Paper 1: Accounting Accounting Standards Contents: CA Shruthi BN AS 6 AS 10 As 9
AS 6 Depreciation Accounting DEPRECIATION Meaning 2 It is a measure of wearing out, consumption or other loss of value of a depreciable asset arising from use and passage of time. Depreciable Assets They are those assets which are: Are expected to be used for more than one accounting period Have a limited useful life Are held for use in production of goods and services
Applicability of AS 6 AS 6 is not applicable to the following: Forests, Plantations Wasting Assets, Minerals and Natural gas Expenditure on R&D Goodwill Live stock 3
Calculation of Depreciation 4 Depreciation = Historical cost/revalued amount Estimated scrap value of depreciable assets Estimated useful life of depreciable assets Cost of depreciable assets is the total cost spent in connection with its acquisition, installation and commissioning. Estimated useful life is the period over which it is expected to be used by the enterprise. Generally useful life is shorter than physical life. Estimated scrap value is the price fetched when the depreciable asset is sold or scrapped at the end of its useful life. Depreciable Amount = Historical cost/revalued cost estimated scrap value
As Per AS6 Methods of Depreciation Straight Line Method and Written down value method 5 Selection of appropriate method depends on Type of asset Nature of the use of such asset Circumstances prevailing in the business, etc.
Changes in Depreciation Method Changes in depreciation method can be effected in following circumstances: For compliance of statute For compliance of accounting standards For more appropriate presentation of the financial statements Accounting treatment 6 New depreciation method should be applied from retrospective date (i.e. from the date of acquisition) Any difference between total depreciation charged up to date to be taken to profit and loss account
Change in Estimated Useful life Such changes to be given prospective effect in the books of account Change in estimated useful life Outstanding depreciable amount on the date of change to be allocated over revised useful life of assets Example P/M has useful life of 5 yrs. Depreciable amount is Rs 40 lakhs. The company has charged SLM depreciation. At the end of 6 th year, the balance useful life was re-estimated at 8 years. Depreciation charge from 7 th year = 40 40/10*6 = 2 7 8
Change in Historical Cost and Estimated Scrap Value 8 Change in the historical cost may occur due to revaluation, price adjustment, etc. Increase or decrease in historical cost is added/ deducted from the outstanding depreciable amount on the date of change. Such adjusted depreciable amount is allocated over remaining useful life of the depreciable asset Above principle has to be applied for change in estimated scrap value
Depreciation Charge on Addition/ Extension to an Existing Asset Addition/extension 9 If addition/extension is an integral part of existing asset, then it is depreciated over the remaining useful life of the existing asset In a reverse case, it is depreciated over the estimated useful life of additional assets. When the depreciable asset is discarded, demolished or destroyed book value after netting off sale proceeds to be debited/ credited to profit and loss account.
Disclosure Accounting policy with respect to depreciation Total cost of each class of assets, depreciation for the period and accumulated depreciation Following disclosure is given in the balance sheet: Gross block of fixed assets Less: Accumulated depreciation Net block of fixed assets Depreciation method and rated/useful life 10 Change in depreciation method XXX XXX XXX
Question No. 1 What would need to be done in books of account for change in the depreciation method? (a) (b) (c) (d) 11 Effect of change in depreciation method to be provided prospectively Retrospective effect to be given for such change from the date of acquisition of the asset No effect to be given in the books Change in the depreciation method is not possible as the method chosen first should be applied consistently from period to period
Question 1 Answer 12 Answer: (b)
Question No. 2 13 ABC Ltd uses horses to transport material from one place to another place on hilly area for construction activity. It purchases horses worth Rs 80,000 for transporting material on 1.4.2010. Useful life of horses was estimated at 5 years, therefore company decided to write off depreciation on horses as per SLM over 5 years as per AS 6. Whether the treatment is correct? (a) Yes (b) No (c) Can t say
Question 2 Answer 14 Answer : (b)
Question No. 3 A plant was depreciated under two different methods as under- 15 Year SLM WDV 1 st year 3.9 10.69 2 nd year 3.9 7.9 3 rd year 3.9 5.84 4 th year 3.9 4.32 Total 15.60 28.75 5 th year 3.9 3.19 If the company followed WDV for first four years and decides to switch over to SLM, what would be the amount of resultant surplus/deficiency? (a) Deficiency of 13.15 to be debited to profit and loss account (b) Deficiency of 13.15 to be credited to profit and loss account (c) Surplus of 13.15 to be debited to profit and loss account (d) Surplus of 13.15 to be credited to profit and loss account
