Advanced financial accounting reporting ICWAI

FINAL GROUP - IV PAPER - 16 ADVANCED FINANCIAL ACCOUNTING & REPORTING The Institute of Cost and Works Accountants of India 12, SUDDER STREET, KOLKATA - 700 016 First Edition : January 2008 Revised Edition : March 2009 Second Revised Edition : June 2010 Reprint : May 2011 Published by: Directorate of Studies The Institute of Cost and Works Accountants of India 12, SUDDER STREET, KOLKATA - 700 016 Printed at : India Limited, 50/2, TTC MIDC Industrial Area, Mahape, Navi Mumbai - 400 710, India Copyright of these Study Notes is reserved by the Institute of Cost and Works Accountants of India and prior permission from the Institute is necessary for reproduction of the whole or any part thereof CONTENTS Page No Study Note - Introduction to IAS, USGAAP, Indian Accounting Standard 1.1 Framework of Accounting 1.1.1 Introduction 1.1.2 Meaning of Accounting 1.1.3 Objectives and Functions of Accounting 1.1.4 Fundamental Accounting Assumptions 1.1.5 Limitations of Accounting 1.1.6 Financial Statements 1.1.7 Qualitative Characteristics of Financial Statements 1.2 Accounting Standards - Applicability, Interpretation, Scope and Compliance 1.3 1.4 1.5 1.6 2 3 4 US GAAPS 1.3.1 Established Accounting Principles in the US 1.3.2 Other Accounting Literature 1.3.3 AICPA 1.3.4 FASB 1.3.5 Components of US GAAP International Accounting Standards 1.4.1 Introduction 1.4.2 Extract of the International Accounting Standards 10 10 11 11 11 11 13 13 13 International Financial Reporting Standards A Comparison IGAAP - US GAAP - IFRS 29 39 Study Note - Preparation of Company Accounts under Various Circumstances 49 2.1 Merger and Acquisitions 50 2.1.1 Introduction 50 2.1.2 What is Merger? 50 2.1.3 Varieties of Mergers 51 2.1.4 Acquisitions 51 2.1.5 Types of Acquisitions 52 2.1.6 Distinction Between Mergers and Acquisitions 52 Accounting for Mergers and Acquisitions 54 2.2.1 Methods of Accounting 55 Pooling of Interest Method 55 Purchase Method 56 2.2.2 How to Value an Acquisition 60 2.2 Page No 2.3 2.2.3 Sources of Gains from Acquisitions 60 2.2.4 Valuation Procedures 61 External Reconstruction 62 Illustrations I Computation and Discharge of Purchase Consideration II Basics of Amalgamation and Absorption III Purchasing Company holding shares in Selling Company IV Selling Company holding shares in Purchasing Company V Cross Holding 66 66 73 118 142 146 VI VII VIII IX X XI XII XIII Chain Holding Internal Reconstruction Reverse Merger External Reconstruction Surrender of Shares Demerger Sales of Division Impact of Reconstruction over Wealth of Investor and Company 155 158 171 176 179 182 205 208 XIV Buy back of Shares 211 XV Conversion 217 Study Note - Group Financial Statements 225 3.1 Holding Company 226 3.2 Methods of Combination 226 3.3 Accounting Treatment 227 3.4 Preparation of Group Cash Flow Statement 299 3.5 Statement of Cash Flows 300 3.6 Illustrations on Cash Flow Statement 304 Study Note - Segmental Reporting 359 4.1 Introduction 360 4.2 Need for Segmental Reporting 360 4.3 Arguments against Segmental Reporting 361 4.4 International Scenario 362 Page No 4.5 The Indian Scenario 370 4.5.1 Definitions 370 4.5.2 Disclosure Requirements 373 4.5.3 Accounting and Auditing Issues 373 4.6 Segmental Reporting Problems & Difficulties 375 4.7 Specific Issues Relating to Management Accountants 377 4.8 Segmental Disclosure – A Practical Example 381 4.9 Illustrations on Segmental Reporting 385 Study Note - Development in External Reporting 389 5.1 Indian Accounting Standards 390 5.1.1 Companies (Accounting Standards) Rules, 2006 390 5.1.2 Applicability of Accounting Standard to Non-corporate Entities 392 5.2 Accounting Standards 395 5.3 Financial Reporting across the world 473 5.4 Post Balance Sheet Events 477 5.5 External Reporting under Capital Market Regulations 479 5.6 Value Added Statement 494 5.7 Economic Value Added Statement 507 5.8 Human Resource Accounting 512 5.9 Environmental Accounting 512 5.10 Guidance Notes on Accounting for Tax Matters 516 5.11 Guidance Notes on Derivatives 533 5.12 Guidance Notes for Special Businesses / Reports 556 Study Note - Government Accounting in India 571 6.1 6.2 6.3 6.4 Government Accounting in India General Principles of Government Accounting Methods of Government Accounting Comparison with Commercial Accounting 572 572 573 573 6.5 Comptroller and Auditor General of India 574 6.6 Audit of Government Companies (Commercial Audit) 574 6.7 Audit Board Setup in Commercial Audit 574 Page No Section - 11 Comptroller and Auditor General to Prepare and Submit Accounts to the President, Governors of State and Administrators of Union Territories having Legislative Assemblies 576 6.8 Public Accounts Committee 576 6.9 Role of Public Accounts Committee 581 6.10 Committee on Public Undertakings 582 6.11 Specimen Report 