GROUP - I PAPER - 1 ACCOUNTING V1 APPENDIX I

APPENDIX - I Accounting Standards AS 1 : Disclosure of Accounting Policies∗ The following is the text of the Accounting Standard 1 (AS-1) issued by the Accounting Standards Board, the Institute of Chartered Accountants of India on “Disclosure of Accounting Policies”. The Standard deals with the disclosure of significant accounting policies followed in preparing and presenting financial statements. In the initial years, this accounting standard will be recommendatory in character. During this period, this standard is recommended for use by companies listed on a recognised stock exchange and other large commercial, industrial and business enterprises in the public and private sectors. Introduction 1. This statement deals with the disclosure of significant accounting policies followed in preparing presenting financial statements. 2. The view presented in the financial statements of an enterprise of its state of affairs and of the profit or loss can be significantly affected by the accounting policies followed in the preparation and presentation of the financial statements. The accounting policies followed vary from enterprise to enterprise. Disclosure of significant accounting policies followed is necessary if the view presented is to be properly appreciated. 3. The disclosure of some of accounting policies followed in the preparation and presentation of the financial statements is required by law in some cases. 4. The Institute of Chartered Accountants of India has, in Statements issued by it, recommended the disclosure of certain accounting policies, e.g., translation policies in respect of foreign currency items. 5. In recent years, a few enterprises in India have adopted the practice of including in their annual reports to shareholders a separate statement of accounting policies followed in preparing and presenting the financial statements. 6. In general, however, accounting policies are not at present regularly and fully disclosed in all financial statements. Many enterprises include in the Notes on the Accounts, descriptions of some of the significant accounting policies. But the nature and degree of disclosure vary considerably between the corporate and the non-corporate sectors and between units in the same sector. 7. Even among the few enterprises that presently include in their annual reports a separate statement of accounting policies, considerable variation exists. The statement of accounting policies form part of accounts in some cases while in others it is given as supplementary information. 8. The purpose of this statement is to promote better understanding of financial statements by establishing through an accounting standard the disclosure of significant accounting policies and the manner in which accounting policies are disclosed in the financial statements. Such disclosure would also facilitate a more meaningful comparison between financial statements of different enterprises. ∗ Issued in November, 1979 © The Institute of Chartered Accountants of India Appendix - I Explanation Fundamental Accounting Assumptions 9. Certain fundamental accounting assumptions underlie the preparation and presentation of financial statements. They are usually not specifically stated because their acceptance and use are assumed. Disclosure is necessary if they are not followed. 10. The following have been generally accepted as fundamental accounting assumptions : (a) Going Concern The enterprise is normally viewed as a going concern, that is as continuing in operation for the foreseeable future. It is assumed that the enterprise has neither the intention nor the necessity of liquidation or of curtailing materially the scale of the operations. (b) Consistency It is assumed that accounting policies are consistent from one period to another. (c) Accrual Revenues and costs are accrued, that is recognised as they are earned or incurred (and not as money is received or paid) and recorded in the financial statements of the periods to which they relate (The considerations affecting the process of matching costs with revenues under the accrual assumption are not dealt with in this statement). Nature of Accounting Policies 11. The accounting policies refer to the specific accounting principles and the methods of applying those principles adopted by the enterprise in the preparation and presentation of financial statements. 12. There is no single list of accounting policies which are applicable to all circumstances. The differing circumstances in which enterprises operate in a situation of diverse and complex economic activity make alternative accounting principles and methods of applying those principles acceptable. The choice of the appropriate accounting principles and the methods of applying those principles in the specific circumstances of each enterprise calls for considerable judgment by the management of the enterprise. 13. The various statements of the Institute of Chartered Accountants of India combined with the efforts of government and other regulatory agencies and progressive managements have reduced in recent years the number of acceptable alternatives particularly in the case of corporate enterprises. While continuing efforts in this regard in future are likely to reduce the number still further, the availability of alternative accounting principles and methods of applying those principles is not likely to be eliminated altogether in view of the differing circumstances faced by the enterprises. Areas in Which Differing Accounting Policies are Encountered 14. The following are examples of the areas in which different accounting policies may be adopted by different enterprises. (cid:190) Methods of depreciation, depletion and amortisation (cid:190) Treatment of expenditure during construction (cid:190) Conversion or translation of foreign currency items I-2 © The Institute of Chartered Accountants of India Accounting (cid:190) Valuation of inventories (cid:190) Treatment of goodwill (cid:190) Valuation of investments (cid:190) Treatment of retirement benefits (cid:190) Recognition of profit on long-term contracts (cid:190) Valuation of fixed assets (cid:190) Treatment of contingent liabilities 15. The above list of examples is not intended to be exhaustive. Considerations in the Selection of Accounting Policies 16. The primary consideration in the selection of Accounting Policies by an enterprise is that the financial statements prepared and presented on the basis of such accounting policies should represent a true and fair view of the state of affairs of the enterprise as at the Balance Sheet date and of the profit or loss for the period ended on that date. 17. For this purpose, the major considerations governing the selection and application of accounting policies are :— (a) Prudence In view of the uncertainty attached to future events, profits are not anticipated but recognised only when realised though not necessarily in cash. Provision is made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information. (b) Substance over Form The accounting treatment and presentation in financial statements of transactions and events should be governed by their substance and not merely by the legal form. (c) Materiality Financial statements should disclose all “material” items, i.e., items the knowledge of which might influence the decisions of the user of financial statements. Disclosure of Accounting Policies 18. To ensure proper understanding of financial statements, it is necessary that all significant accounting policies adopted in the preparation and presentation of financial statements should be disclosed. 19. Such disclosure should form part of the financial statements. 20. It would be helpful to the reader of financial statements if they are all disclosed as such in one place instead of being scattered over several statements, schedules and notes. 21. Examples of matters in respect of which disclosure of accounting policies adopted will be required are contained in paragraph 14. This list of examples is not, however, intended to be exhaustive. 22. Any change in an accounting policy which has a material effect should be disclosed. The amount by which any item in the financial statements is affected by such change should also be disclosed to the extent ascertainable. Where such amount is not ascertainable, wholly or in part, the fact should be indicated. If a change is made in the accounting policies which has no material effect on the financial I-3 © The Institute of Chartered Accountants of India Appendix - I statements for the current period but which is reasonably expected to have a material effect in later periods, the fact of such change should be appropriately disclosed in the period in which the change is adopted. 23. Disclosure of accounting policies or of changes therein cannot remedy a wrong or inappropriate treatment of the item in the accounts. Accounting Standard (The Accounting Standard comprises paragraphs 24-27 of this Statement. The Standard should be read in the context of paragraphs 1-23 of this Statement and of the Preface to the Statements of Accounting Standards.) 24. All significant accounting policies adopted in the preparation and presentation of financial statements should be disclosed. 25. The disclosure of the significant accounting policies as such should form part of the financial statements and the significant accounting policies should normally be disclosed in one place. 26. Any change in the accounting policies which has a material effect in the current period or which is reasonably expected to have a material effect in later periods should be disclosed. In the case of a change in accounting policies which has a material effect in the current period, the amount by which any item in the financial statements is affected by such change should also be disclosed to the extent ascertainable. Where such amount is not ascertainable, wholly or in part, the fact should be indicated. 27. If the fundamental accounting assumptions, viz. Going concern, Consistency and Accrual are followed in financial statements, specific disclosure is not required. If a fundamental accounting assumption is not followed, the fact should be disclosed. AS 2 (Revised) : Valuation Of Inventories The following is the text of the revised Accounting Standard (AS) 2, ‘Valuation of Inventories’, issued by the Council of the Institute of Chartered Accountants of India. This revised Standard supersedes Accounting Standard (AS) 2, ‘Valuation of Inventories’, issued in June, 1981. The revised standard comes into effect in respect of accounting periods commencing on or after 1.4.1999 and is mandatory in nature. Objective A primary issue in accounting for inventories is the determination of the value at which inventories are carried in the financial statements until the related revenues are recognised. This Statement deals with the determination of such value, including the ascertainment of cost of inventories and any write-down thereof to net realisable value. Scope 1. This Statement should be applied in accounting for inventories other than: (a) work in progress arising under construction contracts, including directly related service contracts (see Accounting Standard (AS) 7, Accounting for Construction1 Contracts); 1 This standard has been revised and titled as ‘Construction Contracts.’ I-4 © The Institute of Chartered Accountants of India Accounting (b) work in progress arising in the ordinary course of business of service providers; (c) shares, debentures and other financial instruments held as stock-in-trade; and (d) producers’ inventories of livestock, agricultural and forest products, and mineral oils, ores and gases to the extent that they are measured at net realisable value in accordance with well established practices in those industries. 2. The inventories referred to in paragraph 1 (d) are measured at net realisable value at certain stages of production. This occurs, for example, when agricultural crops have been harvested or mineral oils, ores and gases have been extracted and sale is assured under a forward contract or a government guarantee, or when a homogenous market exists and there is a negligible risk of failure to sell. These inventories are excluded from the scope of this Statement. Definitions 3. The following terms are used in this Statement with the meanings specified: Inventories are assets: (a) held for sale in the ordinary course of business; (b) in the process of production for such sale; or (c) in the form of materials or supplies to be consumed in the production process or in the rendering of services. Net realisable value 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. 4. Inventories encompass goods purchased and held for resale, for example, merchandise purchased by a retailer and held for resale, computer software held for resale, or land and other property held for resale. Inventories also encompass finished goods produced, or work in progress being produced, by the enterprise and include materials, maintenance supplies, consumables and loose tools awaiting use in the production process. Inventories do not include machinery spares which can be used only in connection with an item of fixed asset and whose use is expected to be irregular; such machinery spares are accounted for in accordance with Accounting Standard (AS) 10, Accounting for Fixed Assets.2 Measurement of Inventories 5. Inventories should be valued at the lower of cost and net realisable value. Cost of Inventories 6. The cost of inventories should comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Costs of Purchase 7. The costs of purchase consist of the purchase price including duties and taxes (other than those subsequently recoverable by the enterprise from the taxing authorities), freight inwards and other expenditure directly attributable to the acquisition. Trade discounts, rebates, duty drawbacks and other similar items are deducted in determining the costs of purchase. 2 Refer to Accounting Standards interpretation (ASI)2. I-5 © The Institute of Chartered Accountants of India Appendix - I Costs of Conversion 8. The costs of conversion of inventories include costs directly related to the units of production, such as direct labour. They also include a systematic allocation of fixed and variable production overheads that are incurred in converting materials into finished goods. Fixed production overheads are those indirect costs of production that remain relatively constant regardless of the volume of production, such as depreciation and maintenance of factory buildings and the cost of factory management and administration. Variable production overheads are those indirect costs of production that vary directly, or nearly directly, with the volume of production, such as indirect materials and indirect labour. 9. The allocation of fixed production overheads for the purpose of their inclusion in the costs of conversion is based on the normal capacity of the production facilities. Normal capacity is the production expected to be achieved on an average over a number of periods or seasons under normal circumstances, taking into account the loss of capacity resulting from planned maintenance. The actual level of production may be used if it approximates normal capacity. The amount of fixed production overheads allocated to each unit of production is not increased as a consequence of low production or idle plant. Unallocated overheads are recognised as an expense in the period in which they are incurred. In periods of abnormally high production, the amount of fixed production overheads allocated to each unit of production is decreased so that inventories are not measured above cost. Variable production overheads are assigned to each unit of production on the basis of the actual use of the production facilities. 10. A production process may result in more than one product being produced simultaneously. This is the case, for example, when joint products are produced or when there is a main product and a by-product. When the costs of conversion of each product are not separately identifiable, they are allocated between the products on a rational and consistent basis. The allocation may be based, for example, on the relative sales value of each product either at the stage in the production process when the products become separately identifiable, or at the completion of production. Most by-products as well as scrap or waste materials, by their nature, are immaterial. When this is the case, they are often measured at net realisable value and this value is deducted from the cost of the main product. As a result, the carrying amount of the main product is not materially different from its cost. Other Costs 11. Other costs are included in the cost of inventories only to the extent that they are incurred in bringing the inventories to their present location and condition. For example, it may be appropriate to include overheads other than production overheads or the costs of designing products for specific customers in the cost of inventories. 