Question 3 Answer 16 Answer : (d)
Question No. 4 Can land be depreciated? (a) (b) Yes, as it is a fixed asset No 17
Question 4 Answer 18 Ans: (b) as land is not a depreciable asset and may not satisfy the conditions laid out for depreciable assets (i.e. does not have a limited useful life)
AS 10 - Accounting for Fixed Assets Fixed assets Meaning It is an asset which is Held with intention of being used for the purposes of producing or providing goods and service Not held for sale in the normal course of business Expected to be used for more than one accounting period Examples: land and building, plant, machinery, furniture, etc. 19 This accounting standard is not applicable to the following items Forests, plantations and similar regenerative natural resources Wasting assets like minerals Expenditure on real estate development Live stock
Fixed Assets Measurement Fixed assets can be accounted at Historical cost/ Revalued price 20 Historical Cost includes Purchase price Import duties and non-refundable duties Directly attributable cost of bringing the asset to the working condition for its intended use such as delivery and handling cost, installation and commissioning charges, architect s fees, price adjustments, etc
Historical Cost for Self Constructed Assets Historical cost includes All costs which are directly related to the specific assets All attributable costs to the construction activity Any internal profit included in the cost should be eliminated 21
Cost of the Asset Acquired in Exchange of Existing Assets 22 Scenario 1: Fixed assets exchanged are not similar Assets acquired should be recorded at either fair market value of the asset given up or fair market value of the asset acquired, which ever is more clearly evident. Scenario 2: Fixed assets exchanged are similar Assets acquired should be recorded at either fair market value of the asset given up or fair market value of the asset acquired, if this is more clearly evident or net book value of the asset given up Scenario 3: fixed assets acquired in exchange of shares or other securities Assets should be recorded at either fair market value of asset purchased or fair market value of shares or securities, whichever is clearly available.
Revaluation of Fixed Assets Accounting Treatment First time upward revaluation Fixed asset account.. Dr Revaluation Account. Cr First time downward revaluation 23 Profit and loss account Dr Fixed assets account Cr
Revaluation of Fixed Assets Accounting Treatment First time downward revaluation and subsequent upward revaluation First time Same as before Subsequent upward revaluation : Fixed assets account Dr Profit and loss account Cr (only to the extent of amount written in first time downward revaluation) Revaluation reserve account Cr (for the balance amount) First time upward revaluation and subsequent downward revaluation 24 First time same as before Subsequent downward revaluation: Revaluation reserve account.. Dr (only to the extent of balance available with respect to the asset being revalued first time) Profit and loss account Dr (for balance amount or full amount) Fixed asset account Cr
Special circumstances Assets acquired on hire purchase To be recorded at cash price. Recording will be done as per AS 19 Jointly held assets Cost of the asset to be recorded proportionate to the right entity has to utilize the asset Fixed assets acquired at consolidated price Cost of each asset to be determined on a fair basis as per valuation by competent valuers. 25
Other matters 26 Improvements or repairs to fixed assets to be added to the cost of fixed assets if there is an increase in the expected future benefits from the assets, else charged to profit and loss account Addition or extension to an existing fixed asset If it forms an integral part, the cost to be added to the gross block of existing assets, else to be accounted separately. Profit or loss on disposal/retirement of assets to be taken to profit and loss account.
Disclosure 27 Gross and net book values at the beginning and end of the financial year Expenditure on construction of fixed assets Revalued amount
Question No 5 28 A company has purchased plant and machinery in the year 2007-08 for Rs 45 lakhs. A balance of Rs 5 lakh is still payable to the suppliers for the same. The supplier waived off the balance amount during the financial year 20010-11. What is the correct treatment of Rs 5 lakh? (a) (b) (c) (d) Treat it as income and credit it to profit and loss account. As there is no cash flow involved, Rs 5 lakh need not be accounted Rs 5 lakh to be deducted from the cost price of the asset Rs 5 lakh to be deducted from the cost price of the asset over the useful life of the asset.