583 STUDY NOTE - Introduction to IAS, USGAAP, Indian Accounting Standard This Study Note includes: • Framework of Accounting • Indian Accounting Standard • US GAAP • International Accounting Standards • International Financial Reporting Standards • Comparative Analysis of the Indian Accounting Standard, IFRS and USGAAP Framework of Accounting 1.1 Framework of Accounting 1.1.1 Introduction Most of the world’s work is done through organizations - g roups of people who work together to accomplish one or more objectives In doing its work, an organization uses resources - l abor, materials, various services, buildings, and equipment These resources need to be financed, or paid for To work effectively, the people in an organization need information about the amounts of these resources, the mean of financing them and the results achieved through using them Parties outside the organization need similar information to make judgments about the organization Accounting is a system that provides such information Organizations can be classified broadly as either for-profit or nonprofit As these names suggest, a dominant purpose of organizations in the former category is to earn a profit, whereas organizations in the latter category have other objectives, such as governing, providing social services, and providing education Accounting is basically similar in both types of organizations 1.1.2 Meaning of Accounting The Committee on Terminology set up by the American Institute of Certified Public Accountants formulated the following definition of accounting in 1961: “Accounting is the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character, and interpreting the result thereof As per this definition, accounting is simply an art of record keeping The process of accounting starts by first identifying the events and transactions which are of financial character and then be recorded in the books of account This recording is done in Journal or subsidiary books, also known as primary books Every good record keeping system includes suitable classification of transactions and events as well as their summarization for ready reference After the transaction and events are recorded, they are transferred to secondary books i.e Ledger In ledger transactions and events are classified in terms of income, expense, assets and liabilities according to their characteristics and summarized in profit & loss account and balance sheet Essentially the transactions and events are to be measured in terms of money Measurement in terms of money means measuring at the ruling currency of a country, for example, rupee in India, dollar in the U.S.A and like The transactions and events must have at least in par, financial characteristics The inauguration of a new branch of a bank is an event without having financial character, while the business disposed of by the branch is an event having financial character Accounting also interprets the recorded, classified and summarized transactions and events 1.1.3 Objectives and Functions of Accounting The main objectives are Systematic recording of transactions, Ascertainment of results of recorded transactions and the financial position of the business, providing information to the users for rational decision-making and to know the solvency position The functions of accounting are Measurement, Forecasting, Decision-making, Comparison & Evaluation, Control, Government Regulation and Taxation Advanced Financial Accounting & Reporting Accounting concepts Accounting concepts define the assumptions on the basis of which financial statements of a business entity are prepared Certain concepts are perceived, assumed and accepted in accounting to provide a unifying structure and internal logic to accounting process The word concept means idea or notion, which has universal application Financial transactions are interpreted in the light of the concepts, which govern accounting methods Concepts are those basic assumptions and conditions, which form the basis upon which the accountancy has been laid Unlike physical science, accounting concepts are only result of broad consensus These accounting concepts lay the foundation on the basis of which the accounting principles are formulated Accounting principles “Accounting principles are a body of doctrines commonly associated with the theory and procedures of accounting serving as an explanation of current practices and as a guide for selection of conventions or procedures where alternatives exists.” Accounting principles must satisfy the following conditions: They should be based on real assumptions; They must be simple, understandable and explanatory; They must be followed consistently; They should be able to reflect future predictions; They should be informational for the users Accounting conventions Accounting conventions