is 21,23,27 and
required 25

(ii) For Level II, III and IV Entities

Particulars Level II Entities Level III Entities Level IV Entities
Full Exemption 3,17,20 3,17,18,20,24 3, 17, 18, 20, 24, 28
(Not applicable on AS)
Partial Exemption on AS 15 15 15, 22
Disclosure Exemption on AS 19,28,29 10,11,19,28,29 10,11,13,19,26,29
Applicable AS only when any 21,23,27 and 25 21,23,27 and 25 14, 21,23,27 and 25
transaction taken place or
reporting is required

2. Indian Accounting Standards are a set of accounting standards notified by the Ministry of
Corporate Affairs which are converged with International Financial Reporting Standards (IFRS)
(IND AS is notified by NACAS / NFRA on 25th Feb 2011.) (NFRA=National Financial Reporting
Authority U/s 132)
Current position / situation of applicability of Ind AS:
(1) IND AS shall be applicable on every Indian company or NBFC:
 whose net worth is 250 crores or more (in accordance with stand alone audited financial
statement of the company) as on the last day of immediately proceeding year; or
 Listed Company or in the process of listing.
(+) Holding company, subsidiary company, joint venture or associate of any company
covered above.
(2) Voluntary Adoption: Any Indian company (except banking companies, insurance companies,
or NBFCs) may voluntarily adopt IND AS.

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 CHAPTER 28 ADVANCED ACCOUNTING BOOSTER BATCH BY CA P S BENIWAL SIR

(3) There is no applicability of Ind AS on banking company or insurance company (even on

voluntary basis).
(4) Once IND AS is applicable on any company then it is mandatory for the company to follow
IND AS forever i.e. permanently.
(5) There is no concept of exemption or relaxation in case of IND AS.
(6) IND AS was applicable to mutual funds from 01/04/23
Note: The company on which IND AS are not applicable shall follow companies (Accounting
Standards) Rule, 2021 as amended from time to time.
FRAMEWORK FOR PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS
1. Qualitative characteristics of the financial statements (FS) which improve the usefulness of the
information furnished therein: The framework suggests that the financial statements (FS)
should observe and maintain the following qualitative characteristics as far as possible within
limits of reasonable cost/ benefit.
(1) Understandability: FS should present information in a manner as to be readily understandable by
the users with reasonable knowledge of business and economic activities.
(2) Relevance: Information, which is likely to influence the economic decisions by the users. is said
to be relevant. Such information may help the users to evaluate past, present or future events.
(3) Materiality: Information is material if its omission or misstatement could influence the economic
decisions of users taken on the basis of the financial statements.
(4) Reliability: To be useful, the information must be reliable; that is to say, they must be free from
material error and bias. The information provided are not likely to be reliable unless: Transactions
and events reported (a) are faithfully represented; (b) reported in terms of their substance and
economic reality not merely on the basis of their legal form; (c) neutral, i.e. free from bias; (d)
Prudence is exercised in reporting and (e) Completeness.
(5) Comparability: The financial statements should permit both inter-firm and intra-firm comparison.
One essential requirement of comparability is disclosure of financial effect of change in
accounting policies.
(6) True and Fair View: Financial statements are required to show a true and fair view of the
performance, financial position and cash flows of an enterprise.
2. Elements of Financial Statements. Items of financial statements can be classified in five broad
groups depending on their economic characteristics:
Asset: Resource controlled by the enterprise as a result of past events from which future
economic benefits are expected to flow to the enterprise.
Liability: Present obligation of the enterprise arising from past events, the settlement of which
is expected to result in an outflow of a resource embodying economic benefits.
Equity: Residual interest in the assets of an enterprise after deducting all its liabilities.
Income/gain: Increase in economic benefits during the accounting period in the form of inflows or
enhancement of assets or decreases in liabilities that result in increase in equity
other than those relating to contributions from equity participants
Expense/loss: Decrease in economic benefits during the accounting period in the form of outflows
or depletions of assets or incurrence of liabilities that result in decrease in equity other
than those relating to distributions to equity participants.
3. Measurement bases:
(1) Historical Cost: Historical cost means acquisition price.

