GOVERNMENT OF INDIA
Ministry of Corporate Affairs
NOTICE INVITING COMMENTS ON THE DRAFT COMPANIES
(ACCOUNTING STANDARDS) AMENDMENT RULES 2016
Dated the 16th February, 2016
1. The draft Companies (Accounting Standards) Amendment Rules,
2016 has been placed on the Ministry's website at www.mca.gov.in. It has
been decided to invite suggestions/comments on the above draft.
3. Suggestions/comments on above mentioned draft along with
justification in brief may be sent latest by 1st March, 2016 through email at
cas@mca.gov.in. It is requested that the name, Telephone number and
address of the sender should be indicated clearly at the time of sending
suggestions/comments.
Name, Address, Contact No. of Stake holder __________________
SL.No Para No. Suggestion Justification
Ministry of Corporate Affairs
DRAFT NOTIFICATION
New Delhi, the ..................
ACCOUNTING STANDARDS
G.S.R....... (E). ­ In exercise of the powers conferred by section 133 read with section 469
of the Companies Act, 2013 (18 of 2013) and sub-section (1) of section 210A of the
Companies Act, 1956 (1 of 1956), the Central Government, in consultation with National
Advisory Committee on Accounting Standards, hereby makes the following rules, which
shall supersede the Companies (Accounting Standards) Rules, 2006 to the extent specified
in these rules namely:-
1. Short title and commencement.- (1) These rules may be called the Companies
(Accounting Standards) Rules, 2016.
(2) They shall come into force on the date of their publication in the Official Gazette.
2. Definitions.- (1)In these rules, unless the context otherwise requires,-
(a) "Accounting Standards" means the standards of accounting or any addendum
thereto as specified in rule 3 of these rules.
(b) "Act" means the Companies Act, 2013 (18 of 2013).
(c) "Annexure" means an Annexure to these rules.
(d) "Financial Statements" means financial statements as defined in sub -section 40
of Section 2 of the Act.
(e) "Enterprise" means a `company' as defined in sub-section 20 of Section 2 of
the Companies Act, 2013.
(f) "Small and Medium Sized Company" (SMC) means, a company-
(i) whose equity or debt securities are not listed or are not in the process of
listing on any stock exchange, whether in India or outside India;
(ii) which is not a bank, financial institution or an insurance company;
(iii) whose turnover (excluding other income) does not exceed rupees fifty crore
in the immediately preceding accounting year;
(iv) which does not have borrowings (including public deposits) in excess of
rupees ten crore at any time during the immediately preceding accounting
year; and
(v) which is not a holding or subsidiary company of a company which is not a
small and medium-sized company.
(g) Indian Accounting Standards" means the standards of accounting or any
addendum thereto as specified in Companies (Indian Accounting Standards)
Rules, 2015 and as amended from time to time.
Explanation: For the purposes of clause (f), a company shall qualify as a Small and
Medium Sized Company, if the conditions mentioned therein are satisfied as at the end of
the relevant accounting period.
(2) Words and expressions used herein and not defined in these rules but defined in the
Act shall have the same meaning respectively assigned to them in the Act.
3. Accounting Standards.- (1) The Accounting Standards AS 2, AS 4, AS 10, AS
14, AS 21 and AS 29 as specified in Annexure to these Rules, in supersession of the
corresponding Accounting Standards with the same number and nomenclature specified
in Companies (Accounting Standards) Rules, 2006, shall come into effect in respect of
accounting periods commencing on or after the publication of these Rules.
(2) The Accounting Standards as specified in Annexure to the Companies
(Accounting Standards) Rules, 2006, except those substituted by sub rule 2 shall continue
to be applicable till these are specifically substituted.
4. Obligation to comply with the Accounting Standards.- (1) Every company, other
than companies required to comply with Indian Accounting Standards and its auditor(s)
shall comply with the Accounting Standards in the manner specified in Annexure to these
rules.
(2) The Accounting Standards shall be applied in the preparation of General Purpose
Financial Statements.
5. An existing company, which was previously not a Small and Medium Sized
Company (SMC) and subsequently becomes an SMC, shall not be qualified for exemption
or relaxation in respect of Accounting Standards available to an SMC until the company
remains an SMC for two consecutive accounting periods.
ANNEXURE
(See rule 3)
ACCOUNTING STANDARDS
A. General Instructions
1. The Accounting Standards prescribed in the Annexure to the Companies
(Accounting Standards) Rules, 2006 shall be the accounting standards prescribed
under these rules except for the modifications as specified these rules.
Provided that the Transitional Provisions pertaining to the Accounting Standards
contained in the abovesaid Annexure shall be applicable only where an Accounting
Standard which was not applicable to a company earlier becomes applicable to the
company for the first time.
2. The reference to Accounting Standard (AS) 6, Depreciation Accounting or/and
Accounting Standard (AS) 10, Accounting for Fixed Assets shall be read as
Accounting Standard (AS) 10, Property, Plant and Equipment.
3. The reference to `Schedule VI' or `Companies Act, 1956' shall mutatis mutandis
mean `Schedule III' and `Companies Act, 2013', r espectively.
4. SMCs shall follow the following instructions while complying with Accounting
Standards under these rules:-
5.1 the SMC which does not disclose certain information pursuant to the exemptions
or relaxations given to it shall disclose (by way of a note to its financial
statements) the fact that it is an SMC and has complied with the Accounting
Standards insofar as they are applicable to an SMC on the following lines:
"The Company is a Small and Medium Sized Company (SMC) as defined in
the General Instructions in respect of Accounting Standards notified under the
Companies Act, 2013. Accordingly, the Company has complied with the
Accounting Standards as applicable to a Small and Medium Sized Company."
5.2 Where a company, being an SMC, has qualified for any exemption or relaxation
previously but no longer qualifies for the relevant exemption or relaxation in
the current accounting period, the relevant standards or requirements become
applicable from the current period and the figures for the corresponding period
of the previous accounting period need not be revised merely by reason of its
having ceased to be an SMC. The fact that the company was an SMC in the
previous period and it had availed of the exemptions or relaxations available to
SMCs shall be disclosed in the notes to the financial statements.
5.3 If an SMC opts not to avail of the exemptions or relaxations available to an
SMC in respect of any but not all of the Accounting Standards, it shall disclose
the standard(s) in respect of which it has availed the exemption or relaxation.
5.4 If an SMC desires to disclose the information not required to be disclosed
pursuant to the exemptions or relaxations available to the SMCs, it shall
disclose that information in compliance with the relevant accounting standard.
5.5 An SMC may opt for availing certain exemptions or relaxations from
compliance with the requirements prescribed in an Accounting Standard:
Provided that such a partial exemption or relaxation and disclosure shall not be
permitted to mislead any person or public.
5. Accounting Standards, which are prescribed, are intended to be in conformity
with the provisions of applicable laws. However, if due to subsequent amendments in the
law, a particular accounting standard is found to be not in conformity with such law, the
provisions of the said law will prevail and the financial statements shall be prepared in
conformity with such law.
6. Accounting Standards are intended to apply only to items which are material.
7. The accounting standards include paragraphs set in bold italic type and plain
type, which have equal authority. Paragraphs in bold italic type indicate the main
principles. An individual accounting standard shall be read in the context of the objective,
if stated, in that accounting standard and in accordance with these General Instructions.
B. Accounting Standards
Accounting Standard (AS) 2
Valuation of Inventories
(This Accounting Standard includes paragraphs set in bold italic type and plain type,
which have equal authority. Paragraphs in bold italic type indicate the main principles.
This Accounting Standard should be read in the context of its objective and the General
Instructions contained in part A of the Annexure to the Notification.)
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 Standard 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 Standard 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, Construction Contracts);
(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 Standard.
Definitions
3. The following terms are used in this Standard with the meanings specified:
3.1 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.
3.2 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 spare parts, servicing equipment and
standby equipment which meet the definition of property, plant and equipment as per AS
10, Property, Plant and Equipment. Such items are accounted for in accordance with
Accounting Standard (AS) 10, Property, Plant and Equipment.
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.
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. Un allocated
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;
(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 ordinarily 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.
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 consistent 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
(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:
(a) Raw materials and components
(b) Work-in-progress
(c) Finished goods
(d) Stock-in-trade (in respect of goods acquired for trading)
(e) Stores and spares
(f) Loose tools
(g) Others (specify nature)
Accounting Standard (AS) 4
All paragraphs of this Standard that deal with contingencies are applicable only to the extent not covered by
other Accounting Standards prescribed by the Central Government. For example, the impairment of financial
Contingencies and Events Occurring After the Balance Sheet Date
(This Accounting Standard includes paragraphs set in bold italic type and plain type,
which have equal authority. Paragraphs in bold italic type indicate the main principles.
This Accounting Standard should be read in the context of the General Instructions
contained in part A of the Annexure to the Notification.)
Introduction
1. This Standard deals with the treatment in financial statements of
(a) contingencies, and
(b) events occurring after the balance sheet date.
2. The following subjects, which may result in contingencies, are excluded from the
scope of this Standard in view of special considerations applicable to them:
(a) liabilities of life assurance and general insurance enterprises arising from
policies issued;
(b) obligations under retirement benefit plans; and
(c) commitments arising from long-term lease contracts.
Definitions
3. The following terms are used in this Standard with the meanings specified:
3.1 A contingency is a condition or situation, the ultimate 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.
3.2 Events occurring after the balance sheet date are those significant events, both
favourable and unfavourable, that occur between the balance sheet date and the date on
which the financial statements are approved by the Board of Directors in the case of a
company, and, by the corresponding approving authority in the case of any other entity.
Two types of events can be identified:
(a) those which provide further evidence of conditions that existed at the balance
sheet date; and
(b) those which are indicative of conditions that arose subsequent to the balance
sheet date.
Explanation
4. Contingencies
4.1 The term "contingencies" used in this Standard is restricted to conditions or
situations at the balance sheet date, the financial effect of which is to be determined by
future events which may or may not occur.
4.2 Estimates are required for determining the amounts to be stated in the financial
statements for many on-going and recurring activities of an enterprise. One must,
however, distinguish between an event which is certain and one which is uncertain. The
assets such as impairment of receivables (commonly known as provision for bad and doubtful debts) is governed
by this Standard.
fact that an estimate is involved does not, of itself, create the type of uncertainty which
characterises a contingency. For example, the fact that estimates of useful life are used to
determine depreciation, does not make depreciation a contingency; the eventual expiry of
the useful life of the asset is not uncertain. Also, amounts owed for services received are
not contingencies as defined in paragraph 3.1, even though the amounts may have been
estimated, as there is nothing uncertain about the fact that these obligations have been
incurred.