Question No 5 29 Answer : (c)
Question No 6 ABC Ltd is constructing a fixed asset. The cost of the project is Materials : Rs 500,000 Direct expenses : Rs 100,000 Total wages of the company during the year Rs 120000 of which 1/12 is chargeable to the project Depreciation on asset used for the project Rs 12,000 Profit on sale of scrapped material Rs 10,000 What is the cost of fixed assets? (a) 732,000 (b) 722,000 (c) 622,000 (d) 612,000 30
Question 6 Answer 31 Answer: (d) Cost = 500,000+100,000+120,000/12+12,000-10,000
Question No 7 32 A company has credited the surplus arising in revaluation of land and building to the profit and loss account to the extent of depreciation charged theron in the previous year. It is argued by the company that to this extent, depreciation need not have been charged in these years. Whether the accounting treatment is correct? (a) (b) Yes, as AS 10 permits credit to the profit and loss account to the extent of depreciation amount No, AS 10 does not permit such credits to profit and loss account unless it is a case of subsequent upward revaluation.
Question No 7 33 Answer: (b)
AS 9 Revenue recognition 34 This standard explains when the revenue should be recognized in the profit and loss account and also the circumstances in which revenue recognition has to be postponed Revenue means gross inflow of cash, receivable or other consideration arising in the course of ordinary activities of an enterprise An enterprise generated revenue from The sale of goods Rendering of services Use of the enterprises resources by others yielding interest, dividend and royalties.
Sale of Goods 35 Revenue from sale of goods to be recognized when all the three conditions are fulfilled Seller has transferred the ownership of goods to the buyer for a price. OR all significant risks and rewards of ownership have been transferred to the buyer Seller does not retain any effective control of ownership of the transferred goods There is no significant uncertainty in collection of the amount of consideration
Sale of Goods Certain Principles 36 Circumstance 1 Delivery of goods is delayed at buyer s request Revenue recognition Where buyer has taken the title to goods and accepts billing, revenue to be recognized immediately 2 Sale on approval basis Revenue to be recognized when the buyer confirms his desire to buy such goods by communication 3 Warranty sales Sales recognized immediately, but a provision to be made to cover the unexpired warranty as per AS 29 4 Consignment sales Revenue should be recognized only when the goods are sold to third party 5 Installment sales Cash price to be recognized as revenue immediately. However, interest portion has to be recognized over a period of time.
Services Revenue from rendering services Following two methods can be followed 37 Completed service contract method where revenue is recognized only upon completion of the service contract and there exists no uncertainty about the collection of amount of service charges Proportionate completion method where revenue is recognized with reference to performance of each act. No significant uncertainty in collection of the revenue to exist.
Revenue from use of Enterprise Resources Sl. No. Particulars Revenue Recognition Criteria 1 Royalties On accrual basis as per terms of the agreement 2 Dividend When the declaring company declares dividend 3 Interest Recognized on time proportion basis 38
Postponement of revenue recognition 39 Where there exists significant uncertainty in collection of the revenue, revenue recognition should be postponed When uncertainty of collection of revenue arises subsequently after the revenue recognition, make a provision for the uncertainty in collection.
Question No 8 40 Case 1 : Sales include value of inter-division transfer of finished goods at market price for captive consumption of the consuming division. The year-end stock of such transferred goods is valued at cost. Case 2 : Sales are accounted on dispatch of products and include cost of self consumption of goods produced. Whether accounting treatment is correct from the perspective of AS 9? (a) (b) (c) (d) Yes in both cases No in the first case and yes in the second case No in both the cases Yes in the first case and No in the second case
Question 8 Answer 41 Answer: (c) ICAI has announced that inter-divisional transfers are not sales. Further, in the case of self-consumption, there is not transfer of risk to a third party.
Question No. 9 42 ABC Ltd has recognized Rs 7.5 lakhs on accrual basis income from dividend on securities and units of mutual funds of face value of Rs 50 lakhs held by it at the end of the financial year 31 March 2010. Dividends on the securities and mutual funds were declared at the rate of 15% on 15 th June, 2010. The dividend was proposed on 31 March, 2010 by the declaring company. Whether this treatment is as per the relevant accounting standard? (a) Yes, as the dividends were proposed on 31 March, 2010 (b) No, as the dividends were declared only on 15 June 2010 which is after the accounting year.
Question 9 Answer 43 Answer: (b) As per AS 9, income from dividend would need to be recognized only when it is declared.
THANK YOU 44