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(2) Current Cost: It gives an alternative measurement basis. Assets/Liabilities are carried out at
the amount of cash or cash equivalent that would have to be paid if the same or an equivalent
asset was acquired/settle the obligation currently.
(3) Realisable (Settlement) Value: As per realisable value, assets are carried at the amount of
cash or cash equivalents that could currently be obtained by selling the assets in an orderly
disposal. Liabilities are carried at their settlement values; i.e. the undiscounted amount of
cash or cash equivalents paid to satisfy the liabilities in the normal course of business.
(4) Present Value: Under PV convention, assets/ Liabilities are carried at present value of future net
cash flows generated/expected to be required to settle by the concerned assets/liabilities
respectively in the normal course of business.
4. Users of financial statements: Investors, Potential investor, Employees, Lenders,
Supplies/Creditors, Customers, Government & Public etc.
5. Fundamental Accounting Assumptions:
(1) Going Concern: assumption means it is assumed that entity will continue its operation forever;
there is no necessity to liquidate its operation.
(2) Consistency: means accounting policy are forever and there is no necessity to change such
policy.
(3) Accrual assumption: Accrual means charging of income & expenditure on periodic basis.
Note: These assumptions should not disclose if followed. In case they are not being followed
these should be disclosed.
6. Components of financial statements: A complete set of financial statements normally consists of a
Balance Sheet, a Statement of Profit and Loss and a Cash Flow Statement together with notes,
statements and other explanatory materials that form integral parts of the financial statements.
A) Balance Sheet portrays value of economic resources controlled by an enterprise. It also
provides information about liquidity and solvency of an enterprise.
B) Statement of Profit and Loss presents the result of operations of an enterprise for an accounting
period, i.e., it depicts the performance of an enterprise, in particular its profitability.
C) Cash Flow Statement shows the way an enterprise has generated cash and the way they
have been used in an accounting period and helps in evaluating the investing, financing and
operating activities during the reporting period.
D) Notes and other statements present supplementary information explaining different items
of financial statements.
7. Capital maintenance: is a theoretical concept which tries to ensure that excessive dividends are
not paid to shareholders in times of changing prices. This concept can be classified as follows:
A. Physical capital maintenance (PCM): (Also known as Operating capital maintenance) It sets
aside profits in order to allow the business to continue to operate at current levels of activity. In
practice, this tends to mean adjusting opening capital by specific price changes hitting the
business, rather than general.
B. Financial capital maintenance (FCM): It sets aside profits in order to preserve the value of
shareholders’ funds in either
(i) At historical cost/Monetary terms: We can measure the increase in monetary terms; OR
(ii) Constant purchasing power (real financial capital): Inflation over time makes comparisons
difficult so constant purchasing power adjusts for general indices of inflation e.g. retail prices
index (RPI).

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 CHAPTER 28 ADVANCED ACCOUNTING BOOSTER BATCH BY CA P S BENIWAL SIR

PRACTICAL QUESTIONS
1. A company with a turnover of Rs. 225 crores and borrowings of Rs. 51 crore during the year ended 31st March, 2021,
wants to avail the exemptions available in adoption of Accounting Standards applicable to companies for the year ended
31.3. 2021. Advise the management on the exemptions that are available as per the Companies (Accounting Standards)
Rules, 2021.
Solution: The question deals with the issue of Applicability of Accounting Standards for corporate entities. The
companies can be classified under two categories viz SMCs and Non-SMCs under the Companies (Accounting
Standards) Rules, 2021. As per the Companies (Accounting Standards) Rules, 2021, criteria for above classification as
SMCs, are:
“Small and Medium Sized Company” (SMC) means, a company-
(i) whose equity or debt securities are not listed or are not in the process of listing on any stock exchange, whether in
India or outside India;
(ii) which is not a bank, financial institution or an insurance company;
(iii) whose turnover (excluding other income) does not exceed rupees two-fifty crores in the immediately preceding
accounting year;
(iv) which does not have borrowings (including public deposits) in excess of rupees fifty crores at any time during the
immediately preceding accounting year; and
(v) which is not a holding or subsidiary company of a company which is not a small and medium-sized company.
Since, XYZ Ltd.’s turnover was Rs. 225 crores which does not exceed Rs. 250 crores but borrowings of Rs. 51 crore are
more than Rs. 50 crores, it is not a small and medium sized company (SMC). The exemptions available to SMC are not
available to this company.