4.3 The uncertainty relating to future events can be expressed by a range of outcomes.
This range may be presented as quantified probabilities, but in most circumstances, this
suggests a level of precision that is not supported by the available information. The
possible outcomes can, therefore, usually be generally described except where reasonable
quantification is practicable.
4.4 The estimates of the outcome and of the financial effect of contingencies are
determined by the judgement of the management of the enterprise. This judgement is
based on consideration of information available up to the date on which the financial
statements are approved and will include a review of events occurring after the balance
sheet date, supplemented by experience of similar transactions and, in some cases, reports
from independent experts.
5. Accounting Treatment of Contingent Losses
5.1 The accounting treatment of a contingent loss is determined by the expected outcome
of the contingency. If it is likely that a contingency will result in a loss to the enterprise,
then it is prudent to provide for that loss in the financial statements.
5.2 The estimation of the amount of a contingent loss to be provided for in the financial
statements may be based on information referred to in paragraph 4.4.
5.3 If there is conflicting or insufficient evidence for estimating the amount of a
contingent loss, then disclosure is made of the existence and nature of the contingency.
5.4 A potential loss to an enterprise may be reduced or avoided because a contingent
liability is matched by a related counter-claim or claim against a third party. In such cases,
the amount of the provision is determined after taking into account the probable recovery
under the claim if no significant uncertainty as to its measurability or collectability exists.
Suitable disclosure regarding the nature and gross amount of the contingent liability is
also made.
5.5 The existence and amount of guarantees, obligations arising from discounted bills of
exchange and similar obligations undertaken by an enterprise are generally disclosed in
financial statements by way of note, even though the possibility that a loss to the enterprise
will occur, is remote.
5.6 Provisions for contingencies are not made in respect of general or unspecified
business risks since they do not relate to conditions or situations existing at the balance
sheet date.
6. Accounting Treatment of Contingent Gains
Contingent gains are not recognised in financial statements since their recognition
may result in the recognition of revenue which may never be realised. However, when the
realisation of a gain is virtually certain, then such gain is not a contingency and accounting
for the gain is appropriate.
7. Determination of the Amounts at which Contingencies are included in Financial
Statements
7.1 The amount at which a contingency is stated in the financial statements is based on
the information which is available at the date on which the financial statements are
approved. Events occurring after the balance sheet date that indicate that an asset may
have been impaired, or that a liability may have existed, at the balance sheet date are,
therefore, taken into account in identifying contingencies and in determining the amounts
at which such contingencies are included in financial statements.
7.2 In some cases, each contingency can be separately identified, and the special
circumstances of each situation considered in the determination of the amount of the
contingency. A substantial legal claim against the enterprise may represent such a
contingency. Among the factors taken into account by management in evaluating such a
contingency are the progress of the claim at the date on which the financial statements are
approved, the opinions, wherever necessary, of legal experts or other advisers, the
experience of the enterprise in similar cases and the experience of other enterprises in
similar situations.
7.3 If the uncertainties which created a contingency in respect of an individual transaction
are common to a large number of similar transactions, then the amount of the contingency
need not be individually determined, but may be based on the group of similar
transactions. An example of such contingencies may be the estimated uncollectable
portion of accounts receivable. Another example of such contingencies may be the
warranties for products sold. These costs are usually incurred frequently and experience
provides a means by which the amount of the liability or loss can be estimated with
reasonable precision although the particular transactions that may result in a liability or a
loss are not identified. Provision for these costs results in their recognition in the same
accounting period in which the related transactions took place.
8. Events Occurring after the Balance Sheet Date
8.1 Events which occur between the balance sheet date and the date on which the
financial statements are approved, may indicate the need for adjustments to assets and
liabilities as at the balance sheet date or may require disclosure.
8.2 Adjustments to assets and liabilities are required for events occurring after the
balance sheet date that provide additional information materially affecting the
determination of the amounts relating to conditions existing at the balance sheet date. For
example, an adjustment may be made for a loss on a trade receivable account which is
confirmed by the insolvency of a customer which occurs after the balance sheet date.
8.3 Adjustments to assets and liabilities are not appropriate for events occurring after the
balance sheet date, if such events do not relate to conditions existing at the balance sheet
date. An example is the decline in market value of investments between the balance sheet
date and the date on which the financial statements are approved. Ordinary fluctuations
in market values do not normally relate to the condition of the investments at the balance
sheet date, but reflect circumstances which have occurred in the following period.
8.4 Events occurring after the balance sheet date which do not affect the figures stated in
the financial statements would not normally require disclosure in the financial statements
although they may be of such significance that they may require a disclosure in the report
of the approving authority to enable users of financial statements to make proper
evaluations and decisions.
8.5 There are events which, although they take place after the balance sheet date, are
sometimes reflected in the financial statements because of statutory requirements or
because of their special nature. For example, if dividends are declared after the balance
sheet date but before the financial statements are approved for issue, the dividends are not
recognised as a liability at the balance sheet date because no obligation exists at that time
unless a statute requires otherwise. Such dividends are disclosed in the notes.
8.6 Events occurring after the balance sheet date may indicate that the enterprise ceases
to be a going concern. A deterioration in operating results and financial position, or
unusual changes affecting the existence or substratum of the enterprise after the balance
sheet date (e.g., destruction of a major production plant by a fire after the balance sheet
date) may indicate a need to consider whether it is proper to use the fundamental
accounting assumption of going concern in the preparation of the financial statements.
9. Disclosure
9.1 The disclosure requirements herein referred to apply only in respect of those
contingencies or events which affect the financial position to a material extent.
9.2 If a contingent loss is not provided for, its nature and an estimate of its financial
effect are generally disclosed by way of note unless the possibility of a loss is remote
(other than the circumstances mentioned in paragraph 5.5). If a reliable estimate of the
financial effect cannot be made, this fact is disclosed.
9.3 When the events occurring after the balance sheet date are disclosed in the report of
the approving authority, the information given comprises the nature of the events and an
estimate of their financial effects or a statement that such an estimate cannot be made.
Main Principles
Contingencies
10. The amount of a contingent loss should be provided for by a charge in the
statement of profit and loss if:
(a) it is probable that future events will confirm that, after taking into account
any related probable recovery, an asset has been impaired or a liability has
been incurred as at the balance sheet date, and
(b) a reasonable estimate of the amount of the resulting loss can be made.
11. The existence of a contingent loss should be disclosed in the financial statements
if either of the conditions in paragraph 10 is not met, unless the possibility of a loss is
remote.
12. Contingent gains should not be recognised in the financial statements.
Events Occurring after the Balance Sheet Date
13. Assets and liabilities should be adjusted for events occurring after the balance
sheet date that provide additional evidence to assist the estimation of amounts relating
to conditions existing at the balance sheet date or that indicate that the fundamental
accounting assumption of going concern (i.e., the continuance of existence or
substratum of the enterprise) is not appropriate.
14. If an enterprise declares dividends to shareholders after the balance sheet date,
the enterprise should not recognise those dividends as a liability at the balance sheet
date unless a statute requires otherwise. Such dividends should be disclosed in notes.
15. Disclosure should be made in the report of the approving authority of those events
occurring after the balance sheet date that represent material changes and
commitments affecting the financial position of the enterprise.
Disclosure
16. If disclosure of contingencies is required by paragraph 11 of this Standard, the
following information
(a) the nature of the contingency;
(b) the uncertainties which may affect the future outcome;
(c) an estimate of the financial effect, or a statement that such an estimate cannot
be made.
17. If disclosure of events occurring after the balance sheet date in the report of the
approving authority is required by paragraph 15 of this Standard, the following
information should be provided:should be provided:
(a) the nature of the event;
(b) an estimate of the financial effect, or a statement that such an estimate
cannot be made.
Accounting Standard (AS) 10
Property, Plant and Equipment
(This Accounting Standard includes paragraphs set in bold italic type and plain type,
which have equal authority. Paragraphs in bold italic type indicate the main principles.
This Accounting Standard should be read in the context of the General Instructions
contained in part A of the Annexure to the Notification.)
Objective
1. The objective of this Standard is to prescribe the accounting treatment for property,
plant and equipment so that users of the financial statements can discern information
about investment made by an enterprise in its property, plant and equipment and the
changes in such investment. The principal issues in accounting for property, plant and
equipment are the recognition of the assets, the determination of their carrying amounts
and the depreciation charges and impairment losses to be recognised in relation to them.
Scope
2. This Standard should be applied in accounting for property, plant and equipment
except when another Accounting Standard requires or permits a different accounting
treatment.
3. This Standard does not apply to:
(a) biological assets related to agricultural activity other than bearer plants. This
Standard applies to bearer plants but it does not apply to the produce on
bearer plants; and
(b) wasting assets including mineral rights, expenditure on the exploration for
and extraction of minerals, oil, natural gas and similar non-regenerative
resources.
However, this Standard applies to property, plant and equipment used to develop or
maintain the assets described in (a) and (b) above.
4. Other Accounting Standards may require recognition of an item of property, plant
and equipment based on an approach different from that in this Standard. For example,
AS 19, Leases, requires an enterprise to evaluate its recognition of an item of leased
property, plant and equipment on the basis of the transfer of risks and rewards. However,
in such cases other aspects of the accounting treatment for these assets, including
depreciation, are prescribed by this Standard.
5. Investment property, as defined in AS 13, Accounting for Investments , should be
accounted for only in accordance with the cost model prescribed in this standard.
Definitions
6. The following terms are used in this Standard with the meanings specified:
Agricultural Activity is the management by an enterprise of the biological
transformation and harvest of biological assets for sale or for conversion into
agricultural produce or into additional biological assets.
Agricultural Produce is the harvested product of biological assets of the enterprise.
Bearer plant is a plant that
(a) is used in the production or supply of agricultural produce;
(b) is expected to bear produce for more than a period of twelve months; and
(c) has a remote likelihood of being sold as agricultural produce, except for
incidental scrap sales.
The following are not bearer plants:
(i) plants cultivated to be harvested as agricultural produce (for example,
trees grown for use as lumber);
(ii) plants cultivated to produce agricultural produce when there is more
than a remote likelihood that the entity will also harvest and sell the plant as
agricultural produce, other than as incidental scrap sales (for example, trees that are
cultivated both for their fruit and their lumber); and
(iii) annual crops (for example, maize and wheat).
When bearer plants are no longer used to bear produce they might be cut down and
sold as scrap, for example, for use as firewood. Such incidental scrap sales would
not prevent the plant from satisfying the definition of a bearer plant.
Biological Asset is a living animal1 or plant
Carrying amount is the amount at which an asset is recognised after deducting any
accumulated depreciation and accumulated impairment losses.