emerge of accounting practices, commonly known as accounting, principles, adopted by various organizations above a period of time These conventions are derived by usage and practice The accountancy bodies of the world may change any of the convention to improve the quality of accounting information Accounting conventions need not have universal application 1.1.4 Fundamental Accounting Assumptions The Financial Statements are prepared with the following three Fundamental Accounting Assumptions Unless otherwise specified the readers of the Financial Statements assume that the Financial Statements are prepared in line with these assumptions They are Going Concern, Consistency & Accrual Accounting Standard describes them as follows 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 Consistency It is assumed that accounting policies are consistent from one period to another 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.) Framework of Accounting 1.1.5 Limitations of Accounting The Financials Statements are prepared on the basis of the above-mentioned assumptions, conventions and the Accounting Principles which the accountant chooses to adopt These bring in lot of subjectivity to the Financial Statements and hence these basis assumptions conventions and principles become the limitation of accounting The Financial Statements as the name states, accounts only for the items that can be measured by Money There are lots of items that money cannot measure but still are the most valuable assets for the enterprise, like Human Resources, which the Financial Statements does not depict The language of accounting has certain practical limitations and, therefore, the financial statements should be interpreted carefully keeping in mind all various factors influencing the true picture 1.1.6 Financial Statements Financial statements form part of the process of financial reporting A complete set of financial statements normally includes a balance sheet, a statement of profit and loss (also known as ‘income statement’), a cash flow statement and those notes and other statements and explanatory material that are an integral part of the financial statements They may also include supplementary schedules and information based on or derived from, and expected to be read with, such statements Such schedules and supplementary information may deal, for example, with financial information about business and geographical segments, and disclosures about the effects of changing prices Financial statements not, however, include such items as reports by directors, statements by the chairman, discussion and analysis by management and similar items that may be included in a financial or annual report Users and Their Information Needs The users of financial statements include present and potential investors, employees, lenders, suppliers and other trade creditors, customers, governments and their agencies and the public They use financial statements in order to satisfy some of their information needs These needs include the following: (a) Investors The providers of risk capital are concerned with the risk inherent in, and return provided by, their investments They need information to help them determine whether they should buy, hold or sell They are also interested in information which enables them to assess the ability of the enterprise to pay dividends (b) Employees Employees and their representative groups are interested in information about the stability and profitability of their employers They are also interested in information which enables them to assess the ability of the enterprise to provide remuneration, retirement benefits and employment opportunities (c) Lenders Lenders are interested in information which enables them to determine whether their loans, and the interest attaching to them, will be paid when due (d) Suppliers and other trade creditors Suppliers and other creditors are interested in information which enables them to determine whether amounts owing to them will be paid when due Trade creditors are likely to be interested in an enterprise over a shorter period than lenders unless they are dependent upon the continuance of the enterprise as a major customer ... of accounting are Measurement, Forecasting, Decision-making, Comparison & Evaluation, Control, Government Regulation and Taxation Advanced Financial Accounting & Reporting Accounting concepts Accounting. .. entities to present a statement of cash flows 14 Advanced Financial Accounting & Reporting International Accounting Standard Accounting Policies, Changes in Accounting Estimates and Errors Objective... in accounting for property, plant and equipment except when another Standard requires or permits a different accounting treatment 16 Advanced Financial Accounting & Reporting International Accounting