12. Interest and other borrowing costs are usually considered as not relating to bringing the inventories to their present location and condition and are, therefore, usually not included in the cost of inventories. Exclusions from the Cost of Inventories 13. In determining the cost of inventories in accordance with paragraph 6, it is appropriate to exclude certain costs and recognise them as expenses in the period in which they are incurred. Examples of such costs are: (a) abnormal amounts of wasted materials, labour, or other production costs; (b) storage costs, unless those costs are necessary in the production process prior to a further production stage; I-6 © The Institute of Chartered Accountants of India Accounting (c) administrative overheads that do not contribute to bringing the inventories to their present location and condition; and (d) selling and distribution costs. Cost Formulas 14. The cost of inventories of items that are not ordinarily interchangeable and goods or services produced and segregated for specific projects should be assigned by specific identification of their individual costs. 15. Specific identification of cost means that specific costs are attributed to identified items of inventory. This is an appropriate treatment for items that are segregated for a specific project, regardless of whether they have been purchased or produced. However, when there are large numbers of items of inventory which are ordinari ly interchangeable, specific identification of costs is inappropriate since, in such circumstances, an enterprise could obtain predetermined effects on the net profit or loss for the period by selecting a particular method of ascertaining the items that remain in inventories. 16. The cost of inventories, other than those dealt with in paragraph 14, should be assigned by using the first-in, first-out (FIFO), or weighted average cost formula. The formula used should reflect the fairest possible approximation to the cost incurred in bringing the items of inventory to their present location and condition. 17. A variety of cost formulas is used to determine the cost of inventories other than those for which specific identification of individual costs is appropriate. The formula used in determining the cost of an item of inventory needs to be selected with a view to providing the fairest possible approximation to the cost incurred in bringing the item to its present location and condition. The FIFO formula assumes that the items of inventory which were purchased or produced first are consumed or sold first, and consequently the items remaining in inventory at the end of the period are those most recently purchased or produced. Under the weighted average cost formula, the cost of each item is determined from the weighted average of the cost of similar items at the beginning of a period and the cost of similar items purchased or produced during the period. The average may be calculated on a periodic basis, or as each additional shipment is received, depending upon the circumstances of the enterprise. Techniques for the Measurement of Cost 18. Techniques for the measurement of the cost of inventories, such as the standard cost method or the retail method, may be used for convenience if the results approximate the actual cost. Standard costs take into account normal levels of consumption of materials and supplies, labour, efficiency and capacity utilisation. They are regularly reviewed and, if necessary, revised in the light of current conditions. 19. The retail method is often used in the retail trade for measuring inventories of large numbers of rapidly changing items that have similar margins and for which it is impracticable to use other costing methods. The cost of the inventory is determined by reducing from the sales value of the inventory the appropriate percentage gross margin. The percentage used takes into consideration inventory which has been marked down to below its original selling price. An average percentage for each retail department is often used. I-7 © The Institute of Chartered Accountants of India Appendix - I Net Realisable Value 20. The cost of inventories may not be recoverable if those inventories are damaged, if they have become wholly or partially obsolete, or if their selling prices have declined. The cost of inventories may also not be recoverable if the estimated costs of completion or the estimated costs necessary to make the sale have increased. The practice of writing down inventories below cost to net realisable value is con- sistent with the view that assets should not be carried in excess of amounts expected to be realised from their sale or use. 21. Inventories are usually written down to net realisable value on an item-by-item basis. In some circumstances, however, it may be appropriate to group similar or related items. This may be the case with items of inventory relating to the same product line that have similar purposes or end uses and are produced and marketed in the same geographical area and cannot be practicably evaluated separately from other items in that product line. It is not appropriate to write down inventories based on a classification of inventory, for example, finished goods, or all the inventories in a particular business segment. 22. Estimates of net realisable value are based on the most reliable evidence available at the time the estimates are made as to the amount the inventories are expected to realise. These estimates take into consideration fluctuations of price or cost directly relating to events occurring after the balance sheet date to the extent that such events confirm the conditions existing at the balance sheet date. 23. Estimates of net realisable value also take into consideration the purpose for which the inventory is held. For example, the net realisable value of the quantity of inventory held to satisfy firm sales or service contracts is based on the contract price. If the sales contracts are for less than the inventory quantities held, the net realisable value of the excess inventory is based on general selling prices. Contingent losses on firm sales contracts in excess of inventory quantities held and contingent losses on firm purchase contracts are dealt with in accordance with the principles enunciated in Accounting Standard (AS) 4, Contingencies and Events Occurring After the Balance Sheet Date∗. 24. Materials and other supplies held for use in the production of inventories are not written down below cost if the finished products in which they will be incorporated are expected to be sold at or above cost. However, when there has been a decline in the price of materials and it is estimated that the cost of the finished products will exceed net realisable value, the materials are written down to net realisable value. In such circumstances, the replacement cost of the materials may be the best available measure of their net realisable value. 25. An assessment is made of net realisable value as at each balance sheet date. Disclosure 26. The financial statements should disclose: (a) the accounting policies adopted in measuring inventories, including the cost formula used; and ∗ Pursuant to AS 29, Provisions, Contingent Liabilities and Contingent Assets, becoming mandatory in respect of accounting periods commencing on or after 1.4.2004, all paragraphs of AS 4 that deal with contingencies stand withdrawn except to the extent they deal with impairment of assets not covered by other Indian Accounting Standards I-8 © The Institute of Chartered Accountants of India Accounting (b) the total carrying amount of inventories and its classification appropriate to the enterprise. 27. Information about the carrying amounts held in different classifications of inventories and the extent of the changes in these assets is useful to financial statement users. Common classifications of inventories are raw materials and components, work in progress, finished goods, stores and spares, and loose tools. AS 3 (Revised 1997) Cash Flow Statements The following is the text of the revised Accounting Standard (AS 3), Cash Flow Statements, issued by the Council of the Institute of Chartered Accountants of India. This Standard supersedes Accounting Standard (AS 3), Changes In Financial Position, issued in June, 1981.This standard is mandatory in nature in respect of accounting periods commencing on or after 1-4-2004 for the enterprises which fall in any one or more of the following categories, at any time during the accounting period: (i) Enterprises whose equity or debt securities are listed whether in India or outside India. (ii) Enterprises which are in the process of listing their equity or debt securities as evidence by the board of directors’ resolution in this regard. (iii) Banks including co-operative banks. (iv) Financial institutions. (v) Enterprises carrying on insurance business. (vi) All commercial, industrial and business reporting enterprises, whose turnover for the immediately preceding accounting period on the basis of audited financial statements exceeds ` 50 crore. Turnover does not include ‘other income’. (vii) All commercial, industrial and business reporting enterprises having borrowings, including public deposits, in excess of ` 10 crore at any time during the accounting period. (viii) Holding and subsidiary enterprises of any one of the above at any time during the accounting period. The enterprises which do not fall in any of the above categories are encouraged, but are not required, to apply this Standard. Where an enterprise has been covered in any one or more of the above categories and subsequently, ceases to be so covered, the enterprise will not qualify for exemption from application of this Standard, until the enterprise ceases to be covered in any of the above categories for two consecutive years. Where an enterprise has previously qualified for exemption from application of this Standard (being not covered by any of the above categories) but no longer qualifies for exemption in the current accounting period, this Standard becomes applicable from the current period. However, the corresponding previous period figures need not be disclosed. An enterprise, which, pursuant to the above provisions, does not present a cash flow statement, should disclose the fact. I-9 © The Institute of Chartered Accountants of India Appendix - I The following is the text of the Accounting Standard. Objective Information about the cash flows of an enterprise is useful in providing users of financial statements with a basis to assess the ability of the enterprise to generate cash and cash equivalents and the needs of the enterprise to utilise those cash flows. The economic decisions that are taken by users require an evaluation of the ability of an enterprise to generate cash and cash equivalents and the timing and certainty of their generation. The Statement deals with the provision of information about the historical changes in cash and cash equivalents of an enterprise by means of a cash flow statement which classifies cash flows during the period from operating, investing and financing activities. Scope 1. An enterprise should prepare a cash flow statement and should present it for each period for which financial statements are presented. 2. Users of an enterprise’s financial statements are interested in how the enterprise generates and uses cash and cash equivalents. This is the case regardless of the nature of the enterprise’s activities and irrespective of whether cash can be viewed as the product of the enterprise, as may be the case with financial enterprise. Enterprises need cash for essentially the same reasons, however different their principal revenue-producing activities might be. They need cash to conduct their operations, to pay their obligations, and to provide returns to their investors. Benefits of Cash Flow Information 3. A cash flow statement, when used in conjunction with the other financial statements, provides information that enables users to evaluate the changes in net assets of an enterprise, its financial structure (including its liquidity and solvency), and its ability to affect the amounts and timing of cash flows in order to adapt to changing circumstances and opportunities. Cash flow information is useful in assessing the ability of the enterprise to generate cash and cash equivalents and enables users to develop models to assess and compare the present value of the future cash flows of different enterprises. It also enhances the comparability of the reporting of operating performance by different enterprises because it eliminates the effects of using different accounting treatments for the same transactions and events. 4. Historical cash flow information is often used as an indicator of the amount, timing and certainty of future cash flows. It is also useful in checking the accuracy of past assessments of future cash flows and in examining the relationship between profitability and net cash flow and the impact of changing prices. Definitions 5. The following terms are used in this Statement with the meanings specified : Cash comprises cash on hand and demand deposits with banks. Cash equivalents are short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value. I-10 © The Institute of Chartered Accountants of India Accounting Cash flows are inflows and outflows of cash and cash equivalents. Operating activities are the principal revenue-producing activities of the enterprise and other activities that are not investing or financing activities. Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents. Financing activities are activities that result in changes in the size and composition of the owners’ capital (including preference share capital in the case of a company) and borrowings of the enterprise.) Cash and Cash Equivalents 6. Cash equivalents are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes. For an investment to qualify as a cash equivalent, it must be readily convertible to a known amount of cash and be subject to an insignificant risk of changes in value. Therefore, an investment normally qualifies as a cash equivalent only when it has a short maturity of, say, three months or less from the date of acquisition. Investments in shares are excluded from cash equivalents unless they are, in substance, cash equivalents; for example, preference shares of a company acquired shortly before their specified redemption date (provided there is only an insignificant risk of failure of the company to repay the amount at maturity). 7. Cash flows exclude movements between items that constitute cash or cash equivalents because these components are part of the cash management of an enterprise rather than part of its operating, investing and financing activities. Cash management includes the investment of excess cash in cash equivalents. Presentation of a Cash Flow Statement 8. The cash flow statement should report cash flows during the period classified by operating, investing and financing activities. 9. An enterprise presents its cash flows from operating, investing and financing activities in a manner which is most appropriate to its business. Classification by activity provides information that allows users to assess the impact of those activities on the financial position of the enterprise and the amount of its cash and cash equivalents. This information may also be used to evaluate the relationships among those activities. 10. A single transaction may include cash flows that are classified differently. For example, when the instalment paid in respect of a fixed asset acquired on deferred payment basis includes both interest and loan, the interest element is classified under financing activities and the loan element is classified under investing activities. Operating Activities 11. The amount of cash flows arising from operating activities is a key indicator of the extent to which the operations of the enterprise have generated sufficient cash flows to maintain the operating capability of the enterprise, pay dividends, repay loans, and make new investments without recourse to external sources of financing. Information about the specific components of historical I-11 © The Institute of Chartered Accountants of India Appendix - I operating cash flows is useful, in conjunction with other information, in forecasting future operating cash flows. 