Cost is the amount of cash or cash equivalents paid or the fair value of the other
consideration given to acquire an asset at the time of its acquisition or construction
or, where applicable, the amount attributed to that asset when initially recognised
in accordance with the specific requirements of other Accounting Standards.
Depreciable amount is the cost of an asset, or other amount substituted for cost,
less its residual value.
Depreciation is the systematic allocation of the depreciable amount of an asset over
its useful life.
Enterprise -specific value is the present value of the cash flows an enterprise
expects to arise from the continuing use of an asset and from its disposal at the end
of its useful life or expects to incur when settling a liability.
Fair value is the amount for which an asset could be exchanged between
knowledgeable, willing parties in an arm's length transaction.
Gross carrying amount of an asset is its cost or other amount substituted for the
cost in the books of account, without making any deduction for accumulated
depreciation and accumulated impairment losses.
An impairment loss is the amount by which the carrying amount of an asset
exceeds its recoverable amount.
Property, plant and equipment are tangible items that:
(a) are held for use in the production or supply of goods or services, for rental
to others, or for administrative purposes; and
1
An Accounting Standard on Agriculture is under formulation, which will, inter alia, cover accounting for
livestock. Till the time, the Accounting Standard on Agriculture is issued, accounting for livestock meeting the
definition of Property, Plant and Equipment, will be covered as per AS 10 (Revised), Property, Plant and
Equipment.
(b) are expected to be used during more than a period of twelve months.
Recoverable amount is the higher of an asset's net selling price and its value in
use.
The residual value of an asset is the estimated amount that an enterprise would
currently obtain from disposal of the asset, after deducting the estimated costs
of disposal, if the asset were already of the age and in the condition expected
at the end of its useful life.
Useful life is:
(a) the period over which an asset is expected to be available for use by an
enterprise ; or
(b) the number of production or similar units expected to be obtained from the
asset by an enterprise.
Recognition
7. The cost of an item of property, plant and equipment should be recognised as an
asset if, and only if:
(a) it is probable that future economic benefits associated with the item will flow
to the enterprise; and
(b) the cost of the item can be measured reliably.
8. Items such as spare parts, stand-by equipment and servicing equipment are
recognised in accordance with this Standard when they meet the definition of property,
plant and equipment. Otherwise, such items are classified as inventory.
9. This Standard does not prescribe the unit of measure for recognition, i.e., what
constitutes an item of property, plant and equipment. Thus, judgement is required in
applying the recognition criteria to specific circumstances of an enterprise. An example
of a `unit of measure' can be a `project' of co nstruction of a manufacturing plant rather
than individual assets comprising the project in appropriate cases for the purpose of
capitalisation of expenditure incurred during construction period. Similarly, it may be
appropriate to aggregate individually insignificant items, such as moulds, tools and dies
and to apply the criteria to the aggregate value. An enterprise may decide to expense an
item which could otherwise have been included as property, plant and equipment,
because the amount of the expenditure is not material.
10. An enterprise evaluates under this recognition principle all its costs on property, plant
and equipment at the time they are incurred. These costs include costs incurred:
(a) initially to acquire or construct an item of property, plant and equipment; and
(b) subsequently to add to, replace part of, or service it.
Initial Costs
11. The definition of `property, plant and equipment' covers tangible items which are
held for use or for administrative purposes. The term `administrative purposes' has been
used in wider sense to include all business purposes other than production or supply of
goods or services or for rental for others. Thus, property, plant and equipment would
include assets used for selling and distribution, finance and accounting, personnel and
other functions of an enterprise. Items of property, plant and equipment may also be
acquired for safety or environmental reasons. The acquisition of such property, plant and
equipment, although not directly increasing the future economic benefits of any particular
existing item of property, plant and equipment, may be necessary for an enterprise to
obtain the future economic benefits from its other assets. Such items of property, plant
and equipment qualify for recognition as assets because they enable an enterprise to derive
future economic benefits from related assets in excess of what could be derived had those
items not been acquired. For example, a chemical manufacturer may install new chemical
handling processes to comply with environmental requirements for the production and
storage of dangerous chemicals; related plant enhancements are recognised as an asset
because without them the enterprise is unable to manufacture and sell chemicals. The
resulting carrying amount of such an asset and related assets is reviewed for impairment
in accordance with AS 28, Impairment of Assets.
Subsequent Costs
12. Under the recognition principle in paragraph 7, an enterprise does not recognise in
the carrying amount of an item of property, plant and equipment the costs of the day-to-
day servicing of the item. Rather, these costs are recognised in the statement of profit and
loss as incurred. Costs of day-to-day servicing are primarily the costs of labour and
consumables, and may include the cost of small parts. The purpose of such expenditures
is often described as for the `repairs and maintenance' of the item of property, plant and
equipment.
13. Parts of some items of property, plant and equipment may require replacement at
regular intervals. For example, a furnace may require relining after a specified number of
hours of use, or aircraft interiors such as seats and galleys may require replacement several
times during the life of the airframe. Similarly, major parts of conveyor system, such as,
conveyor belts, wire ropes, etc., may require replacement several times during the life of
the conveyor system. Items of property, plant and equipment may also be acquired to
make a less frequently recurring replacement, such as replacing the interior walls of a
building, or to make a non-recurring replacement. Under the recognition principle in
paragraph 7, an enterprise recognises in the carrying amount of an item of property, plant
and equipment the cost of replacing part of such an item when that cost is incurred if the
recognition criteria are met. The carrying amount of those parts that are replaced is
derecognised in accordance with the derecognition provisions of this Standard (see
paragraphs 74-80).
14. A condition of continuing to operate an item of property, plant and equipment (for
example, an aircraft) may be performing regular major inspections for faults regardless
of whether parts of the item are replaced. When each major inspection is performed, its
cost is recognised in the carrying amount of the item of property, plant and equipment as
a replacement if the recognition criteria are satisfied. Any remaining carrying amount of
the cost of the previous inspection (as distinct from physical parts) is derecognised.
15. The derecognition of the carrying amount as stated in paragraphs 13-14 occurs
regardless of whether the cost of the previous part / inspection was identified in the
transaction in which the item was acquired or constructed. If it is not practicable for an
enterprise to determine the carrying amount of the replaced part/ inspection, it may use
the cost of the replacement or the estimated cost of a future similar inspection as an
indication of what the cost of the replaced part/ existing inspection component was when
the item was acquired or constructed.
Measurement at Recognition
16. An item of property, plant and equipment that qualifies for recognition as an asset
should be measured at its cost.
Elements of Cost
17. The cost of an item of property, plant and equipment comprises:
(a) its purchase price, including import duties and non ­refundable
purchase taxes,, after deducting trade discounts and rebates.
(b) any costs directly attributable to bringing the asset to the location and
condition necessary for it to be capable of operating in the manner
intended by management.
(c) the initial estimate of the costs of dismantling, removing the item and
restoring the site on which it is located, referred to as
`decommissioning, restoration and similar liabilities', the obligation
for which an enterprise incurs either when the item is acquired or as a
consequence of having used the item during a particular period for
purposes other than to produce inventories during that period.
18. Examples of directly attributable costs are:
(a) costs of employee benefits (as defined in AS 15, Employee Benefits)
arising directly from the construction or acquisition of the item of
property, plant and equipment;
(b) costs of site preparation;
(c) initial delivery and handling costs;
(d) installation and assembly costs;
(e) costs of testing whether the asset is functioning properly, after
deducting the net proceeds from selling any items produced while
bringing the asset to that location and condition (such as samples
produced when testing equipment); and
(f) professional fees.
19. An enterprise applies AS 2, Valuation of Inventories, to the costs of obligations for
dismantling, removing and restoring the site on which an item is located that are incurred
during a particular period as a consequence of having used the item to produce inventories
during that period. The obligations for costs accounted for in accordance with AS 2 or
AS 10 are recognised and measured in accordance with AS 29, Provisions, Contingent
Liabilities and Contingent Assets.
20. Examples of costs that are not costs of an item of property, plant and equipment are:
(a) costs of opening a new facility or business, such as, inauguration costs;
(b) costs of introducing a new product or service( including costs of
advertising and promotional activities);
(c) costs of conducting business in a new location or with a new class of
customer (including costs of staff training); and
(d) administration and other general overhead costs.
21. Recognition of costs in the carrying amount of an item of property, plant and
equipment ceases when the item is in the location and condition necessary for it to be
capable of operating in the manner intended by management. Therefore, costs incurred in
using or redeploying an item are not included in the carrying amount of that item. For
example, the following costs are not included in the carrying amount of an item of
property, plant and equipment:
(a) costs incurred while an item capable of operating in the manner
intended by management has yet to be brought into use or is operated
at less than full capacity;
(b) initial operating losses, such as those incurred while demand for the
output of an item builds up; and
(c) costs of relocating or reorganising part or all of the operations of an
enterprise.
22. Some operations occur in connection with the construction or development of an item
of property, plant and equipment, but are not necessary to bring the item to the location
and condition necessary for it to be capable of operating in the manner intended by
management. These incidental operations may occur before or during the construction or
development activities. For example, income may be earned through using a building site
as a car park until construction starts. Because incidental operations are not necessary to
bring an item to the location and condition necessary for it to be capable of operating in
the manner intended by management, the income and related expenses of incidental
operations are recognised in the statement of profit and loss and included in their
respective classifications of income and expense.
23. The cost of a self-constructed asset is determined using the same principles as for an
acquired asset. If an enterprise makes similar assets for sale in the normal course of
business, the cost of the asset is usually the same as the cost of constructing an asset for
sale (see AS 2). Therefore, any internal profits are eliminated in arriving at such costs.
Similarly, the cost of abnormal amounts of wasted material, labour, or other resources
incurred in self-constructing an asset is not included in the cost of the asset. AS 16,
Borrowing Costs, establishes criteria for the recognition of interest as a component of the
carrying amount of a self-constructed item of property, plant and equipment.
24. Bearer plants are accounted for in the same way as self-constructed items of property,
plant and equipment before they are in the location and condition necessary to be capable
of operating in the manner intended by management. Consequently, references to
`construction' in this Standard should be read as c overing activities that are necessary to
cultivate the bearer plants before they are in the location and condition necessary to be
capable of operating in the manner intended by management .
Measurement of Cost
25. The cost of an item of property, plant and equipment is the cash price equivalent at
the recognition date. If payment is deferred beyond normal credit terms, the difference
between the cash price equivalent and the total payment is recognised as interest over the
period of credit unless such interest is capitalised in accordance with AS 16.
26. One or more items of property, plant and equipment may be acquired in exchange for
a non-monetary asset or assets, or a combination of monetary and non-monetary assets.