2. Balance sheet of a trader on 31st March, 20X1 is given below:

Liabilities ₹ Assets ₹
Capital 60,000 Property, Plant and Equipment 65,000
Profit and Loss Account 25,000 Stock 30,000
10% Loan 35,000 Trade receivables 20,000
Trade payables 10,000 Deferred costs 10,000
Bank 5,000
1,30,000 1,30,000
Additional information:
(a) The remaining life of Property, Plant and Equipment is 5 years. The pattern of use of the asset is even. The net
realisable value of Property, Plant and Equipment on 31.03.X2 was ₹ 60,000.
(b) The trader’s purchases and sales in 20X1-X2 amounted to ₹ 4 lakh and ₹ 4.5 lakh respectively.
(c) The cost and net realisable value of stock on 31.03.X2 were ₹ 32,000 and ₹ 40,000 respectively.
(d) Expenses (including interest on 10% Loan of ₹ 3,500 for the year) amounted to ₹ 14,900.
(e) Deferred cost is amortised equally over 4 years.
(f) Trade receivables on 31.03.X2 is ₹ 25,000, of which ₹ 2,000 is doubtful. Collection of another ₹ 4,000 depends
on successful re-installation of certain product supplied to the customer.
(g) Closing trade payable is ₹ 12,000, which is likely to be settled at 5% discount.
(h) Cash balance on 31.03.X2 is ₹ 37,100.
(i) There is an early repayment penalty for the loan ₹ 2,500.
You are required to prepare Profit and Loss Accounts and Balance Sheets of the trader in both cases (i) assuming
going concern (ii) not assuming going concern.
Solution: Profit and Loss Account for the year ended 31st March, 20X2
Case (i) Case (ii) Case (i) Case (ii)
To Opening Stock 30,000 30,000 By Sales 4,50,000 4,50,000
To Purchases 4,00,000 4,00,000 By Closing Stock 32,000 40,000
To Expenses 14,900 14,900 By Trade payables - 600
To Depreciation 13,000 5,000
To Provision for doubtful debts 2,000 6,000
To Deferred cost 2,500 10,000
To Loan penalty - 2,500
To Net Profit (b.f.) 19,600 22,200
4,82,000 4,90,600 4,82,000 4,90,600

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Balance Sheet as at 31st March, 20X2

Liabilities Case (i) Case (ii) Assets Case (i) Case (ii)
Capital 60,000 60,000 Property, Plant & Equipment 52,000 60,000
Profit & Loss A/c 44,600 47,200 Stock 32,000 40,000
10% Loan 35,000 37,500 Trade receivables (less
Trade payables 12,000 11,400 provision) 23,000 19,000
Deferred costs 7,500 Nil
Bank 37,100 37,100
1,51,600 1,56,100 1,51,600 1,56,100
3. Opening Balance Sheet of Mr. A is showing the aggregate value of assets, liabilities and equity Rs. 8 lakh, Rs. 3
lakh and Rs. 5 lakh respectively. During accounting period, Mr. A has the following transactions:
(1) Earned 10% dividend on 2,000 equity shares held of Rs. 100 each
(2) Paid Rs. 50,000 to creditors for settlement of Rs. 70,000
(3) Rent of the premises is outstanding Rs. 10,000
(4) Mr. A withdrew Rs. 9,000 for his personal use.
You are required to show the effect of above transactions on Balance Sheet in the form of Assets - Liabilities =
Equity after each transaction.
Solution: Effects of each transaction on Balance sheet of the trader is shown below:
Transactions Assets – Liabilities = Equity
Rs. lakh Rs. lakh Rs. lakh
Opening 8.00 – 3.00 = 5.00
(1) Dividend earned 8.20 – 3.00 = 5.20
(2) Settlement of Creditors 7.70 - 2.30 = 5.40
(3) Rent Outstanding 7.70 – 2.40 = 5.30
(4) Drawings 7.61 – 2.40 = 5.21

4. A trader commenced business on 01/01/20X1 with Rs. 12,000 represented by 6,000 units of a certain product at Rs. 2
per unit. During the year 20X1 he sold these units at Rs. 3 per unit and had withdrawn Rs. 6,000. Let us assume that the
price of the product at the end of year is Rs. 2.50 per unit. In other words, the specific price index applicable to the
product is 125. The average price indices at the beginning and at the end of year are 100 and 120 respectively.
You are required to compute the Capital maintenance under all three bases ie.
(i) Historical costs,
(ii) Current purchasing power and
(iii) Physical capital maintenance.
Solution: Financial Capital Maintenance at historical costs
Rs. Rs.
Closing capital (At historical cost) 12,000
Less: Capital to be maintained 12,000
Opening capital (At historical cost) Nil
Introduction (At historical cost) (12,000)
Retained profit Nil
Financial Capital Maintenance at current purchasing power
Rs. Rs.
Closing capital (At closing price) 12,000
Less: Capital to be maintained 14,400
Opening capital (At closing price) Nil
Introduction (At closing price) (14,400)
Retained profit/(loss) (2,400)
Physical Capital Maintenance
Rs. Rs.
Closing capital (At current cost) ( 4,800 units) 12,000
Less: Capital to be maintained
Opening capital (At current cost) (6,000 units) 15,000
Introduction (At current cost) Nil (15,000)
Loss resulting in non-maintenances of capital (3,000)

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