12. Cash flows from operating activities are primarily derived from the principal revenue-producing activities of the enterprise. Therefore, they generally result from the transactions and other events that enter into the determination of net profit or loss. Examples of cash flows from operating activities are : (a) cash receipts from the sale of goods and the rendering of services; (b) cash receipts from royalties, fees, commissions, and other revenue; (c) cash payments to suppliers for goods and services; (d) cash payments to and on behalf of employees; (e) cash receipts and cash payments of an insurance enterprise for premiums and claims, annuities and other policy benefits; (f) cash payments or refunds of income taxes unless they can be specifically identified with financing and investing activities; and (g) cash receipts and payments relating to futures contracts, forward contracts, option contracts, and swap contracts when the contracts are held for dealing or trading purposes. 13. Some transactions, such as the sale of an item of plant, may give rise to a gain or loss which is included in the determination of net profit or loss. However, the cash flows relating to such transactions are cash flows from investing activities. 14. An enterprise may hold securities and loans for dealing or trading purposes, in which case they are similar to inventory acquired specifically for resale. Therefore, cash flows arising from the purchase and sale of dealing or trading securities are classified as operating activities. Similarly, cash advances and loans made by financial enterprises are usually classified as operating activities since they relate to the main revenue-producing activity of that enterprise. Investing Activities 15. The separate disclosure of cash flows arising from investing activities is important because the cash flows represent the extent to which expenditures have been made for resources intended to generate future income and cash flows. Examples of cash flows arising from investing activities are: (a) cash payments to acquire fixed assets (including intangibles). These payments include those relating to capitalised research and development costs and self-constructed fixed assets; (b) cash receipts from disposal of fixed assets (including intangibles); (c) cash payments to acquire shares, warrants, or debt instruments of other enterprises and interests in joint ventures (other than payments for those instruments considered to be cash equivalents and those held for dealing or trading purposes); (d) cash receipts from disposal of shares, warrants, or debt instruments of other enterprises and I-12 © The Institute of Chartered Accountants of India Accounting interests in joint ventures (other than receipts from those instruments considered to be cash equivalents and those held for dealing or trading purposes); (e) cash advances and loans made to third parties (other than advances and loans made by a financial enterprise); (f) cash receipts from the repayment of advances and loans made to third parties (other than advances and loans of a financial enterprise); (g) cash payments for futures contracts, forward contracts, option contracts, and swap contracts except when the contracts are held for dealing or trading purposes, or the payments are classified as financing activities; and (h) cash receipts from futures contracts, forward contracts, option contracts, and swap contracts except when the contracts are held for dealing or trading purposes, or the receipts are classified as financing activities. 16. When a contract is accounted for as a hedge of an identifiable position, the cash flows of the contract are classified in the same manner as the cash flows of the position being hedged. Financing Activities 17. The separate disclosure of cash flows arising from financing activities is important because it is useful in predicting claims on future cash flows by providers of funds (both capital and borrowings) to the enterprise. Examples of cash flows arising from financing activities are : (a) cash proceeds from issuing shares or other similar instruments; (b) cash proceeds from issuing debentures, loans, notes, bonds, and other short or long-term borrowings; and (c) cash repayments of amounts borrowed. Reporting Cash Flows from Operating Activities 18. An enterprise should report cash flows from operating activities using either : (a) the direct method, whereby major classes of gross cash receipts and gross cash payments are disclosed; or (b) the indirect method, whereby net profit or loss is adjusted for the effects of transactions of a non-cash nature, any deferrals or accruals of past or future operating cash receipts or payments, and items of income or expense associated with investing or financing cash flows. 19. The direct method provides information which may be useful in estimating future cash flows and which is not available under the indirect method and is, therefore, considered more appropriate than the indirect method. Under the direct method, information about major classes of gross cash receipts and gross cash payments may be obtained either : (a) from the accounting records of the enterprise; or (b) by adjusting sales, cost of sales (interest and similar income and interest expense and similar charges for a financial enterprise) and other items in the statement of profit and loss I-13 © The Institute of Chartered Accountants of India Appendix - I for: (i) changes during the period in inventories and operating receivables and payables; (ii) other non-cash items; and (iii) other items for which the cash effects are investing or financing cash flows. 20. Under the indirect method, the net cash flow from operating activities is determined by adjusting net profit or loss for the effects of : (a) changes during the period in inventories and operating receivables and payables; (b) non-cash items such as depreciation, provisions, deferred taxes, and unrealised foreign exchange gains and losses; and (c) all other items for which the cash effects are investing or financing cash flows. Alternatively, the net cash flow from operating activities may be presented under the indirect method by showing the operating revenues and expenses, excluding non-cash items disclosed in the statement of profit and loss and the changes during the period in inventories and operating receivables and payables. Reporting Cash Flows from Investing and Financing Activities 21. An enterprise should report separately major classes of gross cash receipts and gross cash payments arising from investing and financing activities, except to the extent that cash flows de- scribed in Paragraphs 22 and 24 are reported on a net basis. Reporting Cash Flows on a Net Basis 22. Cash flows arising from the following operating, investing or financing activities may be reported on a net basis : (a) cash receipts and payments on behalf of customers when the cash flows reflect the activities of the customer rather than those of the enterprise; and (b) cash receipts and payments for items in which the turnover is quick, the amounts are large, and the maturities are short. 23. Examples of cash receipts and payments referred to in Paragraph 22(a) are : (a) the acceptance and repayment of demand deposits by a bank; (b) funds held for customers by an investment enterprise; and (c) rents collected on behalf of, and paid over to, the owners of properties. Examples of cash receipts and payments referred to in Paragraph 22(b) are advances made for, and the repayments of : (a) principal amounts relating to credit card customers; (b) the purchase and sale of investments; and (c) other short-term borrowings, for example, those which have a maturity period of three months or less. I-14 © The Institute of Chartered Accountants of India Accounting 24. Cash flows arising from each of the following activities of a financial enterprise may be reported on a net basis : (a) cash receipts and payments for the acceptance and repayment of deposits with a fixed maturity date; (b) the placement of deposits with and withdrawal of deposits from other financial enterprises; and (c) cash advances and loans made to customers and the repayment of those advances and loans. Foreign Currency Cash Flows 25. Cash flows arising from transactions in a foreign currency should be recorded in an enterprise’s reporting currency by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the cash flow. A rate that approximates the actual rate may be used if the result is substantially the same as would arise if the rates at the dates of the cash flows were used. The effect of changes in exchange rates on cash and cash equivalents held in a foreign currency should be reported as a separate part of the reconciliation of the changes in cash and cash equivalents during the period. 26. Cash flows denominated in foreign currency are reported in a manner consistent with Accounting Standard (AS) 11, Accounting for the Effects of Changes in Foreign Exchange Rates∗. This permits the use of an exchange rate that approximates the actual rate. For example, a weighted average exchange rate for a period may be used for recording foreign currency transactions. 27. Unrealised gains and losses arising from changes in foreign exchange rates are not cash flows. However, the effect of exchange rate changes on cash and cash equivalents held or due in foreign currency is reported in the cash flow statement in order to reconcile cash and cash equivalents at the beginning and the end of the period. This amount is presented separately from cash flows from operating, investing and financing activities and includes the differences, if any, had those cash flows been reported at the end-of-period exchange rates. Extraordinary Items 28. The cash flows associated with extraordinary items should be classified as arising from operating, investing or financing activities as appropriate and separately disclosed. 29. The cash flows associated with extraordinary items are disclosed separately as arising from operating, investing or financing activities in the cash flow statement, to enable users to understand their nature and effect on the present and future cash flows of the enterprise. These disclosures are in addition to the separate disclosures of the nature and amount of extraordinary items required by Accounting Standard (AS) 5, Net Profit or loss for the Period, Prior Period Items, and Changes in Accounting Policies. ∗ This standard has been revised in 2003, and titled as ‘The Effects of Changes in Foreign Exchange Rates’. I-15 © The Institute of Chartered Accountants of India Appendix - I Interest and Dividends 30. Cash flows from interest and dividends received and paid should each be disclosed separately. Cash flows arising from interest paid and interest and dividends received in the case of a financial enterprise should be classified as cash flows arising from operating activities. In the case of other enterprises, cash flows arising from interest paid should be classified as cash flows from financing activities while interest and dividends received should be classified as cash flows from investing activities. Dividends paid should be classified as cash flows from financing activities. 31. The total amount of interest paid during the period is disclosed in the cash flow statement whether it has been recognised as an expense in the statement of profit and loss or capitalised in accordance with Accounting Standard (AS) 10, Accounting for Fixed Assets.∗ 32. Interest paid and interest and dividends received are usually classified as operating cash flows for a financial enterprise. However, there is no consensus on the classification of these cash flows for other enterprises. Some argue that interest paid and interest and dividends received may be classified as operating cash flows because they enter into the determination of net profit or loss. However, it is more appropriate that interest paid and interest and dividends received are classified as financing cash flows and investing cash flows respectively, because they are cost of obtaining financial resources or returns on investments. 33. Some argue that dividends paid may be classified as a component of cash flows from operating activities in order to assist users to determine the ability of an enterprise to pay dividends out of operating cash flows. However, it is considered more appropriate that dividends paid should be classified as cash flows from financing activities because they are cost of obtaining financial resources. Taxes on Income 34. Cash flows arising from taxes on income should be separately disclosed and should be classified as cash flows from operating activities unless they can be specifically identified with financing and investing activities. 35. Taxes on income arise on transactions that give rise to cash flows that are classified as operating, investing or financing activities in a cash flow statement. While tax expense may be readily identifiable with investing or financing activities, the related tax cash flows are often impracticable to identify and may arise in a different period from the cash flows of the underlying transactions. Therefore, taxes paid are usually classified as cash flows from operating activities. However, when it is practicable to identify the tax cash flow with an individual transaction that gives rise to cash flows that are classified as investing or financing activities, the tax cash flow is classified as an investing or financing activity as appropriate. When tax cash flows are allocated over more than one class of activity, the total amount of taxes paid is disclosed. Investments in Subsidiaries, Associates, and Joint Ventures ∗ Pursuant to the issuance of AS 16, Borrowing Costs, which came into effect in respect of accounting periods commencing on or after 1.4.2004, accounting for borrowing costs is governed by As 16 from that date. I-16 © The Institute of Chartered Accountants of India Accounting 36. When accounting for an investment in an associate or a subsidiary or a joint venture, an investor restricts its reporting in the cash flow statement to the cash flows between itself and the investee/joint venture, for example, cash flows relating to dividends and advances. Acquisitions and Disposals of Subsidiaries and Other Business Units 37. The aggregate cash flows arising from acquisitions and from disposals of subsidiaries or other business units should be presented separately and classified as investing activities. 38. An enterprise should disclose, in aggregate, in respect of both acquisition and disposal of subsidiaries or other business units during the period each of the following : (a) the total purchase or disposal consideration; and (b) the portion of the purchase or disposal consideration discharged by means of cash and cash equivalents. 39. The separate presentation of the cash flow effects of acquisitions and disposals of subsidiaries and other business units as single line items helps to distinguish those cash flows from other cash flows. The cash flow effects of disposals are not deducted from those of acquisitions. Non-Cash Transactions 40. Investing and financing transactions that do not require the use of cash or cash equivalents should be excluded from a cash flow statement. Such transactions should be disclosed elsewhere in the financial statements in a way that provides all the relevant information about these investing and financing activities. 41. Many investing and financing activities do not have a direct impact on current cash flows although they do affect the capital and asset structure of an enterprise. The exclusion of non-cash transactions from the cash flow statement is consistent with the objective of a cash flow statement as these items do not involve cash flows in the current period. Examples of non-cash transactions are : (a) the acquisition of assets by assuming directly related liabilities; (b) the acquisition of an enterprise by means of issue of shares; and (c) the conversion of debt to equity. Components of Cash and Cash Equivalents 42. An enterprise should disclose the components of cash and cash equivalents and should present a reconciliation of the amounts in its cash flow statement with the equivalent items reported in the balance sheet. 43. In view of the variety of cash management practices, an enterprise discloses the policy which it adopts in determining the composition of cash and cash equivalents. 