group 4, accounting standarsd 1-16, 22-08-2012

8/13/2019 Group 4, Accounting Standarsd 1-16, 22-08-2012

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AccountingStandardsPart 1

By:

Abhinav Singh Khanduja (208/2012)

Aayush Sharma (209/2012)

Nalini Katiyar (215/2012)

Mohit Rathi (220/2012)

Kriti Singh (236/2012)

Keshav Kishore (261/2012)


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Structure of Presentation

1. Objective

2. Introduction

3. Accounting Standards illustrated withexamples


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Objective

To explain Accounting Standards 1 to 16


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Introduction

Accounting Standards developed to harmonies diverse

accounting practices and policies

Accounting Standards developed by ASB (Accounting

Standards Board) and established by ICAI (Institute of

Chartered Accountants of India)

Accounting Standards apply in respect of any enterprise

(whether organised in corporate, co-operative or other

forms) engaged in commercial, industrial or business

activities, irrespective of whether it is profit oriented or itis established for charitable or religious purposes

Presently 31 Accounting Standards in IndiaAS 1 to AS

32 with AS 8 now incorporated in AS 26


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ACCOUNTING STANDARD-1

DISCLOSURE OF ACCOUNTINGPOLICIES


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INTRODUCTION

Objective is to promote better understanding of Financial Statements

Compliance Facilitates better more meaningful comparison between

Financial Statements of different enterprises and the Financial

Statements of same enterprise at different times.

Fundamental Assumptions: Going Concern, Consistency, Accrual

Basis of Accounting.

Selection of Accounting Policy: Financial Statements to be prepared

to portray true and fair view of affairs of an enterprise. Selection of Accounting Policy to be governed by: Prudence,

Substance over form, Materiality.

Manner of Disclosure: All significant accounting policies adopted in

the preparation of financial statements should be disclosed and

should be disclosed at one place. Disclosure of change in accounting policies: Any change in

accounting policies which has a material effect in the current period

or which is expected to have a material effect in a later period should

be disclosed.


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Example illustrating Prudence as per AS-1

Raj, a trader, purchased 500 units of pens @ Rs. 10 per

unit. He sold 400 pens @ Rs. 15 per unit. If the netrealizable value per unit of the unsold pens is Rs. 15, Raj

shall value his stock at Rs. 10 per unit and thus ignoring

the profit of Rs. 500 that he may earn in the next

accounting period by selling 100 pens. If the net realizablevalue per unit of the unsold pens is Rs. 8, Raj shall value

his stock at Rs. 8 per unit and thus recognizing possible

loss Rs. 200 that he may incur in the next accounting

period by selling 100 units of unsold pens. This illustrates

that, as specified in AS-1, the prudence principle shall befollowed


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Valuation of inventories


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INTRODUCTION

Basic Principle: Inventory to be valued at lower of cost and net

realizable value (based on Principle of Prudence).

Standard specifies what cost of inventory should consist of and howto calculate Net Realizable Value.

Inventories are defined as assets held for sale in the ordinary course

of business, in the process of production for such sale or the raw

materials for production of materials for sale.

These do not form a part of Inventory: WIP arising in the business of

service providers, Financial Instruments held as stock-in-trade,

Producers stocks of agricultural and forest products, livestock,

mineral oils.

Cost of Inventory = Cost of Purchase + Cost of Conversion + Other

costs incurred to bring inventories to their present location.

NRV to be estimated on the most reliable evidence available at the

time.


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Example illustrating AS-2

Cost of a partly finished Table at the end of the year is Rs. 8000. The

table can be finished next year by a further expenditure of Rs. 1000.

The finished table can be sold for Rs. 2500, subject to payment of4% brokerage on selling price. The value of inventory is determined

as following:

Net Selling Price 2500

Less: Estimated Cost of Completion 1000

--------

1500

Less: Brokerage (4% of 2500) 100

--------

Net Realizable value 1400--------

Cost of Inventory 8000

Value of Inventory (Lower of Cost and Net Realizable Value) 1400


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Cash Flow Statements


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SCOPE

This standard applies to the enterprises: Having turnover more than Rs. 50 Crores in afinancial year;

Listed companies

This Accounting Standard is not mandatory forSmall and Medium Sized Companies and non-corporate entities falling in Level II and Level III

as defined in Appendix 1 to this CompendiumApplicability ofAccounting Standards to VariousEntities.