The following discussion refers simply to an exchange of one non-monetary asset for
another, but it also applies to all exchanges described in the preceding sentence. The cost
of such an item of property, plant and equipment is measured at fair value unless (a) the
exchange transaction lacks commercial substance or (b) the fair value of neither the
asset(s) received nor the asset(s) given up is reliably measurable. The acquired item(s)
is/are measured in this manner even if an enterprise cannot immediately derecognise the
asset given up. If the acquired item(s) is/are not measured at fair value, its/their cost is
measured at the carrying amount of the asset(s) given up.
27. An enterprise determines whether an exchange transaction has commercial substance
by considering the extent to which its future cash flows are expected to change as a result
of the transaction. An exchange transaction has commercial substance if:
(a) the configuration (risk, timing and amount) of the cash flows of the asset
received differs from the configuration of the cash flows of the asset
transferred; or
(b) the enterprise-specific value of the portion of the operations of the enterprise
affected by the transaction changes as a result of the exchange;
(c) and the difference in (a) or (b) is significant relative to the fair value of the
assets exchanged.
For the purpose of determining whether an exchange transaction has commercial
substance, the enterprise -specific value of the portion of operations of the enterprise
affected by the transaction should reflect post-tax cash flows. In certain cases, the
result of these analyses may be clear without an enterprise having to perform detailed
calculations.
28. The fair value of an asset is reliably measurable if (a) the variability in the range of
reasonable fair value measurements is not significant for that asset or (b) the probabilities
of the various estimates within the range can be reasonably assessed and used when
measuring fair value. If an enterprise is able to measure reliably the fair value of either
the asset received or the asset given up, then the fair value of the asset given up is used to
measure the cost of the asset received unless the fair value of the asset received is more
clearly evident.
29. Where several items of property, plant and equipment are purchased for a
consolidated price, the consideration is apportioned to the various items on the basis of
their respective fair values at the date of acquisition. In case the fair values of the items
acquired cannot be measured reliably, these values are estimated on a fair basis as
determined by competent valuers.
30. The cost of an item of property, plant and equipment held by a lessee under a finance
lease is determined in accordance with AS 19, Leases.
31. The carrying amount of an item of property, plant and equipment may be reduced by
government grants in accordance with AS 12, Accounting for Government Grants.
Measurement after Recognition
32. An enterprise should choose either the cost model in paragraph 33 or the
revaluation model in paragraph 34 as its accounting policy and should apply that policy
to an entire class of property, plant and equipment.
Cost Model
33. After recognition as an asset, an item of property, plant and equipment should be
carried at its cost less any accumulated depreciation and any accumulated impairment
losses.
Revaluation Model
34. After recognition as an asset, an item of property, plant and equipment whose fair
value can be measured reliably should be carried at a revalued amount, being its fair
value at the date of the revaluation less any subsequent accumulated depreciation and
subsequent accumulated impairment losses. Revaluations should be made with
sufficient regularity to ensure that the carrying amount does not differ materially from
that which would be determined using fair value at the balance sheet date.
35. The fair value of items of property, plant and equipment is usually determined from
market-based evidence by appraisal that is normally undertaken by professionally
qualified valuers.
36. If there is no market-based evidence of fair value because of the specialised nature
of the item of property, plant and equipment and the item is rarely sold, except as part of
a continuing business, an enterprise may need to estimate fair value using an income
approach (for example, based on discounted cash flow projections) or a depreciated
replacement cost approach which aims at making a realistic estimate of the current cost
of acquiring or constructing an item that has the same service potential as the existing
item.
37. The frequency of revaluations depends upon the changes in fair values of the items
of property, plant and equipment being revalued. When the fair value of a revalued asset
differs materially from its carrying amount, a further revaluation is required. Some items
of property, plant and equipment experience significant and volatile changes in fair value,
thus necessitating annual revaluation. Such frequent revaluations are unnecessary for
items of property, plant and equipment with only insignificant changes in fair value.
Instead, it may be necessary to revalue the item only every three or five years.
38. When an item of property, plant and equipment is revalued, the carrying amount of
that asset is adjusted to the revalued amount. At the date of the revaluation, the asset is
treated in one of the following ways:
(a) the gross carrying amount is adjusted in a manner that is consistent with
the revaluation of the carrying amount of the asset. For example, the
gross carrying amount may be restated by reference to observable
market data or it may be restated proportionately to the change in the
carrying amount. The accumulated depreciation at the date of the
revaluation is adjusted to equal the difference between the gross
carrying amount and the carrying amount of the asset after taking into
account accumulated impairment losses; or
(b) the accumulated depreciation is eliminated against the gross carrying
amount of the asset.
The amount of the adjustment of accumulated depreciation forms part of the
increase or decrease in carrying amount that is accounted for in accordance with
paragraphs 42 and 43.
39. If an item of property, plant and equipment is revalued, the entire class of property,
plant and equipment to which that asset belongs should be revalued.
40. A class of property, plant and equipment is a grouping of assets of a similar nature
and use in operations of an enterprise. The following are examples of separate classes:
(a) land;
(b) land and buildings;
(c) machinery;
(d) ships;
(e) aircraft;
(f) motor vehicles;
(g) furniture and fixtures;
(h) office equipment;and
(i) bearer plants.
41. The items within a class of property, plant and equipment are revalued
simultaneously to avoid selective revaluation of assets and the reporting of amounts in
the financial statements that are a mixture of costs and values as at different dates.
However, a class of assets may be revalued on a rolling basis provided revaluation of the
class of assets is completed within a short period and provided the revaluations are kept
up to date.
42. An increase in the carrying amount of an asset arising on revaluation should be
credited directly to owners' interests under the heading of revaluation surplus However,
the increase should be recognised in the statement of profit and loss to the extent that
it reverses a revaluation decrease of the same asset previously recognised in the
statement of profit and loss.
43. A decrease in the carrying amount of an asset arising on revaluation should be
charged to the statement of profit and loss. However, the decrease should be debited
directly to owners' interests under the heading of revaluation surplus to the extent of
any credit balance existing in the revaluation surplus in respect of that asset.
44. The revaluation surplus included in owners' interests in respect of an item of
property, plant and equipment may be transferred to the revenue reserves when the asset
is derecognised. This may involve transferring the whole of the surplus when the asset is
retired or disposed of. However, some of the surplus may be transferred as the asset is
used by an enterprise. In such a case, the amount of the surplus transferred would be the
difference between depreciation based on the revalued carrying amount of the asset and
depreciation based on its original cost. Transfers from revaluation surplus to the revenue
reserves are not made through the statement of profit and loss.
Depreciation
45. Each part of an item of property, plant and equipment with a cost that is significant
in relation to the total cost of the item should be depreciated separately.
46. An enterprise allocates the amount initially recognised in respect of an item of
property, plant and equipment to its significant parts and depreciates each such part
separately. For example, it may be appropriate to depreciate separately the airframe and
engines of an aircraft, whether owned or subject to a finance lease.
47. A significant part of an item of property, plant and equipment may have a useful life
and a depreciation method that are the same as the useful life and the depreciation method
of another significant part of that same item. Such parts may be grouped in determining
the depreciation charge.
48. To the extent that an enterprise depreciates separately some parts of an item of
property, plant and equipment, it also depreciates separately the remainder of the item.
The remainder consists of the parts of the item that are individually not significant. If an
enterprise has varying expectations for these parts, approximation techniques may be
necessary to depreciate the remainder in a manner that faithfully represents the
consumption pattern and/or useful life of its parts.
49. An enterprise may choose to depreciate separately the parts of an item that do not
have a cost that is significant in relation to the total cost of the item.
50. The depreciation charge for each period should be recognised in the statement of
profit and loss unless it is included in the carrying amount of another asset.
51. The depreciation charge for a period is usually recognised in the statement of profit
and loss. However, sometimes, the future economic benefits embodied in an asset are
absorbed in producing other assets. In this case, the depreciation charge constitutes part
of the cost of the other asset and is included in its carrying amount. For example, the
depreciation of manufacturing plant and equipment is included in the costs of conversion
of inventories (see AS 2). Similarly, the depreciation of property, plant and equipment
used for development activities may be included in the cost of an intangible asset
recognised in accordance with AS 26, Intangible Assets.
Depreciable Amount and Depreciation Period
52. The depreciable amount of an asset should be allocated on a systematic basis over
its useful life.
53. The residual value and the useful life of an asset should be reviewed at least at
each financial year-end and, if expectations differ from previous estimates, the
change(s) should be accounted for as a change in an accounting estimate in accordance
with AS 5, Net Profit or Loss for the Period, Prior Period Items and Changes in
Accounting Policies.
54. Depreciation is recognised even if the fair value of the asset exceeds its carrying
amount, as long as the asset's residual value does not exceed its carrying amount. Repair
and maintenance of an asset do not negate the need to depreciate it.
55. The depreciable amount of an asset is determined after deducting its residual value.
56. The residual value of an asset may increase to an amount equal to or greater than its
carrying amount. If it does, depreciation charge of the asset is zero unless and until its
residual value subsequently decreases to an amount below its carrying amount.
57. Depreciation of an asset begins when it is available for use, i.e., when it is in the
location and condition necessary for it to be capable of operating in the manner intended
by management. Depreciation of an asset ceases at the earlier of the date that the asset is
retired from active use and is held for disposal and the date that the asset is derecognised.
Therefore, depreciation does not cease when the asset becomes idle or is retired from
active use (but not held for disposal) unless the asset is fully depreciated. However, under
usage methods of depreciation, the depreciation charge can be zero while there is no
production.
58. The future economic benefits embodied in an asset are consumed by an enterprise
principally through its use. However, other factors, such as technical or commercial
obsolescence and wear and tear while an asset remains idle, often result in the diminution
of the economic benefits that might have been obtained from the asset. Consequently, all
the following factors are considered in determining the useful life of an asset:
(a) expected usage of the asset. Usage is assessed by reference to the
expected capacity or physical output of the asset.
(b) expected physical wear and tear, which depends on operational factors
such as the number of shifts for which the asset is to be used and the
repair and maintenance programme, and the care and maintenance of
the asset while idle.
(c) technical or commercial obsolescence arising from changes or
improvements in production, or from a change in the market demand for
the product or service output of the asset. Expected future reductions in
the selling price of an item that was produced using an asset could
indicate the expectation of technical or commercial obsolescence of the
asset, which, in turn, might reflect a reduction of the future economic
benefits embodied in the asset.
(d) legal or similar limits on the use of the asset, such as the expiry dates
of related leases.