44. The effect of any change in the policy for determining components of cash and cash equivalents is reported in accordance with Accounting Standard (AS) 5, Net Profit or Loss for the Period, Prior Period Items, and Changes in Accounting Policies. I-17 © The Institute of Chartered Accountants of India Appendix - I Other Disclosures 45. An enterprise should disclose, together with a commentary management, the amount of significant cash and cash equivalent balances held by the enterprise that are not available for use by it. 46. There are various circumstances in which cash and cash equivalent balances held by an enterprise are not available for use by it. Examples include cash and cash equivalent balances held by a branch of the enterprise that operates in a country where exchange controls or other legal restrictions apply as a result of which the balances are not available for use by the enterprise. 47. Additional information may be relevant to users in understanding the financial position and liquidity of an enterprise. Disclosure of this information, together with a commentary by man- agement, is encouraged and may include : (a) the amount of undrawn borrowing facilities that may be available for future operating activities and to settle capital commitments, indicating any restrictions on the use of these facilities; and (b) the aggregate amount of cash flows that represent increases in operating capacity separately from those cash flows that are required to maintain operating capacity. 48. The separate disclosure of cash flows that represent increases in operating capacity and cash flows that are required to maintain operating capacity is useful in enabling the user to determine whether the enterprise is investing adequately in the maintenance of its operating capacity. An enterprise that does not invest adequately in the maintenance of its operating capacity may be prejudicing future profitability for the sake of current liquidity and distributions to owners. Appendix I Cash flow statement for an enterprise other than a financial enterprise The appendix is illustrative only and does not form part of the accounting standard. The purpose of this appendix is to illustrate the application of the accounting standard. 1. The example shows only current period amounts. 2. Information from the statement of profit and loss and balance sheet is provided to show how the statements of cash flows under the direct method and the indirect method have been derived. Neither the statement of profit and loss nor the balance sheet is presented in conformity with the disclosure and presentation requirements of applicable laws and accounting standards. The working notes given towards the end of this appendix are intended to assist in understanding the manner in which the various figures appearing in the cash flow statement have been derived. These working notes do not form part of the cash flow statement and, accordingly, need not be published. 3. The following additional information is also relevant for the preparation of the statement of cash flows (figures are in ` ’000). (a) An amount of 250 was raised from the issue of share capital and a further 250 was raised from long-term borrowings. I-18 © The Institute of Chartered Accountants of India Accounting (b) Interest expense was 400 of which 170 was paid during the period. 100 relating to interest expense of the prior period was also paid during the period. (c) Dividends paid were 1,200. (d) Tax deducted at source on dividends received (included in the tax expense of 300 for the year) amounted to 40. (e) During the period, the enterprise acquired fixed assets for 350. The payment was made in cash. (f) Plant with original cost of 80 and accumulated depreciation of 60 was sold for 20. (g) Foreign exchange loss of 40 represents the reduction in the carrying amount of a short-term investment in foreign currency designated bonds arising out of a change in exchange rate between the date of acquisition of the investment and the balance sheet date. (h) Sundry debtors and sundry creditors include amounts relating to credit sales and credit purchases only. Balance Sheet as at 31-12-1996 (` ’000) 1996 1995 Assets Cash on hand and balances with banks 200 25 Short-term investments 670 135 Sundry debtors 1,700 1,200 Interest receivable 100 - Inventories 900 1,950 Long-term investments 2,500 2,500 Fixed assets at cost 2,180 1,910 Accumulated depreciation (1,450) (1,060) Fixed assets (net) 730 850 Total Assets 6,800 6,660 Liabilities Sundry creditors 150 1,890 Interest payable 230 100 Income taxes payable 400 1,000 Long-term debt 1,110 1,040 Total liabilities 1,890 4,030 Shareholders’ Funds Share capital 1,500 1,250 Reserves 3,410 1,380 Total shareholders funds 4,910 2,630 Total liabilities and Shareholders’ funds 6,800 6,660 I-19 © The Institute of Chartered Accountants of India Appendix - I Statement of Profit and Loss for the period ended 31-12-1996 (` ’000) Sales 30,650 Cost of sales (26,000) Gross profit 4,650 Depreciation (450) Administrative and selling expenses (910) Interest expense (400) Interest income 300 Dividend income 200 Foreign exchange loss (40) Net profit before taxation and extraordinary item 3,350 Extraordinary item - Insurance proceeds from earthquake disaster settlement 180 Net profit after extraordinary item 3,530 Income tax (300) Net Profit 3,230 Direct Method Cash Flow Statement [Paragraph 18(a)] (` ’000) 1996 Cash flows from operating activities Cash receipts from customers 30,150 Cash paid to suppliers and employees (27,600) Cash generated from operations 2,550 Income taxes paid (860) Cash flow before extraordinary item 1,690 Proceeds from earthquake disaster settlement 180 Net cash from operating activities 1,870 Cash flows from investing activities Purchase of fixed assets (350) Proceeds from sale of equipment 20 Interest received 200 Dividend received 160 30 Net cash from investing activities Cash flows from financing activities Proceeds from issuance of share capital 250 Proceeds from long-term borrowings 250 Repayments of long-term borrowings (180) I-20 © The Institute of Chartered Accountants of India Accounting Interest paid (270) Dividend paid (1,200) Net cash used in financing activities (1,150) Net increase in cash and cash equivalents 750 Cash and cash equivalents at beginning of period (See Note 1) 160 Cash and cash equivalents at end of the period (see Note 1) 910 Indirect Method Cash Flow Statement [Paragraph 18 (b)] (` ’000) 1996 Cash flows from operating activities Net profit before taxation, and extraordinary item 3,350 Adjustments for : Depreciation 450 Foreign exchange loss 40 Interest income (300) Dividend income (200) Interest expense 400 Operating profit before working capital changes 3,740 Increase in sundry debtors (500) Decrease in inventories 1,050 Decrease in sundry creditors (1,740) Cash generated from operations 2,550 Income taxes paid (860) Cash flow before extraordinary item 1,690 Proceeds from earthquake disaster settlement 180 Net cash from operating activities 1,870 Cash flows from investing activities Purchase of fixed assets (350) Proceeds from sale of equipment 20 Interest received 200 Dividends received 160 Net cash from investing activities 30 Cash flows from financing activities Proceeds from issuance of share capital 250 Proceeds from long-term borrowings 250 Repayment of long-term borrowings (180) Interest paid (270) Dividends paid (1,200) Net cash used in financing activities (1,150) I-21 © The Institute of Chartered Accountants of India Appendix - I Net increase in cash and cash equivalents 750 Cash and cash equivalents at beginning of period (See Note 1) 160 Cash and cash equivalents at end of period 910 (See note 1) Notes to the cash flow statement (direct method and indirect method) 1. Cash and Cash Equivalents Cash and cash equivalents consist of cash on hand and balances with banks, and investments in money-market instruments. Cash and cash equivalents included in the cash flow statement comprise the following balance sheet amounts. 1996 1995 Cash on hand and balances with banks 200 25 Short-term investments 670 135 Cash and cash equivalents 870 160 Effect of exchange rate changes 40 - Cash and cash equivalents as restated 910 160 Cash and cash equivalents at the end of the period include deposits with banks of 100 held by a branch which are not freely remissible to the company because of currency exchange restrictions. The company has undrawn borrowing facilities of 2,000 of which 700 may be used only for future expansion. 2. Total tax paid during the year (including tax deducted at source on dividends received) amounted to 900. Alternative Presentation (indirect method) As an alternative, in an indirect method cash flow statement, operating profit before working capital changes is sometimes presented as follows : Revenues excluding investment income 30,650 Operating expense excluding depreciation (26, 910) Operating profit before working capital changes 3,740 Working Notes The working notes given below do not form part of the cash flow statement and, accordingly need not be published. The purpose of these working notes is merely to assist in understanding the manner in which various figures in the cash flow statement have been derived. (Figures are in ` ’000) 1. Cash receipts from customers Sales 30,650 Add : Sundry debtors at the beginning of the year 1,200 I-22 © The Institute of Chartered Accountants of India Accounting 31,850 Less : Sundry debtors at the end of the year 1,700 30,150 2. Cash paid to suppliers and employees Cost of sales 26,000 Administrative and selling expenses 910 26,910 Add : Sundry creditors at the beginning of the year 1,890 Inventories at the end of the year 900 2,790 29,700 Less : Sundry creditors at the end of the year 150 Inventories at the beginning of the year 1,950 2,100 27,600 3. Income taxes paid (including tax deducted at source from dividends received) Income tax expense for the year (including tax deducted at source from dividends received) 300 Add : Income tax liability at the beginning of the year 1,000 1,300 Less : Income tax liability at the end of the year 400 900 Out of 900, tax deducted at source on dividends received (amounting to 40) is included in cash flows from investing activities and the balance of 860 is included in cash flows from operating activities (See Paragraph 34). 4. Repayment of long-term borrowings Long-term debt at the beginning of the year 1,040 Add : Long-term borrowings made during the year 250 1,290 Less : Long-term borrowings at the end of the year 1,110 180 5. Interest paid Interest expense for the year 400 Add : Interest payable at the beginning of the year 100 500 Less : Interest payable at the end of the year 230 270 I-23 © The Institute of Chartered Accountants of India Appendix - I Appendix II Cash Flow Statement for a Financial Enterprise The appendix is illustrative only and does not form part of the accounting standard. The purpose of this appendix is to illustrate the application of the accounting standard. 1. The example shows only current period amounts. 2. The example is presented using the direct method. (` ’000) 1996 Cash flows from operating activities Interest and commission receipts 28,447 Interest payments (23,463) Recoveries on loans previously written off 237 Cash payments to employees and suppliers (997) Operating profit before changes in operating assets 4,224 (Increase) decrease in operating assets : Short-term funds (650) Deposits held for regulatory or monetary control purposes234 Funds advanced to customers (288) Net increase in credit card receivables (360) Other short-term securities (120) Increase (decrease) in operating liabilities : Deposits from customers 600 Certificates of deposit (200) Net cash from operating activities before income tax 3,440 Income taxes paid (100) Net cash from operating activities 3,340 Cash flows from investing activities Dividends received 250 Interest received 300 Proceeds from sales of permanent investments 1,200 Purchase of permanent investments (600) Purchase of fixed assets (500) Net cash from investing activities 650 Cash flows from financing activities Issue of shares 1,800 Repayment of long-term borrowings (200) Net decrease in other borrowings (1,000) Dividends paid (400) Net cash from financing activities 200 I-24 © The Institute of Chartered Accountants of India Accounting Net increase in cash and cash equivalents 4,190 Cash and cash equivalents at beginning of period 4,650 Cash and cash equivalents at end of the period 8,840 AS 6 (Revised) : Depreciation Accounting Accounting Standard (AS) 6, ‘Depreciation Accounting’, was issued by the Institute in 1985. Subsequently, in the context of insertion of Schedule XIV in the Companies Act in 1988, the Institute brought out a Guidance Note on Accounting for Depreciation in Companies. The Guidance Note differed from AS-6 in respect of accounting treatment of (a) change in the method of depreciation, and (b) change in the rates of depreciation. Based on the recommendations of the Accounting Standards Board, the Council of the Institute at its 168th meeting held on May 26-29, 1994, decided to bring AS-6 in line with the Guidance Note in respect of the aforementioned matters. Accordingly, it was decided to modify paragraphs 11, 15, 22 and 24 and delete paragraph 19 of AS-6. Also, in the context of delinking of rates of depreciation under the Companies Act from those under the Income-tax Act/Rules by the Companies (Amendment) Act, 1988, the Council decided to suitably modify paragraph 13 of AS 6. From the date of AS 26 ‘Intangible Assets’ becoming mandatory for the concerned enterprises, the standard stands withdrawn in so far as it relates to the amortization(depreciation of intangible assets). The complete text of the revised AS-6, which incorporates the above changes, is given below. Introduction 1. This Statement deals with depreciation accounting and applies to all depreciable assets, except the following items to which special considerations apply: (i) forests, plantations and similar regenerative natural resources; (ii) wasting assets including expenditure on the exploration for and extraction of minerals, oils, natural gas and similar non-regenerative resources; (iii) expenditure on research and development; (iv) goodwill; (v) live stock. This statement also does not apply to land unless it has a limited useful life for the enterprise. 2. Different accounting policies for depreciation are adopted by different enterprises. Disclosure of accounting policies for depreciation followed by an enterprise is necessary to appreciate the view presented in the financial statements of the enterprise. Definitions 3. The following terms are used in this statement with the meanings specified : 3.1 ‘Depreciation’ is a measure of the wearing out, consumption or other loss of value of a depreciable asset arising from use, effluxion of time or obsolescence through technology and market changes. Depreciation is allocated so as to charge a fair proportion of the depreciable amount in each I-25 © The Institute of Chartered Accountants of India Appendix - I accounting period during the expected useful life of the asset. Depreciation includes amortisation of assets whose useful life is predetermined. 3.2 ‘Depreciable assets’ are assets which : (i) are expected to be used during more than one accounting period; (ii) have a limited useful life; and (iii) are held by an enterprise for use in the production or supply of goods and services, for rental to others, or for administrative purposes and not for the purpose of sale in the ordinary course of business. 3.3 ‘Useful life’ is either (i) the period over which a depreciable asset is expected to be used by the enterprise; or (ii) the number of production or similar units expected to be obtained from the use of the asset by the enterprise. 3.4 ‘Depreciable amount’ of a depreciable asset is its historical cost, or other amount substituted for historical cost∗ in the financial statements, less the estimated residual value. Explanation 4. Depreciation has a significant effect in determining and presenting the financial position and results of operations of an enterprise. Depreciation is charged in each accounting period by reference to the extent of the depreciable amount, irrespective of an increase in the market value of the assets. 5. Assessment of depreciation and the amount to be charged in respect thereof in an accounting period are usually based on the following three factors: (i) historical cost or other amount substituted for the historical cost of the depreciable asset when the asset had been revalued; (ii) expected useful life of the depreciable asset; and (iii) estimated residual value of the depreciable asset. 