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Introduction

Cash flow statement is additional information to userof financial statement

This statement exhibits the flow of incoming andoutgoing cash

This statement assesses the ability of the enterpriseto generate cash and cash equivalents

It also assesses the needs of the enterprise to utilizethe cash and cash equivalents generated.

Non-cash transactionsshould be excluded fromthe cash flow statement. These transactions shouldbe disclosed in the financial statements


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Definitions

Cashcomprises cash on hand and demand deposits with banks.

Cash equivalents are short term, highly liquid investments that arereadily convertible into known amounts of cash and which aresubject to an insignificant risk of changes in value.

Cash f lows are inflows and outflows of cash and cash equivalents.

Operat ing act iv i t ies are the principal revenue-producing activitiesof the enterprise and other activities that are not investing orfinancing activities.

Invest ing act iv i t ies are the acquisition and disposal of long-termassets and other investments not included in cash equivalents.

Financin g act iv i t ies are activities that result in changes in the sizeand composition of the owners capital (including preference sharecapital in the case of a company) and borrowings of the enterprise.


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Features of Cash Flow StatementThe cash f low s tatement should repor t cash f lows dur ing the per iod

classi f ied by -

1.Operating activities:-These are principal revenue producing activitiesof the enterprise.

For example- cash receipts from the sale of goods and the renderingof services, royalties, fees, commissions and other revenue, cash

payments to suppliers for goods and services.

2.Investment activities:-The activities of acquisition and disposal oflong term assets and other investments not included in cash equivalentare investing activities.

For example- making and collecting loans, acquiring and disposal of debtand equity instruments, property and fixed assets etc.

3. Financ ing ac tivit ies:-Those activities that result in changes in sizeand composition of owners capital and borrowing of the organization.

For example- receipts from issuing shares, debentures, bonds, borrowing

and payment of borrowed amount, loan etc.


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CONTINGENCIES AND

EVENTS OCCURING AFTERTHE BALANCE SHEET DATE


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CONTINGENCIES

A.S.4 defines a contingency as a condition or situation, theultimate outcome of which, gain or loss, will be known or

determined only on the occurrence, or non-occurrence, of one

or more uncertain future events. The term Contingency is

restricted to conditions or situation at the balance sheet date.

For example- obligation arousing from discounted bills of

exchange, amount of guarantees, warranties for product sold

IT DOES NOT COMPRISES FOLLOWING KINDS OF

CONTINGENCIES-Liabilities of general and life insurance enterprises arising

from policies issued, obligations under retirement benefit

plans, depreciation on assets.


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ACCOUNTING TREATMENTCONTINGENT LOSSES-

It can be disclosed in two ways-

1. By making provisions for contingencies- whencontingencies are specified and not remote.

2. By showing a footnote under balance sheet- when

contingencies are general or unspecified and do not relate

to conditions or situations existing at the balance sheet

date.

CONTINGENT GAINS-

Contingency gains are not recognized in financial statements

since those gains may not even realize.

Estimation of financial effect of contingencies-

It is generally determined by judgment of management of

enterprise with help of information available up to the balancesheet date and reports of experts.


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EVENTS OCCURRING AFTER THE BALANCE SHEET DATE

According to A.S.-4, events occurring after the balance sheet

date are those significant events, both favorable and

unfavorable, that occur between the balance sheet date andthe date on which the financial statements are approved by theboard of directors .

Two types of events can be identified-

1. Those which provide further evidence of conditions thatexisted at the balance sheet date.

2. Those which are indicative of conditions that arose

subsequent to the balance sheet date.

For example- loss on trade receivable because of insolvency

of a customer which occur after the balance sheet date,

dividend declared or proposed after the balance sheet date.


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Net profit or loss for the period, priorperiod items and changes inaccounting policies

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OBJECTIVE To prescribe the classification and disclosure of certain items in

the statement of profit and loss so that all enterprises prepare

and present such a statement on a uniform basis.

Scope This Standard deals in presenting profit or loss from ordinary

activities, extraordinary items and prior period items in thestatement of profit and loss, in accounting for changes in

accounting estimates, and in enclosure of changes in

accounting policies.