59. The useful life of an asset is defined in terms of its expected utility to the enterprise.
The asset management policy of the enterprise may involve the disposal of assets after a
specified time or after consumption of a specified proportion of the future economic
benefits embodied in the asset. Therefore, the useful life of an asset may be shorter than
its economic life. The estimation of the useful life of the asset is a matter of judgement
based on the experience of the enterprise with similar assets.
60. Land and buildings are separable assets and are accounted for separately, even when
they are acquired together. With some exceptions, such as quarries and sites used for
landfill, land has an unlimited useful life and therefore is not depreciated. Buildings have
a limited useful life and therefore are depreciable assets. An increase in the value of the
land on which a building stands does not affect the determination of the depreciable
amount of the building.
61. If the cost of land includes the costs of site dismantlement, removal and restoration,
that portion of the land asset is depreciated over the period of benefits obtained by
incurring those costs. In some cases, the land itself may have a limited useful life, in
which case it is depreciated in a manner that reflects the benefits to be derived from it.
Depreciation Method
62. The depreciation method used should reflect the pattern in which the future
economic benefits of the asset are expected to be consumed by the enterprise.
63. The depreciation method applied to an asset should be reviewed at least at each
financial year-end and, if there has been a significant change in the expected pattern
of consumption of the future economic benefits embodied in the asset, the method
should be changed to reflect the changed pattern. Such a change should be accounted
for as a change in an accounting estimate in accordance with AS 5.
64. A variety of depreciation methods can be used to allocate the depreciable amount of
an asset on a systematic basis over its useful life. These methods include the straight-line
method, the diminishing balance method and the units of production method. Straight-
line depreciation results in a constant charge over the useful life if the residual value of
the asset does not change. The diminishing balance method results in a decreasing charge
over the useful life. The units of production method results in a charge based on the
expected use or output. The enterprise selects the method that most closely reflects the
expected pattern of consumption of the future economic benefits embodied in the asset.
That method is applied consistently from period to period unless there is a change in the
expected pattern of consumption of those future economic benefits or that the method is
changed in accordance with the statute to best reflect the way the asset is consumed
65. A depreciation method that is based on revenue that is generated by an activity that
includes the use of an asset is not appropriate. The revenue generated by an activity that
includes the use of an asset generally reflects factors other than the consumption of the
economic benefits of the asset. For example, revenue is affected by other inputs and
processes, selling activities and changes in sales volumes and prices. The price component
of revenue may be affected by inflation, which has no bearing upon the way in which an
asset is consumed.
Changes in Existing Decommissioning, Restoration and Other Liabilities
66. The cost of property, plant and equipment may undergo changes subsequent to its
acquisition or construction on account of changes in liabilities, price adjustments,
changes in duties, changes in initial estimates of amounts provided for dismantling,
removing, restoration and similar factors and included in the cost of the asset in
accordance with paragraph 16. Such changes in cost should be accounted for in
accordance with paragraphs 67­68 below.
67. If the related asset is measured using the cost model:
(a) subject to (b), changes in the liability should be added to, or deducted from,
the cost of the related asset in the current period.
(b) the amount deducted from the cost of the asset should not exceed its
carrying amount. If a decrease in the liability exceeds the carrying amount
of the asset, the excess should be recognised immediately in the statement
of profit and loss.
(c) if the adjustment results in an addition to the cost of an asset, the enterprise
should consider whether this is an indication that the new carrying amount
of the asset may not be fully recoverable. If it is such an indication, the
enterprise should test the asset for impairment by estimating its recoverable
amount, and should account for any impairment loss, in accordance with
AS 28.
68. If the related asset is measured using the revaluation model:
(a) changes in the liability alter the revaluation surplus or deficit
previously recognised on that asset, so that:
(i) a decrease in the liability should (subject to (b)) be credited
directly to revaluation surplus in the owners' interest, except
that it should be recognised in the statement of profit and
loss to the extent that it reverses a revaluation deficit on the
asset that was previously recognised in the statement of profit
and loss;
(ii) an increase in the liability should be recognised in the
statement of profit and loss, except that it should be debited
directly to revaluation surplus in the owners' interest to the
extent of any credit balance existing in the revaluation
surplus in respect of that asset.
(b) in the event that a decrease in the liability exceeds the carrying
amount that would have been recognised had the asset been carried
under the cost model, the excess should be recognised immediately in
the statement of profit and loss.
(c) a change in the liability is an indication that the asset may have to be
revalued in order to ensure that the carrying amount does not differ
materially from that which would be determined using fair value at
the balance sheet date. Any such revaluation should be taken into
account in determining the amounts to be taken to the statement of
profit and loss and the owners' interest under (a). If a revaluation is
necessary, all assets of that class should be revalued.
69. The adjusted depreciable amount of the asset is depreciated over its useful life.
Therefore, once the related asset has reached the end of its useful life, all subsequent
changes in the liability should be recognised in the statement of profit and loss as they
occur. This applies under both the cost model and the revaluation model.
Impairment
70. To determine whether an item of property, plant and equipment is impaired, an
enterprise applies AS 28, Impairment of Assets. AS 28 explains how an enterprise reviews
the carrying amount of its assets, how it determines the recoverable amount of an asset,
and when it recognises, or reverses the recognition of, an impairment loss.
Compensation for Impairment
71. Compensation from third parties for items of property, plant and equipment that
were impaired, lost or given up should be included in the statement of profit and loss
when the compensation becomes receivable.
72. Impairments or losses of items of property, plant and equipment, related claims for
or payments of compensation from third parties and any subsequent purchase or
construction of replacement assets are separate economic events and are accounted for
separately as follows:
(a) impairments of items of property, plant and equipment are recognised
in accordance with AS 28;
(b) derecognition of items of property, plant and equipment retired or
disposed of is determined in accordance with this Standard;
(c) compensation from third parties for items of property, plant and
equipment that were impaired, lost or given up is included in
determining profit or loss when it becomes receivable; and
(d) the cost of items of property, plant and equipment restored, purchased
or constructed as replacements is determined in accordance with this
Standard.
Retirements
73. Items of property, plant and equipment retired from active use and held for disposal
should be stated at the lower of their carrying amount and net realisable value. Any
write-down in this regard should be recognised immediately in the statement of profit
and loss.
Derecognition
74. The carrying amount of an item of property, plant and equipment should be
derecognised
(a) on disposal; or
(b) when no future economic benefits are expected from its use or
disposal.
75. The gain or loss arising from the derecognition of an item of property, plant and
equipment should be included in the statement of profit and loss when the item is
derecognised (unless AS 19, Leases, requires otherwise on a sale and leaseback). Gains
should not be classified as revenue, as defined in AS 9, Revenue Recognition.
76. However, an enterprise that in the course of its ordinary activities, routinely sells
items of property, plant and equipment that it had held for rental to others should
transfer such assets to inventories at their carrying amount when they cease to be rented
and become held for sale. The proceeds from the sale of such assets should be
recognised in revenue in accordance with AS 9, Revenue Recognition.
77. The disposal of an item of property, plant and equipment may occur in a variety of
ways (e.g. by sale, by entering into a finance lease or by donation). In determining the
date of disposal of an item, an enterprise applies the criteria in AS 9 for recognising
revenue from the sale of goods. AS 19, Leases, applies to disposal by a sale and leaseback.
78. If, under the recognition principle in paragraph 7, an enterprise recognises in the
carrying amount of an item of property, plant and equipment the cost of a replacement for
part of the item, then it derecognises the carrying amount of the replaced part regardless
of whether the replaced part had been depreciated separately. If it is not practicable for an
enterprise to determine the carrying amount of the replaced part, it may use the cost of
the replacement as an indication of what the cost of the replaced part was at the time it
was acquired or constructed.
79. The gain or loss arising from the derecognition of an item of property, plant and
equipment should be determined as the difference between the net disposal proceeds, if
any, and the carrying amount of the item.
80. The consideration receivable on disposal of an item of property, plant and equipment
is recognised in accordance with the principles enunciated in AS 9.
Disclosure
81. The financial statements should disclose, for each class of property, plant and
equipment:
(a) the measurement bases (i.e., cost model or revaluation model) used
for determining the gross carrying amount;
(b) the depreciation methods used;
(c) the useful lives or the depreciation rates used. In case the useful lives
or the depreciation rates used are different from those specified in the
statute governing the enterprise, it should make a specific mention of
that fact;
(d) the gross carrying amount and the accumulated depreciation
(aggregated with accumulated impairment losses) at the beginning
and end of the period; and
(e) a reconciliation of the carrying amount at the beginning and end of
the period showing:
(i) additions;
(ii) assets retired from active use and held for disposal;
(iii) acquisitions through business combinations ;
(iv) increases or decreases resulting from revaluations under
paragraphs 34, 42 and 43 and from impairment losses
recognised or reversed directly in revaluation surplus in
accordance with AS 28;
(v) impairment losses recognised in the statement of profit and
loss in accordance with AS 28;
(vi) impairment losses reversed in the statement of profit and loss
in accordance with AS 28;
(vii) depreciation;
(viii) the net exchange differences arising on the translation of the
financial statements of a non-integral foreign operation in
accordance with AS 11, The Effects of Changes in Foreign
Exchange Rates; and
(ix) other changes.
82. The financial statements should also disclose:
(a) the existence and amounts of restrictions on title, and property, plant
and equipment pledged as security for liabilities;
(b) the amount of expenditure recognised in the carrying amount of an
item of property, plant and equipment in the course of its
construction;
(c) the amount of contractual commitments for the acquisition of
property, plant and equipment;
(d) if it is not disclosed separately on the face of the statement of profit
and loss, the amount of compensation from third parties for items of
property, plant and equipment that were impaired, lost or given up
that is included in the statement of profit and loss; and
(e) the amount of assets retired from active use and held for disposal.
83. Selection of the depreciation method and estimation of the useful life of assets are
matters of judgement. Therefore, disclosure of the methods adopted and the estimated
useful lives or depreciation rates provides users of financial statements with information
that allows them to review the policies selected by management and enables comparisons
to be made with other enterprises. For similar reasons, it is necessary to disclose:
(a) depreciation, whether recognised in the statement of profit and loss or
as a part of the cost of other assets, during a period; and
(b) accumulated depreciation at the end of the period.
84. In accordance with AS 5, an enterprise discloses the nature and effect of a change in
an accounting estimate that has an effect in the current period or is expected to have an
effect in subsequent periods. For property, plant and equipment, such disclosure may arise
from changes in estimates with respect to:
(a) residual values;
(b) the estimated costs of dismantling, removing or restoring items of
property, plant and equipment;
(c) useful lives; and
(d) depreciation methods.