6. Historical cost of a depreciable asset represents its money outlay or its equivalent in connection with its acquisition, installation and commissioning as well as for additions to or improvement thereof. The historical cost of a depreciable asset may undergo subsequent changes arising as a result of increase or decrease in long-term liability on account of exchange fluctuations, price adjustments, changes in duties or similar factors. 7. The useful life of a depreciable asset is shorter than its physical life and is : (i) pre-determined by legal or contractual limits, such as the expiry dates of related leases; (ii) directly governed by extraction or consumption; (iii) dependent on the extent of use and physical deterioration on account of wear and tear which ∗ This statement does not deal with the treatment of the revaluation difference which may arise when historical costs are substituted by revaluations. I-26 © The Institute of Chartered Accountants of India Accounting again depends on operational factors, such as, the number of shifts for which the asset is to be used, repair and maintenance policy of the enterprise etc.; and (iv) reduced by obsolescence arising from such factors as : (a) technological changes; (b) improvement in production methods; (c) change in market demand for the product or service output of the asset; or (d) legal or other restrictions. 8. Determination of the useful life of a depreciable asset is a matter of estimation and is normally based on various factors including experience with similar types of assets. Such estimation is more difficult for an asset using new technology or used in the production of a new product or in the provision of a new service but is nevertheless required on some reasonable basis. 9. Any addition or extension to an existing asset which is of a capital nature and which becomes an integral part of the existing asset is depreciated over the remaining useful life of that asset. As a practical measure, however, depreciation is sometimes provided on such addition or extension at the rate which is applied to an existing asset. Any addition or extension which retains a separate identity and is capable of being used after the existing asset is disposed of, is depreciated independently on the basis of an estimate of its own useful life. 10. Determination of residual value of an asset is normally a difficult matter. If such value is considered as insignificant, it is normally regarded as nil. On the contrary, if the residual value is likely to be significant, it is estimated at the time of acquisition/installation, or at the time of subsequent revaluation of the asset. One of the bases for determining the residual value would be the realisable value of similar assets which have reached the end of their useful lives and have operated under conditions similar to those in which the asset will be used. 11. The quantum of depreciation to be provided in an accounting period involves the exercise of judgment by management in the light of technical, commercial, accounting and legal requirements and accordingly may need periodical review. If it is considered that the original estimate of useful life of an asset requires any revision, the unamortised depreciable amount of the asset is charged to revenue over the revised remaining useful life. 12. There are several methods of allocating depreciation over the useful life of the assets. Those most commonly employed in industrial and commercial enterprises are the straightline method and the reducing balance method. The management of a business selects the most appropriate method(s) based on various important factors, e.g. (i) type of asset, (ii) the nature of the use of such asset, and (iii) circumstances prevailing in the business. A combination of more than one method is sometimes used. In respect of depreciable assets which do not have material value depreciation is often allocated fully in the accounting period in which they are acquired. 13. The statute governing an enterprise may provide the basis for computation of the depreciation. For example, the Companies Act, 1956 lays down the rates of depreciation in respect of various assets. Where the managements’ estimate of the useful life of an asset of the enterprise is shorter than that I-27 © The Institute of Chartered Accountants of India Appendix - I envisaged under the provisions of the relevant statute, the depreciation provision is appropriately computed by applying a higher rate. If the management’s estimate of the useful life of the asset is longer than that envisaged under the statute, depreciation rate lower than that envisaged by the statute can be applied only in accordance with requirements of the statute. 14. Where depreciable assets are disposed of, discarded, demolished or destroyed, the net surplus or deficiency, if material, is disclosed separately. 15. The method of depreciation is applied consistently to provide comparability of the results of the operations of the enterprise from period to period. A change from one method of providing depreciation to another is made only if the adoption of the new method is required by statute or for compliance with an accounting standard or if it is considered that the change would result in a more appropriate preparation or presentation of the financial statements of the enterprise. When such a change in the method of depreciation is made, depreciation is recalculated in accordance with the new method from the date of the asset coming into use. The deficiency or surplus arising from retrospective recomputation of depreciation in accordance with the new method is adjusted in the accounts in the year in which the method of depreciation is changed. In case the change in the method results in deficiency in depreciation in respect of past years, the deficiency is charged in the statement of profit and loss. In case the change in the method results in surplus, the surplus is credited to the statement of profit and loss. Such a change is treated as a change in accounting policy and its effect is quantified and disclosed. 16. Where the historical cost of an asset has undergone a change due to circumstances specified in para 6 above, the depreciation on the revised unamortised depreciable amount is provided prospectively over the residual useful life of the asset. Disclosure 17. The depreciation methods used, the total depreciation for the period for each class of assets, the gross amount of each class of depreciable assets and the related accumulated depreciation are disclosed in the financial statements along with the disclosure of other accounting policies. The depreciation rates or the useful lives of the assets are disclosed only if they are different from the principal rates specified in the statute governing the enterprise. 18. In case the depreciable assets are revalued, the provision for depreciation is based on the revalued amount on the estimate of the remaining useful life of such assets. In case the revaluation has a material effect on the amount of depreciation, the same is disclosed separately in the year in which revaluation is carried out. 19. A change in the method of depreciation is treated as a change in an accounting policy and is disclosed accordingly.∗ Accounting Standard (The Accounting Standard comprises paragraphs 20-29 of this Statement. The Standard should be read in the context of paragraphs 1-19 of this Statement and of the ‘Preface to the Statements of Accounting Standards’.) ∗ Refer to AS 5 I-28 © The Institute of Chartered Accountants of India Accounting 20. The depreciable amount of a depreciable asset should be allocated on a systematic basis to each accounting period during the useful life of the asset. 21. The depreciation method selected should be applied consistently from period to period. A change from one method of providing depreciation to another should be made only if the adoption of the new method is required by statute or for compliance with an accounting standard or if it is considered that the change would result in a more appropriate preparation or presentation of the financial statements of the enterprise. When such a change in the method of depreciation is made, depreciation should be recalculated in accordance with the new method from the date of the asset coming into use. The deficiency or surplus arising from retrospective recomputation of depreciation in accordance with the new method should be adjusted in the accounts in the year in which the method of depreciation is changed. In case the change in the method results in deficiency in depreciation in respect of past years, the deficiency should be charged in the statement of profit and loss. In case the change in the method results in surplus, the surplus should be credited to the statement of profit and loss. Such a change should be treated as a change in accounting policy and its effect should be quantified and disclosed. 22. The useful life of a depreciable asset should be estimated after considering the following factors: (i) expected physical wear and tear; (ii) obsolescence; (iii) legal or other limits on the use of the asset. 23. The useful lives of major depreciable assets or classes of depreciable assets may be reviewed periodically. Where there is a revision of the estimated useful life of an asset, the unamortised depreciable amount should be charged over the revised remaining useful life. 24. Any addition or extension which becomes an integral part of the existing asset should be depreciated over the remaining useful life of that asset. The depreciation on such addition or extension may also be provided at the rate applied to the existing asset. Where an addition or extension retains a separate identity and is capable of being used after the existing asset is disposed of, depreciation should be provided independently on the basis of an estimate of its own useful life. *25. Where the historical cost of a depreciable asset has undergone a change due to increase or decrease in long-term liability on account of exchange fluctuations, price adjustments, changes in duties or similar factors, the depreciation on the revised unamortised depreciable amount should be provided prospectively over the residual useful life of the asset. 26. Where the depreciable assets are revalued, the provision for depreciation should be based on the revalued amount and on the estimate of the remaining useful lives of such assets. In case the revaluation has a material effect on the amount of depreciation, the same should be disclosed separately in the year in which revaluation is carried out. I-29 © The Institute of Chartered Accountants of India Appendix - I 27. If any depreciable asset is disposed of, discarded, demolished or destroyed, the net surplus or deficiency, if material, should be disclosed separately. 28. The following information should be disclosed in the financial statements : (i) the historical cost or other amount substituted for historical cost of each class of depreciable assets; (ii) total depreciation for the period for each class of assets; and (iii) the related accumulated depreciation. 29. The following information should also be disclosed in the financial statements along with the disclosure of other accounting policies: (i) depreciation methods used; and (ii) depreciation rates or the useful lives of the assets, if they are different from the principal rates specified in the statute governing the enterprise. AS 7 (Revised)1 : Construction Contracts Construction Contracts Accounting Standard (AS) 7, Construction Contracts (revised), issued by the Council of the Institute of Chartered Accountants of India, comes into effect in respect of all contracts entered into during accounting periods commencing on or after 1-4-2003 and is mandatory in nature from that date. Accordingly, Accounting Standard (AS) 7, ‘Accounting for Construction Contracts’, issued by the Institute in December 1983, is not applicable in respect of such contracts. Early application of this Standard is, however, encouraged. The following is the text of the revised Accounting Standard. Objective The objective of this Statement is to prescribe the accounting treatment of revenue and costs associated with construction contracts. Because of the nature of the activity undertaken in construction contracts, the date at which the contract activity is entered into and the date when the activity is completed usually fall into different accounting periods. Therefore, the primary issue in accounting for construction contracts is the allocation of contract revenue and contract costs to the accounting periods in which construction work is performed. This Statement uses the recognition criteria established in the Framework for the Preparation and Presentation of Financial Statements to determine when contract revenue and contract costs should be recognised as revenue and expenses in the statement of profit and loss. It also provides practical guidance on the application of these criteria. Scope 1. This Statement should be applied in accounting for construction contracts in the financial statements of contractors. 1 Revised in 2002 I-30 © The Institute of Chartered Accountants of India Accounting Definitions 2. The following terms are used in this Statement with the meanings specified: A construction contract is a contract specifically negotiated for the construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use. A fixed price contract is a construction contract in which the contractor agrees to a fixed contract price, or a fixed rate per unit of output, which in some cases is subject to cost escalation clauses. A cost plus contract is a construction contract in which the contractor is reimbursed for allowable or otherwise defined costs, plus percentage of these costs or a fixed fee. 3. A construction contract may be negotiated for the construction of a single asset such as a bridge, building, dam, pipeline, road, ship or tunnel. A construction contract may also deal with the construction of a number of assets which are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use; examples of such contracts include those for the construction of refineries and other complex pieces of plant or equipment. 4. For the purposes of this Statement, construction contracts include: (a) contracts for the rendering of services which are directly related to the construction of the asset, for example, those for the services of project managers and architects; and (b) contracts for destruction or restoration of assets, and the restoration of the environment following the demolition of assets. 5. Construction contracts are formulated in a number of ways which, for the purposes of this Statement, are classified as fixed price contracts and cost plus contracts. Some construction contracts may contain characteristics of both a fixed price contract and a cost plus contract, for example, in the case of a cost plus contract with an agreed maximum price. In such circumstances, a contractor needs to consider all the conditions in paragraphs 22 and 23 in order to determine when to recognise contract revenue and expenses. Combining and Segmenting Construction Contracts 6. The requirements of this Statement are usually applied separately to each construction contract. However, in certain circumstances, it is necessary to apply the Statement to the separately identifiable components of a single contract or to a group of contracts together in order to reflect the substance of a contract or a group of contracts. 7. When a contract covers a number of assets, the construction of each asset should be treated as a separate construction contract when: (a) separate proposals have been submitted for each asset; (b) each asset has been subject to separate negotiation and the contractor and customer have been able to accept or reject that part of the contract relating to each asset; and (c) the costs and revenues of each asset can be identified. I-31 © The Institute of Chartered Accountants of India Appendix - I 8. A group of contracts, whether with a single customer or with several customers, should be treated as a single construction contract when: (a) the group of contracts is negotiated as a single package; (b) the contracts are so closely interrelated that they are, in effect, part of a single project with an overall profit margin; and (c) the contracts are performed concurrently or in a continuous sequence. 