This Standard does not deal with the tax implications of

extraordinary items, prior period items, changes in accounting

estimates, and changes in accounting policies for which

appropriate adjustments will have to be made depending onthe circumstances.

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DISCLOSURE

Net Profit or Loss for the Period

All items of income and expense which are recognized in a periodshould be included in the determination of net profit or loss for the period.

The net profit or loss for the period comprises the following

components, each of which should be disclosed on the face of the statement

of profit and loss:

(a) profit or loss from ordinary activities; and

(b) extraordinary items.For example, losses sustained as a result of an earthquake.

Prior Period ItemsThe nature and amount of prior period items should be separately

disclosed in the statement of profit and loss in a manner that their impact

on the current profit or loss can be perceived.

The term prior period items, as defined in this Standard , refers only

to income or expenses which arise in the current period as a result of errors

or omissions in the preparation of the financial statements of one or more

prior periods. The term does not include other adjustments necessitated by

circumstances, which though related to prior periods, are determined in the

current period.


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Depreciation accounting


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INTRODUCTION

A measure of the wearing out, consumption or other

loss of value of a depreciable asset arising fromuse, effluxion of time or obsolescence throughtechnology and market changes.

Depreciation is allocated so as to charge a fairproportion of the depreciable amount in eachaccounting period during the expected useful life ofthe asset.

Depreciation includes amortization of assets whoseuseful life is predetermined.

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Scope Expected to be used during more than one accounting

period.

Have a limited useful life .

Held by an enterprise for use in 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 .

NOT APPLICABLE IN:

Forests, plantations and similar regenerative naturalresources.

Wasting assets such as oils, natural gas and similarnon-regenerative resources .

Expenditure on research and development .

Goodwill and other intangible assets . 25


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Assessment

Assessment of depreciation and the amount to be charged

in respect of 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 has

been revalued;

(ii) expected useful life of the depreciable asset; and(iii) estimated residual value of the depreciable asset.

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DEPRECIABLE ASSETS LIFE

The useful life of a depreciable asset is shorter than itsphysical life and is:

Pre-determined by legal or contractual limits.

Directly governed by extraction or consumption;

Dependent on the extent of use and physicaldeterioration on account of wear and tearReduced by obsolescence arising from such factorsas:

(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.27


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Methods of allocating depreciation

The most commonly employed in industrial and

commercial enterprises

1. Straight line method

2. The reducing balance method

The management of a business selects the most

appropriate method(s) based on various important

factors

1. type of asset

2. the nature of the use of such asset

3. circumstances prevailing in the business 28


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Disclosure

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.

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.

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Accounting for

construction contracts


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ObjectiveObjective of A.S. 7 is to prescribe the

accounting treatment of revenue and costsassociated with construction contracts

ScopeIt should be applied in accounting for

construction contracts in the financialstatements of contractors.

Definition


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DefinitionA construction contract is a contract specifically

negotiated for the construction of a single asset such

as a bridge, building 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 such as construction of refineries.

Contract costA. Costs that relate directly to the specific contract.

B. Costs that are attributable to contracts activity in general.

C. Other costs chargeable to customer under terms of contract.

Contract revenuea. The initial amount of revenue agreed in the contracts

b. Variations in contract work, claims and incentive

payments.


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Recognition of contract revenue and

cost

Steps of percentage of completion method

1. Estimate total revenue and cost of contract.

2. Compute cost incurred up to reporting date.

3. Calculate % of cost incurred to total cost.

4. Revenue for the period will be that % of total

revenue.5. Show the amount of revenue and cost in P&L

a/c of the period.

Example


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Example

Contract period of building a bridge is 3 years. Total

estimated revenue and cost are respectively Rs.10000

and Rs.9000.Cost incurred in 1styear is Rs.2700, 2nd

year is Rs.3600, 3rdyear is Rs.2700. find out revenue

and % of completion of contract in 3 years.

So, % of completion of project in 1styear is

2700/9000*100 = 30%, 2ndyear is 3600/9000*100 =

40%, 3rdyear is 2700/9000*100 = 30%

So, revenue for 1styear will be 30% of 10000 = 3000,

2ndyear 40% 0f 10000 = 4000 and 3rdyear 30% of

10000 = 3000.