85. If items of property, plant and equipment are stated at revalued amounts, the
following should be disclosed:
(a) the effective date of the revaluation;
(b) whether an independent valuer was involved;
(c) the methods and significant assumptions applied in estimating fair
values of the items;
(d) the extent to which fair values of the items were determined directly
by reference to observable prices in an active market or recent market
transactions on arm's length terms or were estimated using other
valuation techniques; and
(e) the revaluation surplus, indicating the change for the period and any
restrictions on the distribution of the balance to shareholders.
86. In accordance with AS 28, an enterprise discloses information on impaired property,
plant and equipment in addition to the information required by paragraph 81 (e), (iv), (v)
and (vi).
87. An enterprise is encouraged to disclose the following:
(a) the carrying amount of temporarily idle property, plant and equipment;
(b) the gross carrying amount of any fully depreciated property, plant and
equipment that is still in use;
(c) for each revalued class of property, plant and equipment, the carrying
amount that would have been recognised had the assets been carried
under the cost model;
(d) the carrying amount of property, plant and equipment retired from
active use and not held for disposal.
Transitional Provisions
88. Where an entity has in past recognized an expenditure in the statement of profit
and loss which is eligible to be included as a part of the cost of a project for construction
of property, plant and equipment in accordance with the requirements of paragraph 9,
it may do so retrospectively for such a project. The effect of such retrospective
application of this requirement, should be recognised net-of-tax in revenue reserves.
89. The requirements of paragraphs 26-28 regarding the initial measurement of an
item of property, plant and equipment acquired in an exchange of assets transaction
should be applied prospectively only to transactions entered into after this Standard
becomes mandatory.
90. On the date of this Standard becoming mandatory, the spare parts, which hitherto
were being treated as inventory under AS 2, Valuation of Inventories, and are now
required to be capitalised in accordance with the requirements of this Standard, should
be capitalised at their respective carrying amounts. The spare parts so capitalised
should be depreciated over their remaining useful lives prospectively as per the
requirements of this Standard.
91. The requirements of paragraph 32 and paragraphs 34 ­ 44 regarding the
revaluation model should be applied prospectively. In case, on the date of this Standard
becoming mandatory, an enterprise does not adopt the revaluation model as its
accounting policy but the carrying amount of item(s) of property, plant and equipment
reflects any previous revaluation it should adjust the amount outstanding in the
revaluation reserve against the carrying amount of that item. However, the carrying
amount of that item should never be less than residual value. Any excess of the amount
outstanding as revaluation reserve over the carrying amount of that item should be
adjusted in revenue reserves.
Accounting Standard (AS) 13
Accounting for Investments
(This Accounting Standard includes paragraphs set in bold italic type and plain type,
which have equal authority. Paragraphs in bold italic type indicate the main principles.
This Accounting Standard should be read in the context of the General Instructions
contained in part A of the Annexure to the Notification.)
Introduction
1. This Standard deals with accounting for investments in the financial statements of
enterprises and related disclosure requirements. 1
2. This Standard does not deal with:
(a) the bases for recognition of interest, dividends and rentals earned on investments
which are covered by Accounting Standard 9 on Revenue Recognition;
(b) operating or finance leases;
(c) investments of retirement benefit plans and life insurance enterprises; and
(d) mutual funds and venture capital funds and/or the related asset management
companies, banks and public financial institutions formed under a Central or
State Government Act or so declared under the Companies Act, 2013.
Definitions
3. The following terms are used in this Standard with the meanings assigned:
3.1 Investments are assets held by an enterprise for earning income by way of
dividends, interest, and rentals, for capital appreciation, or for other benefits to the
investing enterprise. Assets held as stock-in-trade are not `investments'.
3.2 A current investment is an investment that is by its nature readily realisable and is
intended to be held for not more than one year from the date on which such investment
is made.
3.3 A long term investment is an investment other than a current investment.
3.4 An investment property is an investment in land or buildings that are not intended
to be occupied substantially for use by, or in the operations of, the investing enterprise.
3.5 Fair value is the amount for which an asset could be exchanged between a
knowledgeable, willing buyer and a knowledgeable, willing seller in an arm's length
transaction. Under appropriate circumstances, market value or net realisable value
provides an evidence of fair value.
3.6 Market value is the amount obtainable from the sale of an investment in an open
1
Shares, debentures and other securities held as stock-in-trade (i.e., for sale in the ordinary course of business)
are not `investments' as defined in this Standard. However, the manner in which they are accounted for and
disclosed in the financial statements is quite similar to that applicable in respect of current investments.
Accordingly, the provisions of this Standard, to the extent that they relate to current investments, are also
applicable to shares, debentures and other securities held as stock-in-trade, with suitable modifications as
specified in this Standard.
market, net of expenses necessarily to be incurred on or before disposal.
Explanation
Forms of Investments
4. Enterprises hold investments for diverse reasons. For some enterprises, investment
activity is a significant element of operations, and assessment of the performance of the
enterprise may largely, or solely, depend on the reported results of this activity.
5. Some investments have no physical existence and are represented merely by
certificates or similar documents (e.g., shares) while others exist in a physical form (e.g.,
buildings). The nature of an investment may be that of a debt, other than a short or long
term loan or a trade debt, representing a monetary amount owing to the holder and usually
bearing interest; alternatively, it may be a stake in the results and net assets of an
enterprise such as an equity share. Most investments represent financial rights, but some
are tangible, such as certain investments in land or buildings.
6. For some investments, an active market exists from which a market value can be
established. For such investments, market value generally provides the best evidence of
fair value. For other investments, an active market does not exist and other means are
used to determine fair value.
Classification of Investments
7. Enterprises present financial statements that classify fixed assets, investments and
current assets into separate categories. Investments are classified as long term investments
and current investments. Current investments are in the nature of current assets, although
the common practice may be to include them in investments. 2
8. Investments other than current investments are classified as long term investments,
even though they may be readily marketable.
Cost of Investments
9. The cost of an investment includes acquisition charges such as brokerage, fees and
duties.
10. If an investment is acquired, or partly acquired, by the issue of shares or other securities,
the acquisition cost is the fair value of the securities issued (which, in appropriate cases, may
be indicated by the issue price as determined by statutory authorities). The fair value may not
necessarily be equal to the nominal or par value of the securities issued.
11. If an investment is acquired in exchange, or part exchange, for another asset, the
acquisition cost of the investment is determined by reference to the fair value of the asset
given up. It may be appropriate to consider the fair value of the investment acquired if it
is more clearly evident.
12. Interest, dividends and rentals receivables in connection with an investment are
generally regarded as income, being the return on the investment. However, in some
circumstances, such inflows represent a recovery of cost and do not form part of income. For
2
Shares, debentures and other securities held for sale in the ordinary course of business are disclosed as
`stock-in-trade' under the head `current assets'.
example, when unpaid interest has accrued before the acquisition of an interest-bearing
investment and is therefore included in the price paid for the investment, the subsequent receipt
of interest is allocated between pre-acquisition and post-acquisition periods; the pre-
acquisition portion is deducted from cost. When dividends on equity are declared from pre-
acquisition profits, a similar treatment may apply. If it is difficult to make such an allocation
except on an arbitrary basis, the cost of investment is normally reduced by dividends receivable
only if they clearly represent a recovery of a part of the cost.
13. When right shares offered are subscribed for, the cost of the right shares is added to
the carrying amount of the original holding. If rights are not subscribed for but are sold in
the market, the sale proceeds are taken to the profit and loss statement. However, where
the investments are acquired on cum-right basis and the market value of investments
immediately after their becoming ex-right is lower than the cost for which they were
acquired, it may be appropriate to apply the sale proceeds of rights to reduce the carrying
amount of such investments to the market value.
Carrying Amount of Investments
Current Investments
14. The carrying amount for current investments is the lower of cost and fair value. In
respect of investments for which an active market exists, market value generally provides
the best evidence of fair value. The valuation of current investments at lower of cost and
fair value provides a prudent method of determining the carrying amount to be stated in
the balance sheet.
15. Valuation of current investments on overall (or global) basis is not considered
appropriate. Sometimes, the concern of an enterprise may be with the value of a category of
related current investments and not with each individual investment, and accordingly the
investments may be carried at the lower of cost and fair value computed categorywise (i.e.
equity shares, preference shares, convertible debentures, etc.). However, the more prudent and
appropriate method is to carry investments individually at the lower of cost and fair value.
16. For current investments, any reduction to fair value and any reversals of such
reductions are included in the profit and loss statement.
Long-term Investments
17. Long-term investments are usually carried at cost. However, when there is a decline,
other than temporary, in the value of a long term investment, the carrying amount is
reduced to recognise the decline. Indicators of the value of an investment are obtained by
reference to its market value, the investee's assets and results and the expected cash flows
from the investment. The type and extent of the investor's stake in the investee are also
taken into account. Restrictions on distributions by the investee or on disposal by the
investor may affect the value attributed to the investment.
18. Long-term investments are usually of individual importance to the investing
enterprise. The carrying amount of long-term investments is therefore determined on an
individual investment basis.
19. Where there is a decline, other than temporary, in the carrying amounts of long term
investments, the resultant reduction in the carrying amount is charged to the profit and
loss statement. The reduction in carrying amount is reversed when there is a rise in the
value of the investment, or if the reasons for the reduction no longer exist.
Investment Properties
20. An investment property is accounted for in accordance with cost model as
prescribed in Accounting Standard (AS) 10, Property, Plant and Equipment. The cost of
any shares in a co-operative society or a company, the holding of which is directly related
to the right to hold the investment property, is added to the carrying amount of the
investment property.
Disposal of Investments
21. On disposal of an investment, the difference between the carrying amount and the
disposal proceeds, net of expenses, is recognised in the profit and loss statement.
22. When disposing of a part of the holding of an individual investment, the carrying
amount to be allocated to that part is to be determined on the basis of the average carrying
amount of the total holding of the investment. 3
Reclassification of Investments
23. Where long-term investments are reclassified as current investments, transfers are
made at the lower of cost and carrying amount at the date of transfer.
24. 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.
Disclosure
25. The following disclosures in financial statements in relation to investments are
appropriate:--
(a) the accounting policies for the determination of carrying amount of investments;
(b) the amounts included in profit and loss statement for:
(i) interest, dividends (showing separately dividends from subsidiary
companies), and rentals on investments showing separately such income
from long term and current investments. Gross income should be stated,
the amount of income tax deducted at source being included under
Advance Taxes Paid;
(ii) profits and losses on disposal of current investments and changes in
carrying amount of such investments;
(iii) profits and losses on disposal of long-term investments and changes in the
carrying amount of such investments;
(c) significant restrictions on the right of ownership, realisability of investments or
the remittance of income and proceeds of disposal;
(d) the aggregate amount of quoted and unquoted investments, giving the aggregate
market value of quoted investments;
3
In respect of shares, debentures and other securities held as stock-in-trade, the cost of stocks disposed of is
determined by applying an appropriate cost formula (e.g. first-in, first-out, average cost, etc.). These cost
formulae are the same as those specified in Accounting Standard (AS) 2, in respect of Valuation of Inventories.