9. A contract may provide for the construction of an additional asset at the option of the customer or may be amended to include the construction of an additional asset. The construction of the additional asset should be treated as a separate construction contract when: (a) the asset differs significantly in design, technology or function from the asset or assets covered by the original contract; or (b) the price of the asset is negotiated without regard to the original contract price. Contract Revenue 10. Contract revenue∗ should comprise: (a) the initial amount of revenue agreed in the contract; and (b) variations in contract work, claims and incentive payments: (i) to the extent that it is probable that they will result in revenue; and (ii) they are capable of being reliably measured 11. Contract revenue is measured at the consideration received or receivable. The measurement of contract revenue is affected by a variety of uncertainties that depend on the outcome of future events. The estimates often need to be revised as events occur and uncertainties are resolved. Therefore, the amount of contract revenue may increase or decrease from one period to the next. For example: (a) a contractor and a customer may agree to variations or claims that increase or decrease contract revenue in a period subsequent to that in which the contract was initially agreed; (b) the amount of revenue agreed in a fixed price contract may increase as a result of cost escalation clauses; (c) the amount of contract revenue may decrease as a result of penalties arising from delays caused by the contractor in the completion of the contract; or (d) when a fixed price contract involves a fixed price per unit of output, contract revenue increases as the number of units is increased. 12. A variation is an instruction by the customer for a change in the scope of the work to be performed under the contract. A variation may lead to an increase or a decrease in contract revenue. Examples of ∗ See also ASI 29. I-32 © The Institute of Chartered Accountants of India Accounting variations are changes in the specifications or design of the asset and changes in the duration of the contract. A variation is included in contract revenue when: (a) it is probable that the customer will approve the variation and the amount of revenue arising from the variation; and (b) the amount of revenue can be reliably measured. 13. A claim is an amount that the contractor seeks to collect from the customer or another party as reimbursement for costs not included in the contract price. A claim may arise from, for example, customer caused delays, errors in specifications or design, and disputed variations in contract work. The measurement of the amounts of revenue arising from claims is subject to a high level of uncertainty and often depends on the outcome of negotiations. Therefore, claims are only included in contract revenue when: (a) negotiations have reached an advanced stage such that it is probable that the customer will accept the claim; and (b) the amount that it is probable will be accepted by the customer can be measured reliably. 14. Incentive payments are additional amounts payable to the contractor if specified performance standards are met or exceeded. For example, a contract may allow for an incentive payment to the contractor for early completion of the contract. Incentive payments are included in contract revenue when: (a) the contract is sufficiently advanced that it is probable that the specified performance standards will be met or exceeded; and (b) the amount of the incentive payment can be measured reliably. Contract Costs 15. Contract costs should comprise: (a) costs that relate directly to the specific contract; (b) costs that are attributable to contract activity in general and can be allocated to the contract; and (c) such other costs as are specifically chargeable to the customer under the terms of the contract. 16. Costs that relate directly to a specific contract include: (a) site labour costs, including site supervision; (b) costs of materials used in construction; (c) depreciation of plant and equipment used on the contract; (d) costs of moving plant, equipment and materials to and from the contract site; (e) costs of hiring plant and equipment; I-33 © The Institute of Chartered Accountants of India Appendix - I (f) costs of design and technical assistance that is directly related to the contract; (g) the estimated costs of rectification and guarantee work, including expected warranty costs; and (h) claims from third parties. These costs may be reduced by any incidental income that is not included in contract revenue, for example income from the sale of surplus materials and the disposal of plant and equipment at the end of the contract. 17. Costs that may be attributable to contract activity in general and can be allocated to specific contracts include: (a) insurance; (b) costs of design and technical assistance that is not directly related to a specific contract; and (c) construction overheads. Such costs are allocated using methods that are systematic and rational and are applied consistently to all costs having similar characteristics. The allocation is based on the normal level of construction activity. Construction overheads include costs such as the preparation and processing of construction personnel payroll. Costs that may be attributable to contract activity in general and can be allocated to specific contracts also include borrowing costs as per Accounting Standard (AS) 16, Borrowing Costs. 18. Costs that are specifically chargeable to the customer under the terms of the contract may include some general administration costs and development costs for which reimbursement is specified in the terms of the contract. 19. Costs that cannot be attributed to contract activity or cannot be allocated to a contract are excluded from the costs of a construction contract. Such costs include: (a) general administration costs for which reimbursement is not specified in the contract; (b) selling costs; (c) research and development costs for which reimbursement is not specified in the contract; and (d) depreciation of idle plant and equipment that is not used on a particular contract. 20. Contract costs include the costs attributable to a contract for the period from the date of securing the contract to the final completion of the contract. However, costs that relate directly to a contract and which are incurred in securing the contract are also included as part of the contract costs if they can be separately identified and measured reliably and it is probable that the contract will be obtained. When costs incurred in securing a contract are recognised as an expense in the period in which they are incurred, they are not included in contract costs when the contract is obtained in a subsequent period. Recognition of Contract Revenue and Expenses 21. When the outcome of a construction contract can be estimated reliably, contract revenue and contract costs associated with the construction contract should be recognised as revenue and expenses respectively by reference to the stage of completion of the contract activity at the I-34 © The Institute of Chartered Accountants of India Accounting reporting date. An expected loss on the construction contract should be recognised as an expense immediately in accordance with paragraph 35. 22. In the case of a fixed price contract, the outcome of a construction contract can be estimated reliably when all the following conditions are satisfied: (a) total contract revenue can be measured reliably; (b) it is probable that the economic benefits associated with the contract will flow to the enterprise; (c) both the contract costs to complete the contract and the stage of contract completion at the reporting date can be measured reliably; and (d) the contract costs attributable to the contract can be clearly identified and measured reliably so that actual contract costs incurred can be compared with prior estimates. 23. In the case of a cost plus contract, the outcome of a construction contract can be estimated reliably when all the following conditions are satisfied: (a) it is probable that the economic benefits associated with the contract will flow to the enterprise; and (b) the contract costs attributable to the contract, whether or not specifically reimbursable, can be clearly identified and measured reliably. 24. The recognition of revenue and expenses by reference to the stage of completion of a contract is often referred to as the percentage of completion method. Under this method, contract revenue is matched with the contract costs incurred in reaching the stage of completion, resulting in the reporting of revenue, expenses and profit which can be attributed to the proportion of work completed. This method provides useful information on the extent of contract activity and performance during a period. 25. Under the percentage of completion method, contract revenue is recognised as revenue in the statement of profit and loss in the accounting periods in which the work is performed. Contract costs are usually recognised as an expense in the statement of profit and loss in the accounting periods in which the work to which they relate is performed. However, any expected excess of total contract costs over total contract revenue for the contract is recognised as an expense immediately in accordance with paragraph 35. 26. A contractor may have incurred contract costs that relate to future activity on the contract. Such contract costs are recognised as an asset provided it is probable that they will be recovered. Such costs represent an amount due from the customer and are often classified as contract work in progress. 27. When an uncertainty arises about the collectability of an amount already included in contract revenue, and already recognised in the statement of profit and loss, the uncollectable amount or the amount in respect of which recovery has ceased to be probable is recognised as an expense rather than as an adjustment of the amount of contract revenue. I-35 © The Institute of Chartered Accountants of India Appendix - I 28. An enterprise is generally able to make reliable estimates after it has agreed to a contract which establishes: (a) each party’s enforceable rights regarding the asset to be constructed; (b) the consideration to be exchanged; and (c) the manner and terms of settlement. It is also usually necessary for the enterprise to have an effective internal financial budgeting and reporting system. The enterprise reviews and, when necessary, revises the estimates of contract revenue and contract costs as the contract progresses. The need for such revisions does not necessarily indicate that the outcome of the contract cannot be estimated reliably. 29. The stage of completion of a contract may be determined in a variety of ways. The enterprise uses the method that measures reliably the work performed. Depending on the nature of the contract, the methods may include: (a) the proportion that contract costs incurred for work performed upto the reporting date bear to the estimated total contract costs; or (b) surveys of work performed; or (c) completion of a physical proportion of the contract work. Progress payments and advances received from customers may not necessarily reflect the work performed. 30. When the stage of completion is determined by reference to the contract costs incurred upto the reporting date, only those contract costs that reflect work performed are included in costs incurred upto the reporting date. Examples of contract costs which are excluded are: (a) contract costs that relate to future activity on the contract, such as costs of materials that have been delivered to a contract site or set aside for use in a contract but not yet installed, used or applied during contract performance, unless the materials have been made specially for the contract; and (b) payments made to subcontractors in advance of work performed under the subcontract. 31. When the outcome of a construction contract cannot be estimated reliably: (a) revenue should be recognised only to the extent of contract costs incurred of which recovery is probable; and (b) contract costs should be recognised as an expense in the period in which they are incurred. An expected loss on the construction contract should be recognised as an expense immediately in accordance with paragraph 35. 32. During the early stages of a contract it is often the case that the outcome of the contract cannot be estimated reliably. Nevertheless, it may be probable that the enterprise will recover the contract costs incurred. Therefore, contract revenue is recognised only to the extent of costs incurred that are expected to be recovered. As the outcome of the contract cannot be estimated reliably,no profit is recognised. However, even though the outcome of the contract cannot be estimated reliably, it may be probable that total contract costs will exceed total contract revenue. In such cases, any expected I-36 © The Institute of Chartered Accountants of India Accounting excess of total contract costs over total contract revenue for the contract is recognised as an expense immediately in accordance with paragraph 35. 33. Contract costs recovery of which is not probable are recognised as an expense immediately. Examples of circumstances in which the recoverability of contract costs incurred may not be probable and in which contract costs may, therefore, need to be recognised as an expense immediately include contracts: (a) which are not fully enforceable, that is, their validity is seriously in question; (b) the completion of which is subject to the outcome of pending litigation or legislation; (c) relating to properties that are likely to be condemned or expropriated; (d) where the customer is unable to meet its obligations; or (e) where the contractor is unable to complete the contract or otherwise meet its obligations under the contract. 34. When the uncertainties that prevented the outcome of the contract being estimated reliably no longer exist, revenue and expenses associated with the construction contract should be recognised in accordance with paragraph 21 rather than in accordance with paragraph 31. Recognition of Expected Losses 35. When it is probable that total contract costs will exceed total contract revenue, the expected loss should be recognised as an expense immediately. 36. The amount of such a loss is determined irrespective of: (a) whether or not work has commenced on the contract; (b) the stage of completion of contract activity; or (c) the amount of profits expected to arise on other contracts which are not treated as a single construction contract in accordance with paragraph 8. Changes in Estimates 37. The percentage of completion method is applied on a cumulative basis in each accounting period to the current estimates of contract revenue and contract costs. Therefore, the effect of a change in the estimate of contract revenue or contract costs, or the effect of a change in the estimate of the outcome of a contract, is accounted for as a change in accounting estimate (see Accounting Standard (AS) 5, Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies). The changed estimates are used in determination of the amount of revenue and expenses recognised in the statement of profit and loss in the period in which the change is made and in subsequent periods. Disclosure 38. An enterprise should disclose: (a) the amount of contract revenue recognised as revenue in the period; (b) the methods used to determine the contract revenue recognised in the period; and (c) the methods used to determine the stage of completion of contracts in progress. I-37 © The Institute of Chartered Accountants of India Appendix - I 39. An enterprise should disclose the following for contracts in progress at the reporting date: (a) the aggregate amount of costs incurred and recognised profits (less recognised losses) upto the reporting date; (b) the amount of advances received; and (c) the amount of retentions. 40. Retentions are amounts of progress billings which are not paid until the satisfaction of conditions specified in the contract for the payment of such amounts or until defects have been rectified. Progress billings are amounts billed for work performed on a contract whether or not they have been paid by the customer. Advances are amounts received by the contractor before the related work is performed. 41. An enterprise should present: (a) the gross amount due from customers for contract work as an asset; and (b) the gross amount due to customers for contract work as a liability. 42. The gross amount due from customers for contract work is the net amount of: (a) costs incurred plus recognised profits; less (b) the sum of recognised losses and progress billings for all contracts in progress for which costs incurred plus recognised profits (less recognised losses) exceeds progress billings. 