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ACCOUNTING STANDARD - 9

Revenue recognition

Objective


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Objective

A.S. 9 is mainly concerned with the timing of

recognition of revenue in the statement of profit and

loss of an enterprise

scope

It is concerned only with recognition of revenue arising

in the course of the ordinary activities of the enterprisefrom

The sale of goods

The rendering of services The use by others of enterprise resources yielding

interest, royalties and dividends.


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It does not deal with followings -1. revenue arising from construction contracts

2. revenue arising from hire purchase lease agreements

3 .revenue arising from govt. grants and similar subsidies4. revenue of insurance companies arising from insurance contracts

for exampleappreciation in value of fixed assets, natural

increase in forest products, change in foreign exchange.

DefinitionRevenue 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 renderings of services,

and from the use by others of enterprise resources yielding interest,

royalties and dividends.


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Timing of recognition of revenue from

a) Sale of goodswhen seller has transferred the property

in the goods to the buyer for a consideration.

b) Rendering of serviceswhen service is performed

proportionately or completely.

c) Intereston the time basis taking into account the

amount outstanding and the rate applicable.

d) Royaltieson the accrual basis in accordance with theterms of the relevant agreement.

a) Dividendwhen the owners right to receive payment is

established.


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Accounting for fixedassets


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Objective

Objective of A.S. 10 is to prescribe the accounting treatment

of fixed assets .

Scope

Fixed assets included under it are such as land, building,

plant and machinery, vehicles, furniture and fittings,

goodwill, patents ,trademarks and designs.

It does not deal with following assets-

Forests, plantations etc. Livestock.

Expenditure on real state development.

Other non regenerative natural resources.


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Definition

Fixed asset is an asset held with the attention of being used

for the purpose of producing or providing goods or services

and is not held for sale in the normal course of business.

Some points to be considered while accounting for fixed

assets

Gains and losses arising from disposal of fixed assets

should be recognized in P&L a/c

If expenditure on fixed asset is of capital nature then it

should be added to its book value. If expenditure on fixed asset is of revenue nature then it

should be written in P&L a/c.

In balance sheet depreciation (if applicable) should be

reduced from book value of asset.


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The effects of changes in

foreign exchange rates


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Scope An enterprise may have transactions in foreign currencies or it may have

foreign operations. These transactions must be expressed in the

enterprises reporting currency in the financial statements.

This Standard also deals with accounting for foreign currency transactionsin the nature of forward exchange contracts.

It does not deal with- This Standard does not specify the currency in which an enterprise presents

its financial statements. However, an enterprise normally uses the currency

of the country in which it is domiciled. This Standard does not deal with the restatement of an enterprises financial

statements from its reporting currency into another currency for the

convenience of users accustomed to that currency or for similar purposes.

This Standard does not deal with the presentation in a cash flow statement

of cash flows arising from transactions in a foreign currency and thetranslation of cash flows of a foreign operation.

This Standard does not deal with exchange differences arising from foreign

currency borrowings to the extent that they are regarded as an adjustment

to interest costs.

Foreign Currency Transactions


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Foreign Currency Transactions

A foreign currency transaction should be recorded, on initial recognition

in the 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 transaction.

Foreign currency monetary items should be reported using the closing

rate. However, in certain circumstances, the closing rate may not reflect

with reasonable accuracy the amount in reporting currency that is likely

to be realized from, or required to disburse(ex: unrealistic closing rate),

such item should be recorded in the reporting currency at the amount

which is likely to be realized from, or required to disburse, such item at

the balance sheet date.

Non-monetary items which are carried in terms of historical cost

denominated in a foreign currency should be reported using the

exchange rate at the date of the transaction.

Contd


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Contd

Non-monetary items which are carried at fair value or other similar

valuation denominated in a foreign currency should be reported using

the exchange rates that existed when the values were determined.

Exchange differences arising on the settlement of monetary items or

on reporting an enterprises monetary items at rates different from

those at which they were initially recorded during the period, orreported in previous financial statements, should be recognized as

income or as expenses in the period in which they arise.

For non-integral foreign operation , however, the exchange

differences forms a part of an enterprises net investment and shouldbe accumulated in a foreign currency translation reserve in the

enterprises financial statements until the disposal of the net

investment, at which time they should be recognized as income or as

expenses.

Financial Statements


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Financial StatementsIntegral Foreign Operations

The financial statements of an integral foreign operation should be

translated using the principles and procedures discussed for foreigncurrency transactions as if the transactions of the foreign operation

had been those of the reporting enterprise itself.