As defined in AS 21, Consolidated Financial Statements
(e) other disclosures as specifically required by the relevant statute governing the
enterprise.
Main Principles
Classification of Investments
26. An enterprise should disclose current investments and long-term investments
distinctly in its financial statements.
27. Further classification of current and long-term investments should be as
specified in the statute governing the enterprise. In the absence of a statutory
requirement, such further classification should disclose, where applicable, investments
in:
(a) Government or Trust securities
(b) Shares, debentures or bonds
(c) Investment properties
(d) Others--specifying nature.
Cost of Investments
28. The cost of an investment should include acquisition charges such as brokerage,
fees and duties.
29. If an investment is acquired, or partly acquired, by the issue of shares or other
securities, the acquisition cost should be the fair value of the securities issued (which in
appropriate cases may be indicated by the issue price as determined by statutory authorities).
The fair value may not necessarily be equal to the nominal or par value of the securities
issued. If an investment is acquired in exchange for another asset, the acquisition cost of
the investment should be determined by reference to the fair value of the asset given up.
Alternatively, the acquisition cost of the investment may be determined with reference to the
fair value of the investment acquired if it is more clearly evident.
Investment Properties
30. An enterprise holding investment properties should account for them in
accordance with cost model as prescribed in AS 10, Property, Plant and Equipment.
Carrying Amount of Investments
31. Investments classified as current investments should be carried in the financial
statements at the lower of cost and fair value determined either on an individual
investment basis or by category of investment, but not on an overall (or global) basis.
32. Investments classified as long term investments should be carried in the financial
statements at cost. However, provision for diminution shall be made to recognise a
decline, other than temporary, in the value of the investments, such reduction being
determined and made for each investment individually.
Changes in Carrying Amounts of Investments
33. Any reduction in the carrying amount and any reversals of such reductions
should be charged or credited to the profit and loss statement.
Disposal of Investments
34. On disposal of an investment, the difference between the carrying amount and
net disposal proceeds should be charged or credited to the profit and loss statement.
Disclosure
35. The following information should be disclosed in the financial statements:
(a) the accounting policies for determination of carrying amount of investments;
(b) classification of investments as specified in paragraphs 26 and 27 above;
(c) the amounts included in profit and loss statement for:
(i) interest, dividends (showing separately dividends from subsidiary
companies), and rentals on investments showing separately such
income from long term and current investments. Gross income should
be stated, the amount of income tax deducted at source being included
under Advance Taxes Paid;
(ii) profits and losses on disposal of current investments and changes in the
carrying amount of such investments; and
(iii) profits and losses on disposal of long term investments and changes in
the carrying amount of such investments;
(d) significant restrictions on the right of ownership, realisability of investments
or the remittance of income and proceeds of disposal;
(e) the aggregate amount of quoted and unquoted investments, giving the
aggregate market value of quoted investments;
(f) other disclosures as specifically required by the relevant statute governing the
enterprise.
Accounting Standard (AS) 14
Accounting for Amalgamations
(This Accounting Standard includes paragraphs set in bold italic type and plain type,
which have equal authority. Paragraphs in bold italic type indicate the main principles.
This Accounting Standard should be read in the context of the General Instructions
contained in part A of the Annexure to the Notification.)
Introduction
1. This standard deals with accounting for amalgamations and the treatment of any
resultant goodwill or reserves. This standard is directed principally to companies although
some of its requirements also apply to financial statements of other enterprises.
2. This standard does not deal with cases of acquisitions which arise when there is a
purchase by one company (referred to as the acquiring company) of the whole or part of
the shares, or the whole or part of the assets, of another company (referred to as the
acquired 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. The
distinguishing feature of an acquisition is that the acquired company is not dissolved and
its separate entity continues to exist.
Definitions
3. The following terms are used in this standard with the meanings specified:
(a) Amalgamation means an amalgamation pursuant to the provisions of the
Companies Act, 2013 or any other statute which may be applicable to
companies and includes `merger'.
(b) Transferor company means the company which is amalgamated into another
company.
(c) Transferee company means the company into which a transferor company is
amalgamated.
(d) Reserve means the portion of earnings, receipts or other surplus of an
enterprise (whether capital or revenue) appropriated by the management for
a general or a specific purpose other than a provision for depreciation or
diminution in the value of assets or for a known liability.
(e) Amalgamation in the nature of merger is an amalgamation which satisfies
all the following conditions.
(i) All the assets and liabilities of the transferor company become, after
amalgamation, the assets and liabilities of the transferee company.
(ii) Share holders holding not less than 90% of the face value of the equity
shares of the transferor company (other than the equity shares already
held therein, immediately before the amalgamation, by the transferee
company or its subsidiaries or their nominees) become equity
shareholders of the transferee company by virtue of the amalgamation.
(iii) The consideration for the amalgamation receivable by those equity
shareholders of the transferor company who agree to become equity
shareholders of the transferee company is discharged by the transferee
company wholly by the issue of equity shares in the transferee company,
except that cash may be paid in respect of any fractional shares.
(iv) The business of the transferor company is intended to be carried on,
after the amalgamation, by the transferee company.
(v) No adjustment is intended to be made to the book values of the assets
and liabilities of the transferor company when they are incorporated in
the financial statements of the transferee company except to ensure
uniformity of accounting policies.
(f) Amalgamation in the nature of purchase is an amalgamation which does not
satisfy any one or more of the conditions specified in sub-paragraph (e)
above.
(g) Consideration for the amalgamation means the aggregate of the shares and
other securities issued and the payment made in the form of cash or other
assets by the transferee company to the shareholders of the transferor
company.
As defined in AS 21, Consolidated Financial Statements
(h) Fair value is the amount for which an asset could be exchanged between a
knowledgeable, willing buyer and a knowledgeable, willing seller in an arm's
length transaction.
(i)Pooling of interests is a method of accounting for amalgamations the object
of which is to account for the amalgamation as if the separate businesses of
the amalgamating companies were intended to be continued by the transferee
company. Accordingly, only minimal changes are made in aggregating the
individual financial statements of the amalgamating companies.
Explanation
Types of Amalgamations
4. Generally speaking, amalgamations fall into two broad categories. In the first category
are those amalgamations where there is a genuine pooling not merely of the assets and
liabilities of the amalgamating companies but also of the shareholders' interests and of the
businesses of these companies. Such amalgamations are amalgamations which are in the
nature of `merger' and the accounting treatment of such amalgamations should ensure that the
resultant figures of assets, liabilities, capital and reserves more or less represent the sum of the
relevant figures of the amalgamating companies. In the second category are those
amalgamations which are in effect a mode by which one company acquires another company
and, as a consequence, the shareholders of the company which is acquired normally do not
continue to have a proportionate share in the equity of the combined company, or the business
of the company which is acquired is not intended to be continued. Such amalgamations are
amalgamations in the nature of 'purchase'.
5. An amalgamation is classified as an `amalgamation in the nature of merger' when
all the conditions listed in paragraph 3(e) are satisfied. There are, however, differing
views regarding the nature of any further conditions that may apply. Some believe that,
in addition to an exchange of equity shares, it is necessary that the shareholders of the
transferor company obtain a substantial share in the transferee company even to the extent
that it should not be possible to identify any one party as dominant therein. This belief is
based in part on the view that the exchange of control of one company for an insignificant
share in a larger company does not amount to a mutual sharing of risks and benefits.
6. Others believe that the substance of an amalgamation in the nature of merger is
evidenced by meeting certain criteria regarding the relationship of the parties, such as the
former independence of the amalgamating companies, the manner of their amalgamation,
the absence of planned transactions that would undermine the effect of the amalgamation,
and the continuing participation by the management of the transferor company in the
management of the transferee company after the amalgamation.
Methods of Accounting for Amalgamations
7. There are two main methods of accounting for amalgamations:
(a) the pooling of interests method; and
(b) the purchase method.
8. The use of the pooling of interests method is confined to circumstances which meet
the criteria referred to in paragraph 3(e) for an amalgamation in the nature of merger.
9. The object of the purchase method is to account for the amalgamation by applying
the same principles as are applied in the normal purchase of assets. This method is used
in accounting for amalgamations in the nature of purchase.
The Pooling of Interests Method
10. Under the pooling of interests method, the assets, liabilities and reserves of the
transferor company are recorded by the transferee company at their existing carrying
amounts (after making the adjustments required in paragraph 11).
11. If, at the time of the amalgamation, the transferor and the transferee companies have
conflicting accounting policies, a uniform set of accounting policies is adopted following
the amalgamation. The effects on the financial statements of any changes in accounting
policies are reported in accordance with Accounting Standard (AS) 5, Net Profit or Loss
for the Period, Prior Period Items and Changes in Accounting Policies.
The Purchase Method
12. Under the purchase method, the transferee company accounts for the amalgamation
either by incorporating the assets and liabilities at their existing carrying amounts or by
allocating the consideration to individual identifiable assets and liabilities of the
transferor company on the basis of their fair values at the date of amalgamation. The
identifiable assets and liabilities may include assets and liabilities not recorded in the
financial statements of the transferor company.
13. Where assets and liabilities are restated on the basis of their fair values, the determination
of fair values may be influenced by the intentions of the transferee company. For example, the
transferee company may have a specialised use for an asset, which is not available to other
potential buyers. The transferee company may intend to effect changes in the activities of the
transferor company which necessitate the creation of specific provisions for the expected
costs, e.g. planned employee termination and plant relocation costs.
Consideration
14. The consideration for the amalgamation may consist of securities, cash or other assets.
In determining the value of the consideration, an assessment is made of the fair value of its
elements. A variety of techniques is applied in arriving at fair value. For example, when the
consideration includes securities, the value fixed by the statutory authorities may be taken to
be the fair value. In case of other assets, the fair value may be determined by reference to the
market value of the assets given up. Where the market value of the assets given up cannot be
reliably assessed, such assets may be valued at their respective net book values.
15. Many amalgamations recognise that adjustments may have to be made to the
consideration in the light of one or more future events. When the additional payment is
probable and can reasonably be estimated at the date of amalgamation, it is included in
the calculation of the consideration. In all other cases, the adjustment is recognised as
soon as the amount is determinable [see Accounting Standard (AS) 4, Contingencies and
Events Occurring After the Balance Sheet Date].