43. The gross amount due to customers for contract work is the net amount of: (a) the sum of recognised losses and progress billings; less (b) costs incurred plus recognised profits for all contracts in progress for which progress billings exceed costs incurred plus recognised profits (less recognised losses). 44. An enterprise discloses any contingencies in accordance with Accounting Standard (AS) 4, Contingencies and Events Occurring After the Balance Sheet Date. Contingencies may arise from such items as warranty costs, penalties or possible losses.∗ APPENDIX The appendix is illustrative only and does not form part of the Accounting Standard. The purpose of the appendix is to illustrate the application of the Accounting Standard to assist in clarifying its meaning. Disclosure of Accounting Policies The following are examples of accounting policy disclosures: Revenue from fixed price construction contracts is recognised on the percentage of completion method, measured by reference to the percentage of labour hours incurred upto the reporting date to estimated total labour hours for each contract. ∗ Pursuant to AS 29, Provisions, Contingent Liabilities and Contingent Assets, becoming mandatory in respect of accounting periods commencing on or after 1.4.2004, all paragraphs of AS 4 that deal with contingencies stand withdrawn except to the extent they deal with impairment of assets not covered by other Indian Accounting Standards I-38 © The Institute of Chartered Accountants of India Accounting Revenue from cost plus contracts is recognised by reference to the recoverable costs incurred during the period plus the fee earned, measured by the proportion that costs incurred upto the reporting date bear to the estimated total costs of the contract. The Determination of Contract Revenue and Expenses The following example illustrates one method of determining the stage of completion of a contract and the timing of the recognition of contract revenue and expenses (see paragraphs 21 to 34 of the Standard). (Amounts shown herein below are in ` lakhs) A construction contractor has a fixed price contract for ` 9,000 to build a bridge. The initial amount of revenue agreed in the contract is ` 9,000. The contractor’s initial estimate of contract costs is ` 8,000. It will take 3 years to build the bridge. By the end of year 1, the contractor’s estimate of contract costs has increased to ` 8,050. In year 2, the customer approves a variation resulting in an increase in contract revenue of ` 200 and estimated additional contract costs of ` 150. At the end of year 2, costs incurred include ` 100 for standard materials stored at the site to be used in year 3 to complete the project. The contractor determines the stage of completion of the contract by calculating the proportion that contract costs incurred for work performed upto the reporting date bear to the latest estimated total contract costs. A summary of the financial data during the construction period is as follows: (amount in ` lakhs) Year 1 Year 2 Year 3 Initial amount of revenue agreed in contract 9,000 9,000 9,000 Variation —— 200 200 Total contract 9,000 9,200 9,200 Contract costs incurred upto the reporting date 2,093 6,168 8,200 Contract costs to complete 5,957 2,032 —— Total estimated contract costs 8,050 8,200 8,200 Estimated Profit 950 1,000 1,000 Stage of completion 26% 74% 100% The stage of completion for year 2 (74%) is determined by excluding from contract costs incurred for work performed upto the reporting date, ` 100 of standard materials stored at the site for use in year 3. The amounts of revenue, expenses and profit recognised in the statement of profit and loss in the three years are as follows: Upto the Recognised in Recognised in Reporting Date Prior years current year Year 1 Revenue (9,000x .26) 2,340 2,340 Expenses (8,050x .26) 2,093 2,093 Profit 247 247 I-39 © The Institute of Chartered Accountants of India Appendix - I Year 2 Revenue (9,200x .74) 6,808 2,340 4,468 Expenses (8,200x .74) 6,068 2,093 3,975 Profit 740 247 493 Year 3 Revenue (9,200x 1.00) 9,200 6,808 2,392 Expense 8,200 6,068 2,132 Profit 1,000 740 260 Contract Disclosures A contractor has reached the end of its first year of operations. All its contract costs incurred have been paid for in cash and all its progress billings and advances have been received in cash. Contract costs incurred for contracts B, C and E include the cost of materials that have been purchased for the contract but which have not been used in contract performance upto the reporting date. For contracts B, C and E, the customers have made advances to the contractor for work not yet performed. The status of its five contracts in progress at the end of year 1 is as follows: Contract (amount in ` lakhs) A B C D E Total Contract Revenue recognised in 145 520 380 200 55 1,300 accordance with paragraph 21 Contract Expenses recognised in 110 450 350 250 55 1,215 accordance with paragraph 21 Expected Losses recognised in — — — 40 30 70 accordance with paragraph 35 Recognised profits less recognised losses 35 70 30 (90) (30) 15 Contract Costs incurred in the period 110 510 450 250 100 1,420 Contract Costs incurred recognised as contract expenses in the period in accordance with paragraph 21 110 450 350 250 55 1,215 Contract Costs that relate to future activity recognised as an asset in accordance with paragraph 26 — 60 100 — 45 205 I-40 © The Institute of Chartered Accountants of India Accounting Contract Revenue (see above) 145 520 380 200 55 1,300 Progress Billings (paragraph 40) 100 520 380 180 55 1,235 Unbilled Contract Revenue 45 — — 20 — 65 Advances (paragraph 40) — 80 20 — 25 125 The amounts to be disclosed in accordance with the Standard are as follows: Contract revenue recognised as revenue in the period (paragraph 38(a)) 1,300 Contract costs incurred and recognised profits (less recognised losses) upto the reporting date (paragraph 39(a)) 1,435 Advances received (paragraph 39(b)) 125 Gross amount due from customers for contract work— presented as an asset in accordance with paragraph 41(a) 220 Gross amount due to customers for contract work— presented as a liability in accordance with paragraph 41(b) (20) The amounts to be disclosed in accordance with paragraphs 39(a), 41(a) and 41(b) are calculated as follows: (amount in ` lakhs) A B C D E TOTAL Contract Costs incurred 110 510 450 250 100 1,420 Recognised profits less 35 70 30 (90) (30) 15 recognised losses 145 580 480 160 70 1,435 Progress billings 100 520 380 180 55 1,235 Due from customers 45 60 100 — 15 220 Due to customers — — — (20) — (20) The amount disclosed in accordance with paragraph 39(a) is the same as the amount for the current period because the disclosures relate to the first year of operation. Accounting Standards Interpretation (ASI) 29 Turnover incase of Contractors Accounting Standard (AS) 7, Construction Contr4acts (Revised 2002) ISSUE 1. AS 7, Construction Contracts (revised 2002) deals, inter alia, with revenue recognition in respect of construction contracts in the financial statements of contractors. It requires recognition of revenue by reference to the stage of completion of a contract (referred to as ‘percentage of completion method’). I-41 © The Institute of Chartered Accountants of India Appendix - I This method results in reporting of revenue which can be attributed to the proportion of work completed. Under this method, contract revenue is recognized as revenue in the statement of profit and loss in the accounting period in which the work is performed. The issue is whether the revenue so recognized in the financial statements of contractors as per the requirements of AS 7 can be considered as ‘turnover’. CONSENSUS 2. The amount of contract revenue recognized as revenue in the statement of profit and loss as per the requirements of AS 7 should be considered as ‘turnover’. BASIS FOR CONCLUSIONS 3. The paragraph dealing with the ‘Objective’ of AS 7 provides as follows: “OBJECTIVE The objective of this Statement is to prescribe the accounting treatment of revenue and costs associated with construction contracts. Because of the nature of the activity undertaken in construction contracts, the date at which the contract activity is entered into and the date when the activity is completed usually fall into different accounting periods. Therefore, the primary issue in accounting for construction contracts is the allocation of contract revenue and contract costs to the accounting period in which construction work is performed. This Statement uses the recognition criteria established in the Frame work for the Preparation and Presentation of financial Statements to determine when contract revenue and contract costs should be recognized as revenue and expenses in the statement of profit and loss. It also provides practical guidance on the application of these criteria.” From the above, it may be noted that AS 7 deals, inter alia, with the allocation of contract revenue to the accounting periods in which constructions work is performed. 4. Paragraphs 21 and 31 of AS 7 provide as follows: “21. When the outcome of a construction contract can be estimated reliably, contract revenue and contract costs associated with the construction contract should be recognized as revenue and expenses respectively by reference to the stage of completion of the contract activity at the reporting date. An expected loss on the construction contract should be recognised as an expense immediately in accordance with paragraph 35.” “31. When the outcome of a construction contract cannot be estimated reliably: (a) revenue should be recognized only to the extent of contract costs incurred of which recovery is probable; and (b) contract costs should be recognized as an expense in the period in which they are incurred. An expected loss on the construction contract should be recognized as an expense immediately in accordance with paragraph 35.” I-42 © The Institute of Chartered Accountants of India Accounting From the above, it may be noted that the recognition of revenue as per AS 7 may be inclusive of profit (as per paragraph 21 reproduced above) or exclusive of profit (as per paragraph 31 above) depending on whether the outcome of the construction contact can be estimated reliably or not. When the outcome of the construction contract can be estimated reliably, the revenue is recognized inclusive of profit and when klthe same cannot be estimated reliably, it is recognized exclusive of profit. However, in either case it is considered as revenue as per AS 7. 5. ‘Revenue’ is a wider term. For example, within the meaning of AS 9, revenue Recognition, the term ‘revenue’ includes revenue from sales transactions, rendering of services and from the use by others of enterprise resources yielding interest, royalties and dividends. The term ‘turnover’ is used in relation to the source of revenue that arises from the principal revenue generating activity of an enterprise. In case of a contractor, the construction activity is its principal revenue generating activity. Hence, the revenue recognized in the statement of profit and loss of a contractor in accordance with the principles laid down in AS 7, by whatever nomenclature described in the financial statements, is considered as ‘turnover’. AS 9 : Revenue Recognition The following is the ‘text of the Accounting Standard 9 (AS 9) issued by the Institute of Chartered Accountants of India on “Revenue Recognition1”. In the initial years, this accounting standard will be recommendatory in character. During this period, this standard is recommended for use by companies listed on a recognised stock exchange and other large commercial, industrial and business enterprises in the public and private sectors. Introduction 1. This Statement deals with the bases for recognition of revenue in the statement of profit and loss of an enterprise. The Statement is concerned with the recognition of revenue arising in the course of the ordinary activities of the enterprise from — the sale of goods∗ — the rendering of services, and — the use by others of enterprise resources yielding interest, royalties and dividends. 2. This Statement does not deal with the following aspects of revenue recognition to which special considerations apply: (i) Revenue arising from construction contracts; (ii) Revenue arising from hire-purchase, lease agreements; (iii) Revenue arising from government grants and other similar subsidies; (iv) Revenue of insurance companies arising from insurance contracts. 1 It is reiterated that this AS (as in the case of other AS) assumes that the three fundamental accounting assumptions i.e. going concern, consistency and accrual have been followed in the preparation and presentation of financial statements. ∗ ∗ Refer to ASI 14. I-43 © The Institute of Chartered Accountants of India Appendix - I 3. Examples of items not included within the definition of “revenue” for the purpose of this Statement are: (i) Realised gains resulting from the disposal of, and unrealised gains resulting from the holding of non-current assets e.g. appreciation in the value of fixed assets; (ii) Unrealised holding gains resulting from the change in value of current assets, and the natural increases in herds and agricultural and forest products; (iii) Realised or unrealised gains resulting from changes in foreign exchange rates and adjustments arising on the translation of foreign currency financial statements; (iv) Realised gains resulting from the discharge of an obligation at less than its carrying amount; (v) Unrealised gains resulting from the restatement of the carrying amount of an obligation. Definitions 4. The following terms are used in this Statement with the meanings specified: 4.1 Revenue is the gross inflow of cash, receivables or other consideration arising in the course of the ordinary activities of an enterprise€ from the sale of goods, from the rendering of services, and from the use by others of enterprise resources yielding interest, royalties and dividends. Revenue is measured by the charges made to customers or clients for goods supplied and services rendered to them and by the charges and rewards arising from the use of resources by them. In an agency relationship, the revenue is the amount of commission and not the gross inflow of cash, receivables or other consideration. 4.2 Completed Service contract method is a method of accounting which recognises revenue in the statement of profit and loss only when the rendering of services under a contract is completed or substantially completed. 4.3 Proportionate completion method is a method of accounting which recognises revenue in the statement of profit and loss proportionately with the degree of completion of services under a contract. Explanation 5. Revenue recognition is mainly concerned with the timing of recognition of revenue in the statement of profit and loss of an enterprise. The amount of revenue arising on a transaction is usually determined by agreement between the parties involved in the transaction. When uncertainties exist regarding the determination of the amount, or its associated costs, these uncertainties may influence the timing of revenue recognition. 6. Sale of Goods 6.1 A key criterion for determining when to recognise revenue from a transaction involving the sale of goods is that the seller has transferred the property in the goods to the buyer for a consideration. The € the Institute has issued an announcement in 2005 titled ‘Treatment of Inter-divisional Transfers’. As per this announcement, the recognition of inter divisional transfers as sales is an inappropriate treatment and is inconsistent with AS 9. I-44 © The Institute of Chartered Accountants of India Accounting transfer of property in goods, in most cases, results in or coincides with the transfer of significant risks and rewards of ownership to the buyer. However, there may be situations where transfer of property in goods, does not coincide with the transfer of significant risks and rewards of ownership. Revenue in such situations is recognised at the time of transfer of significant risks and rewards of ownership to the buyer. Such cases may arise where delivery has been delayed through the fault of either the buyer or the seller and the goods are at the risk of the party at fault as regards any loss which might not have occurred but for such fault. Further, sometimes the parties may agree that the risk will pass at a time different from the time when ownership passes. 6.2 At certain stages in specific industries, such as when agricultural crops have been harvested or mineral ores have been extracted, performance may be substantially complete prior to the execution of the transaction generating revenue. In such cases when sale is assured under a forward contract or a government guarantee or where market exists and there is a negligible risk of failure to sell, the goods involved are often valued at net realisable value. Such amounts, while not revenue as defined in this Statement, are sometimes recognised in the statement of profit and loss and appropriately described. 