Non-integral Foreign Operations

In translating the financial statements of a non-integral foreignoperation for incorporation in its financial statements, the reporting

enterprise should use the following procedures:

(a) the assets and liabilities, both monetary and non-monetary, of the

non-integral foreign operation should be translated at the closing rate.

(b) income and expense items of the non-integral foreign operationshould be translated at exchange rates at the dates of the

transactions.

(c) all resulting exchange differences should be accumulated in a foreign

currency translation reserve until the disposal of the net investment.


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ACCOUTING STANDARD-12

Accounting for governmentgrants


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Scope

This Standard deals with accounting for government grants.

Government Grants are sometimes called by other names suchas subsidies, cash incentives, duty drawbacks, etc.

It does not deal with:

The special problems arising in accounting for governmentgrants in financial statements reflecting the effects of changingprices or in supplementary information of a similar nature

Government assistance other than in the form of governmentgrants

Government participation in the ownership of the enterprise

Accounting Treatment


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Accounting Treatment

Government grants should not be recognized until there is reasonable

assurance that

(i) the enterprise will comply with the conditions attached to them, and

(ii) the grants will be received.

Two broad approaches may be followed for the accounting treatment of

government grants: the capital approach, under which a grant is treated aspart of shareholders funds, and the income approach, under which a grant

is taken to income over one or more periods. It is generally considered

appropriate that accounting for government grant should be based on the

nature of the relevant grant. Grants which have the characteristics similar to

those of promoters contribution should be treated as part of shareholders

funds. Income approach may be more appropriate in the case of other

grants.

Government grants of the nature of promoters contribution should be

credited to capital reserve and treated as a part of shareholders funds.


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Contd


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ContdGovernment grants that are receivable as compensation for expenses or

losses incurred in a previous accounting period or for the purpose of giving

immediate financial support to the enterprise with no further related costs,should be recognized and disclosed in the profit and loss statement of the

period in which they are receivable, as an extraordinary item if appropriate

Government grants that become refundable should be accounted for as an

extraordinary item. The amount refundable in respect of a grant related to

revenue should be applied first against any unamortized deferred credit

remaining in respect of the grant. To the extent that the amount refundable

exceeds any such deferred credit, or where no deferred credit exists, the

amount should be charged to profit and loss statement. The amount

refundable in respect of a grant related to a specific fixed asset should be

recorded by increasing the book value of the asset or by reducing the capitalreserve

Government grants in the nature of promoters contribution that become

refundable should be reduced from the capital reserve


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Accounting Standard-13

Accounting forInvestments


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Scope

This Standard deals with accounting for investments in the financial

statements of enterprises and related disclosure requirements.

It does not deal with- The bases for recognition of interest, dividends and rentals earned on

investments

Operating or finance leases

Investments of retirement benefit plans and life insurance enterprises

Mutual funds and venture capital funds and/or the related assetmanagement companies, banks and public financial institutionsformed under a Central or State Government Act or so declared underthe Companies Act, 1956

I t t


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Investment:-

Investments are assets held by an enterprise for earning income by wayof dividends, interest, and rentals, for capital appreciation, or for other

benefits to the investing enterprise. Investments by a firm can be in a different forms and for different

motives.

We can classify investment in two parts:-

1) Current investment. 2) Long Term Investment.

Cost of Investment:-The cost of an investment includes acquisition charges such as brokerage,

fees and duties.

If an investment is acquired, or partly acquired, by the issue of shares orother securities, the acquisition cost is the fair value of the securities

issued. If an investment is acquired in exchange, or part exchange, for another

asset, the acquisition cost of the investment is determined by referenceto the fair value of the asset given up.

Carrying Amount of Investment:


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Carrying Amount of Investment:-

1) Current Investment:-

The carrying amount is the lower of cost and fair value.

Any reduction to fair value and any reversals of such reductions areincluded in the profit and loss statement.

2) Long Term Investment:-

These are usually of individual importance to the investing

enterprise. The carrying amount of long-term investments is

therefore determined on an individual investment basis.

Reclassification of investments:-

Where long-term investments are reclassified as current

investments, transfers are made at the lower of cost and carryingamount at the date of transfer.

Where investments are reclassified from current to long-term,

transfers are made at the lower of cost and fair value at the date of

transfer.