7. Rendering of Services 7.1 Revenue from service transactions is usually recognised as the service is performed, either by the proportionate completion method or by the completed service contract method. (i) Proportionate completion method: Performance consists of the execution of more than one act. Revenue is recognised proportionately by reference to the performance of each act. The revenue recognised under this method would be determined on the basis of contract value, associated costs, number of acts or other suitable basis. For practical purposes, when services are provided by an indeterminate number of acts over a specific period of time, revenue is recognised on a straight line basis over the specific period unless there is evidence that some other method better represents the pattern of performance. (ii) Completed service contract method : Performance consists of the execution of a single act. Alternatively, services are performed in more than a single act, and the services yet to be performed are so significant in relation to the transaction taken as a whole that performance cannot be deemed to have been completed until the execution of those acts. The completed service contract method is relevant to these patterns of performance and accordingly revenue is recognised when the sole or final act takes place and the service becomes chargeable. 8. The Use by Others of Enterprise Resources Yielding Interest, Royalties and Dividends 8.1 The use by others of such enterprise resources gives rise to : (i) interest - charges for the use of cash resources or amounts due to the enterprise; (ii) royalties - charges for the use of such assets as know how, patents, trade marks and copyrights; (iii) dividends - rewards from the holding of investments in shares. 8.2 Interest accrues, in most circumstances, on the time basis determined by the amount outstanding and the rate applicable. Usually, discount or premium on debt securities held is treated as though it were accruing over the period to maturity. I-45 © The Institute of Chartered Accountants of India Appendix - I 8.3 Royalties accrue in accordance with the terms of the relevant agreement and are usually recognised on that basis unless, having regard to the substance of the transactions, it is more appropriate to recognise revenue on some other systematic and rational basis. 8.4 Dividends from investments in shares are not recognised in the statement of profit and loss until a right to receive payment is established. 8.5 When interest, royalties and dividends from foreign countries require exchange permission and uncertainty in remittance is anticipated, revenue recognition may need to be postponed. 9. Effect of Uncertainties on Revenue Recognition 9.1 Recognition of revenue requires that revenue is measurable and that at the time of sale of goods or the rendering of the service it would not be unreasonable to expect ultimate collection. 9.2 Where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim, e.g., for escalation of price, export incentives, interest etc., revenue recognition is postponed to the extent of uncertainty involved. In such cases, it may be appropriate to recognise revenue only when it is reasonably certain that the ultimate collection will be made. Where there is no uncertainty as to ultimate collection, revenue is recognised at the time of sale or rendering of service even though payments are made by instalments. 9.3 When the uncertainty relating to collectability arises subsequent to the time of sale or the rendering of the service, it is more appropriate to make a separate provision to reflect the uncertainty rather than to adjust the amount of revenue originally recorded. 9.4 An essential criterion for the recognition of revenue is that the consideration receivable for the sale of goods,the rendering of services or from the use by others of enterprise resources is reasonably determinable. When such consideration is not determinable within reasonable limits, the recognition of revenue is postponed. 9.5 When recognition of revenue is postponed due to the effect of uncertainties, it is considered as revenue of the period in which it is properly recognised. Accounting Standard (Accounting Standard comprises paragraphs 10-14 of this Statement. ‘The Standard should be read in the context of paragraphs 1-9 of this Statement and of the Preface to the Statements of Accounting Standards’.) 10. Revenue from sales or service transactions should be recognised when the requirements as to performance set out in paragraphs 11 and 12 are satisfied, provided that at the time of performance it is not unreasonable to expect ultimate collection. If at the time of raising of any claim it is unreasonable to expect ultimate collection, revenue recognition should be post- poned. 11. In a transaction involving the sale of goods, performance should be regarded as being achieved when the following conditions have been fulfilled : (i) the seller of goods has transferred to the buyer the property in the goods for a price or all significant risks and rewards of ownership have been transferred to the buyer and the I-46 © The Institute of Chartered Accountants of India Accounting seller retains no effective control of the goods transferred to a degree usually associated with ownership; and (ii) no significant uncertainty exists regarding the amount of the consideration that will be derived from the sale of the goods. 12. In a transaction involving the rendering of services, performance should be measured either under the completed service contract method or under the proportionate completion method, whichever relates revenue to the work accomplished. Such performance should be regarded as being achieved when no significant uncertainty exists regarding the amount of the consideration that will be derived from rendering the service. 13. Revenue arising from the use by others of enterprise resources yielding interest, royalties and dividends should only be recognised when no significant uncertainty as to measurability or collectability exists. These revenues are recognised on the following bases : (i) Interest : on a time proportion basis taking into account the amount outstanding and the rate applicable; (ii) Royalties : on an accrual basis in accordance with the terms of the relevant agreement; and (iii) Dividends from : when the owner’s right to receive payment is Investments in shares established. Disclosure 14. In addition to the disclosures required by Accounting Standard 1 on Disclosure of Accounting Policies (AS 1), an enterprise should also disclose the circumstances in which revenue recogni- tion has been postponed pending the resolution of significant uncertainties. APPENDIX This appendix is illustrative only and does not form part of the accounting standard set forth in this Statement. The purpose of the appendix is to illustrate the application of the Standard to a number of commercial situations in an endeavour to assist in clarifying application of the Standard. A. Sale of goods 1 Delivery is delayed at buyer’s request and buyer takes title and accepts billing Revenue should be recognised not withstanding that physical delivery has not been completed so long as there is every expectation that delivery will be made. However, the item must be on hand, identified and ready for delivery to the buyer at the time the sale is recognised rather than there being simply an intention to acquire or manufacture the goods in time for delivery. 2 Delivered subject to conditions (a) installation and inspection i.e., goods are sold subject to installation, inspection etc. Revenue should normally not be recognised until the customer accepts delivery and installation and inspection are complete. In some cases, however, the installation process may be so simple in nature that it may be appropriate to recognise the sale notwithstanding that installation is not yet completed (e.g. installation of a factory tested television receiver normally only requires unpacking and connecting of power of antennae). I-47 © The Institute of Chartered Accountants of India Appendix - I (b) on approval Revenue should not be recognised until the goods have been formally accepted by the buyer or the buyer has done an act adopting the transaction or the time period for rejection has elapsed or where no time has been fixed, a reasonable time has elapsed. (c) guaranteed sales i.e., delivery is made giving the buyer an unlimited right of return Recognition of revenue in such circumstances will depend on the substance of the agreement. In the case of retail sales offering a guarantee of “money back if not completely satisfied” it may be appropriate to recognise the sale but to make a suitable provision for returns based on previous experience. In other cases, the substance of the agreement may amount to a sale on consignment, in which case it should be treated as indicated below. (d) consignment sales i.e., a delivery is made whereby the recipient undertakes to sell the goods on behalf of the consignor Revenue should not be recognised until the goods are sold to a third party. (e) cash on delivery sales Revenue should not be recognised until cash is received by the seller or his agent. 3. Sales where the purchaser makes a series of instalment payments to the seller and the seller delivers the goods only when the final payment is received Revenue from such sales should not be recognised until goods are delivered. However, when experience indicates that most such sales have been consummated, revenue may be recognised when a significant deposit is received. 4. Special orders and shipments, i.e. where payment (or partial payment) is received for goods not presently held in stock, e.g. the stock is still to be manufactured or is to be delivered directly to the customer from a third party. Revenue from such sales should not be recognised until goods are manufactured, identified and ready for delivery to the buyer by the third party. 5. Sale - repurchase agreements, i.e. where seller concurrently agrees to repurchase the same goods at a later date For such transactions that are in substance a financing agreement, the resulting cash inflow is not revenue as defined and should not be recognised as revenue. 6. Sales to intermediate parties, i.e. where goods are sold to distributors, dealers or others for resale Revenue from such sales can generally be recognised if significant risks of ownership have passed; however, in some situations the buyer may in substance be an agent and in such cases the sale should be treated as a consignment sale. 7. Subscriptions for publications Revenue received or billed should be differed and recognised either on a straight line basis over time or, where the items delivered vary in value from period of period, revenue should be based on the sales value of the item delivered in relation to the total sales value of all items covered by the subscription. I-48 © The Institute of Chartered Accountants of India Accounting 8. Instalment sales When the consideration is receivable in instalments, revenue attributable to the sales price exclusive of interest should be recognised at the date of sale. The interest element should be recognised as revenue, proportionately to the unpaid balance due to the seller. 9. Trade discounts and volume rebates Trade discounts and volume rebates received are not encompassed within the definition of revenue, since they represent a reduction of cost. Trade discounts and volume rebates given should be deducted in determining revenue. B. Rendering of services 1. Installation fees In cases where installation fees are other than incidental to the sale of a product, they should be recognised as revenue only when the equipment is installed and accepted by the customer. 2. Advertising and insurance agency commissions Revenue should be recognised when the service is completed. For advertising agencies, media commissions will normally be recognised when the related advertisement or commercial appears before the public and the necessary intimation is received by the agency, as opposed to production commission, which will be recognised when the project is completed. Insurance agency commissions should be recognised on the effective commencement or renewal dates of the related policies. 3. Financial service commissions A financial service may be rendered as a single act or may be provided over a period of time. Similarly, charges for such services may be made as a single amount or in stages over the period of the service or the life of the transaction to which it relates. Such charges may be settled in full when made, or added to a loan or other account and settled in stages. The recognition of such revenue should therefore have regard to : (a) whether the service has been provided “once and for all” or is on a “continuing” basis; (b) the incidence of the costs relating to the service; and (c) when the payment for the service will be received. In general, commissions charged for arranging or granting loan or other facilities should be recognised when a binding obligation has been entered into. Commitment, facility or loan management fees which relate to continuing obligations or services should normally be recognised over the life of the loan or facility having regard to the amount of the obligation outstanding, the nature of the services provided and the timing of the costs relating thereto. 4. Admission fees Revenue from artistic performances, banquets and other special events should be recognised when the event takes place. When a subscription to a number of events is sold, the fee should be allocated to each event on a systematic and rational basis. 5. Tuition fees Revenue should be recognised over the period of instruction. 6. Entrance and membership fees I-49 © The Institute of Chartered Accountants of India Appendix - I Revenue recognition from these sources will depend on the nature of the services being provided. Entrance free received is generally capitalised. If the membership fee permits only membership and all other services or products are paid for separately, or if there is a separate annual subscription, the fee should be recognised when received. If the membership fee entitles the member to services or publications to be provided during the year, it should be recognised on a systematic and rational basis having regard to the timing and nature of all services provided. Accounting Standards Interpretation (ASI) 14 Disclosure of Revenue from Sales Transactions Accounting Standard (AS) 9, Revenue Recognition [Pursuant to the issuance of this Accounting Standards Interpretation, General Clarification (GC) – 3/2002, issued in June 2002 stands withdrawn.] ISSUE 1. What should be the manner of disclosure of excise duty in the presentation of revenue from sales transactions (turnover) in the statement of profit and loss. CONSENSUS 2. The amount of turnover should be disclosed in the following manner on the face of the statement of profit and loss: Turnover (Gross) XX Less: Excise Duty XX Turnover (Net) XX BASIS FOR CONCLUSIONS 3. Financial analysts and other users of financial statements, sometimes, require the information related to turnover gross of excise duty as well as net of excise duty for meaningful understanding of financial statements. However, it was noted that some enterprises disclose turnover net of excise duty while others disclose turnover at gross amount. Accordingly, this Interpretation requires disclosure of turnover gross of excise duty as well as net of excise duty on the face of the statement of profit and loss. AS 10 : Accounting for Fixed Assets The following is the text of the Accounting Standard 10 (AS 10) issued by the Institute of Chartered Accountants of India on “Accounting for fixed assets”. In the initial years, this accounting standard will be recommendatory in character. During this period, this standard is recommended for use by companies listed on a recognised stock exchange and other large commercial, industrial and business enterprises in the public and private sectors. Introduction 1. Financial statements disclose certain information relating to fixed assets. In many enterprises these assets are grouped into various categories, such as land and buildings, plant and machinery, vehicles, furniture and fittings, goodwill, patents, trademarks and designs. This I-50 © The Institute of Chartered Accountants of India