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Accounting Standard-14

Accounting forAmalgamations

Introduction


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Introduction This standard deals with accounting for amalgamations and the

treatment of any resultant goodwill or reserves.

This standard does not deal with cases of acquisitions which arise

when there is a purchase by one company of the whole or part ofthe shares, or the whole or part of the assets, of another company in

consideration for payment in cash or by issue of shares or other

securities in the acquiring company or partly in one form and partly

in the other.

Types of Amalgamation

Nature of Merger.

Nature of Purchase.

Methods of Accounting for Amalgamations

The pooling of interests method.

The purchase method.

The pooling of interests method:-


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The pooling of interests method:In this method all assets, liabilities and reserves of the transferorcompany are recorded by the transferee company at their existingcarrying amounts.

The purchase method:- In this method assets and liabilities are recorded at their existing

carrying amounts.

By allocating the consideration to individual identifiable assets and

liabilities on the basis of their fair values at the date ofamalgamation.

Consideration:-1. Securities.

2. Cash.

3. Other Assets

In determining the value of the consideration, an assessment is madeof the fair value of its element.

Balance of P&L Acco nt


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Balance of P&L Account

1) Nature of merger- in this type of Amalgamation we aggregate

balances of both the company.

2) Nature of Purchase- In this type of Amalgamation we do notconsider P&L Balance.


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Employee Benefits


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Borrowing costs

ACCOUNTING


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ACCOUNTING This Standard is used to prescribe the accounting treatment

for borrowing costs

This Standard does not deal with the actual or imputed cost ofowners equity, including preference share capital notclassified as a liability

Borrowing costs that are directly attributable to the acquisition,construction or production of a qualifying asset should becapitalized as part of the cost of that asset. The amount ofborrowing costs eligible for capitalization should bedetermined in accordance with this Standard

Other borrowing costs should be recognized as an expense inthe period in which they are incurred


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Example

XYZ Ltd. has taken a loan of USD 10,000 onApril 1, 20X3, for a specific project at aninterest rate of 5% p.a., payable annually. On

April 1, 20X3, the exchange rate between thecurrencies was Rs. 45 per USD. The exchangerate, as at March 31, 20X4, is Rs. 48 per USD.The corresponding amount could have been

borrowed by XYZ Ltd. in local currency at aninterest rate of 11 per cent annum as on April1, 20X3.

Contd


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Contd

The following computation would be made to determine the amount ofborrowing costs for the purposes of AS 16:

Interest for the period = USD 10,000 5% Rs. 48/USD =Rs. 24,000

Increase in the liability towards the principal amount = USD 10,000 (4845) = Rs. 30,000

Interest that would have resulted if the loan was taken in Indian currency =USD 10,000 45 11% = Rs. 49,500

Difference between interest on local currency borrowing and foreigncurrency borrowing = Rs. 49,500Rs. 24,000 = Rs.25,500

Therefore, out of Rs. 30,000 increase in the liability towards principalamount, only Rs. 25,500 will be considered as the borrowing cost

Contd


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Contd Thus, total borrowing cost would be Rs. 49,500 being the aggregate of

interest of Rs. 24,000 on foreign currency borrowings plus the exchangedifference to the extent of difference between interest on local currencyborrowing and interest on foreign currency borrowing of Rs. 25,500

Thus, Rs. 49,500 would be considered as the borrowing cost to beaccounted for as per AS 16 and the remaining Rs. 4,500 would beconsidered as the exchange difference to be accounted for as per AS 11,The Effects of Changes in Foreign Exchange Rates.

In the above example, if the interest rate on local currency borrowings isassumed to be 13% instead of 11%, the entire exchange difference of Rs.30,000 would be considered as borrowing costs, since in that case thedifference between the interest on local currency borrowings and foreigncurrency borrowings [i.e. Rs. 34,500 (Rs. 58,500Rs. 24,000)] is more

than the exchange difference of Rs. 30,000

Therefore, in such a case, the total borrowing cost would be Rs. 54,000(Rs. 24,000 + Rs. 30,000) which would be accounted for under AS 16 andthere would be no exchange difference to be accounted for under AS 11,The Effects of Changes in Foreign Exchange Rates


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THANK

YOU

group 4, accounting standarsd 1-16, 22-08-2012

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