Treatment of Reserves on Amalgamation
16. If the amalgamation is an `amalgamation in the nature of merger', the identity of the
reserves is preserved and they appear in the financial statements of the transferee
company in the same form in which they appeared in the financial statements of the
transferor company. Thus, for example, the General Reserve of the transferor company
becomes the General Reserve of the transferee company, the Capital Reserve of the
transferor company becomes the Capital Reserve of the transferee company and the
Revaluation Reserve of the transferor company becomes the Revaluation Reserve of the
transferee company. As a result of preserving the identity, reserves which are available
for distribution as dividend before the amalgamation would also be available for
distribution as dividend after the amalgamation. The difference between the amount
recorded as share capital issued (plus any additional consideration in the form of cash or
other assets) and the amount of share capital of the transferor company is adjusted is
reserves in the financial statements of the transferee company.
17. If the amalgamation is an `amalgamation in the nature of purchase', the identity of
the reserves, other than the statutory reserves dealt with in paragraph 18, is not preserved.
The amount of the consideration is deducted from the value of the net assets of the
transferor company acquired by the transferee company. If the result of the computation
is negative, the difference is debited to goodwill arising on amalgamation and dealt with
in the manner stated in paragraphs 19-20. If the result of the computation is positive, the
difference is credited to Capital Reserve.
18. Certain reserves may have been created by the transferor company pursuant to the
requirements of, or to avail of the benefits under, the Income-tax Act, 1961; for example,
Development Allowance Reserve, or Investment Allowance Reserve. The Act requires
that the identity of the reserves should be preserved for a specified period. Likewise,
certain other reserves may have been created in the financial statements of the transferor
company in terms of the requirements of other statutes. Though, normally, in an
amalgamation in the nature of purchase, the identity of reserves is not preserved, an
exception is made in respect of reserves of the aforesaid nature (referred to hereinafter as
`statutory reserves') and such reserves retain their identity in the financial statements of
the transferee company in the same form in which they appeared in the financial
statements of the transferor company, so long as their identity is required to be maintained
to comply with the relevant statute. This exception is made only in those amalgamations
where the requirements of the relevant statute for recording the statutory reserves in the
books of the transferee company are complied with. In such cases the statutory reserves
are recorded in the financial statements of the transferee company by a corresponding
debit to a suitable account head (e.g., `Amalgamation Adjustment Reserve') which is
presented as a separate line item. When the identity of the statutory reserves is no longer
required to be maintained, both the reserves and the aforesaid account are reversed.
Treatment of Goodwill Arising on Amalgamation
19. Goodwill arising on amalgamation represents a payment made in anticipation of
future income and it is appropriate to treat it as an asset to be amortised to income on a
systematic basis over its useful life. Due to the nature of goodwill, it is frequently difficult
to estimate its useful life with reasonable certainty. Such estimation is, therefore, made
on a prudent basis. Accordingly, it is considered appropriate to amortise goodwill over a
period not exceeding five years unless a somewhat longer period can be justified.
20. Factors which may be considered in estimating the useful life of goodwill arising on
amalgamation include:
(a) the foreseeable life of the business or industry;
(b) the effects of product obsolescence, changes in demand and other economic factors;
(c) the service life expectancies of key individuals or groups of employees;
(d) expected actions by competitors or potential competitors; and
(e) legal, regulatory or contractual provisions affecting the useful life.
Balance of Profit and Loss Account
21. In the case of an `amalgamation in the nature of merger', the balance of the Profit
and Loss Account appearing in the financial statements of the transferor company is
aggregated with the corresponding balance appearing in the financial statements of the
transferee company. Alternatively, it is transferred to the General Reserve, if any.
22. In the case of an `amalgamation in the nature of purchase', the balance of the Profit
and Loss Account appearing in the financial statements of the transferor company,
whether debit or credit, loses its identity.
Treatment of Reserves Specified in A Scheme of Amalgamation
23. The scheme of amalgamation sanctioned under the provisions of the Companies Act,
2013 or any other statute may prescribe the treatment to be given to the reserves of the
transferor company after its amalgamation. Where the treatment is so prescribed, the
same is followed. In some cases, the scheme of amalgamation sanctioned under a statute
may prescribe a different treatment to be given to the reserves of the transferor company
after amalgamation as compared to the requirements of this Standard that would have
been followed had no treatment been prescribed by the scheme. In such cases, the
following disclosures are made in the first financial statements following the
amalgamation:
(a) A description of the accounting treatment given to the reserves and the reasons
for following the treatment different from that prescribed in this Standard.
(b) Deviations in the accounting treatment given to the reserves as prescribed by
the scheme of amalgamation sanctioned under the statute as compared to the
requirements of this Standard that would have been followed had no treatment
been prescribed by the scheme.
(c) The financial effect, if any, arising due to such deviation.
Disclosure
24. For all amalgamations, the following disclosures are considered appropriate in
the first financial statements following the amalgamation:
(a) names and general nature of business of the amalgamating companies;
(b) effective date of amalgamation for accounting purposes;
(c) the method of accounting used to reflect the amalgamation; and
(d) particulars of the scheme sanctioned under a statute.
25. For amalgamations accounted for under the pooling of interests method, the
Paragraph 23 shall not apply to any scheme of amalgamation approved under the Companies Act, 2013.
following additional disclosures are considered appropriate in the first financial
statements following the amalgamation:
(a) description and number of shares issued, together with the percentage of each
company's equity shares exchanged to effect the amalgamation;
(b) the amount of any difference between the consideration and the value of net
identifiable assets acquired, and the treatment thereof.
26. For amalgamations accounted for under the purchase method, the following
additional disclosures are considered appropriate in the first financial statements
following the amalgamation:
(a) consideration for the amalgamation and a description of the consideration paid
or contingently payable; and
(b) the amount of any difference between the consideration and the value of net
identifiable assets acquired, and the treatment thereof including the period of
amortisation of any goodwill arising on amalgamation.
Amalgamation after the Balance Sheet Date
27. When an amalgamation is effected after the balance sheet date but before the
issuance of the financial statements of either party to the amalgamation, disclosure is made in
accordance with AS 4, `Contingencies and Events Occurring After the Balance Sheet Date',
but the amalgamation is not incorporated in the financial statements. In certain circumstances,
the amalgamation may also provide additional information affecting the financial statements
themselves, for instance, by allowing the going concern assumption to be maintained.
Main Principles
28. An amalgamation may be either ­
(a) an amalgamation in the nature of merger, or
(b) an amalgamation in the nature of purchase.
29. An amalgamation should be considered to be an amalgamation in the nature
of merger when all the following conditions are satisfied:
(i) All the assets and liabilities of the transferor company become, after
amalgamation, the assets and liabilities of the transferee company.
(ii) Shareholders holding not less than 90% of the face value of the equity
shares of the transferor company (other than the equity shares already held
therein, immediately before the amalgamation, by the transferee company
or its subsidiaries or their nominees) become equity shareholders of the
transferee company by virtue of the amalgamation.
(iii) The consideration for the amalgamation receivable by those equity
shareholders of the transferor company who agree to become equity
shareholders of the transferee company is discharged by the transferee
company wholly by the issue of equity shares in the transferee company,
except that cash may be paid in respect of any fractional shares.
(iv) The business of the transferor company is intended to be carried on, after
the amalgamation, by the transferee company.
(v) No adjustment is intended to be made to the book values of the assets and
liabilities of the transferor company when they are incorporated in the
financial statements of the transferee company except to ensure uniformity
of accounting policies.
30. An amalgamation should be considered to be an amalgamation in the nature of
purchase, when any one or more of the conditions specified in paragraph 29 is not satisfied.
31. When an amalgamation is considered to be an amalgamation in the nature of
merger, it should be accounted for under the pooling of interests method described in
paragraphs 33­35.
32. When an amalgamation is considered to be an amalgamation in the nature of
purchase, it should be accounted for under the purchase method described in
paragraphs 36­39.
The Pooling of Interests Method
33. In preparing the transferee company's financial statements, the assets,
liabilities and reserves (whether capital or revenue or arising on revaluation) of the
transferor company should be recorded at their existing carrying amounts and in the
same form as at the date of the amalgamation. The balance of the Profit and Loss
Account of the transferor company should be aggregated with the corresponding
balance of the transferee company or transferred to the General Reserve, if any.
34. If, at the time of the amalgamation, the transferor and the transferee companies
have conflicting accounting policies, a uniform set of accounting policies should be adopted
following the amalgamation. The effects on the financial statements of any changes in
accounting policies should be reported in accordance with Accounting Standard (AS) 5 Net
Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies.
35. The difference between the amount recorded as share capital issued (plus any
additional consideration in the form of cash or other assets) and the amount of share
capital of the transferor company should be adjusted in reserves.
The Purchase Method
36. In preparing the transferee company's financial statements, the assets and
liabilities of the transferor company should be incorporated at their existing carrying
amounts or, alternatively, the consideration should be allocated to individual
identifiable assets and liabilities on the basis of their fair values at the date of
amalgamation. The reserves (whether capital or revenue or arising on revaluation) of
the transferor company, other than the statutory reserves, should not be included in the
financial statements of the transferee company except as stated in paragraph 39.
37. Any excess of the amount of the consideration over the value of the net assets
of the transferor company acquired by the transferee company should be recognised in
the transferee company's financial statements as goodwill arising on amalgamation. If
the amount of the consideration is lower than the value of the net assets acquired, the
difference should be treated as Capital Reserve.
38. The goodwill arising on amalgamation should be amortised to income on a
systematic basis over its useful life. The amortisation period should not exceed five
years unless a somewhat longer period can be justified.
39. Where the requirements of the relevant statute for recording the statutory reserves
in the books of the transferee company are complied with, statutory reserves of the
transferor company should be recorded in the financial statements of the transferee
company. The corresponding debit should be given to a suitable account head (e.g.,
`Amalgamation Adjustment Reserve') which should be presented as a separate line item.
When the identity of the statutory reserves is no longer required to be maintained, both
the reserves and the aforesaid account should be reversed.
Common Procedures
40. The consideration for the amalgamation should include any noncash element
at fair value. In case of issue of securities, the value fixed by the statutory authorities
may be taken to be the fair value. In case of other assets, the fair value may be
determined by reference to the market value of the assets given up. Where the market
value of the assets given up cannot be reliably assessed, such assets may be valued at
their respective net book values.
41. Where the scheme of amalgamation provides for an adjustment to the
consideration contingent on one or more future events, the amount of the additional
payment should be included in the consideration if payment is probable and a
reasonable estimate of the amount can be made. In all other cases, the adjustment
should be recognised as soon as the amount is determinable [see Accounting Standard
(AS) 4, Contingencies and Events Occurring After the Balance Sheet Date].
Treatment of Reserves Specified in A Scheme of Amalgamation
42. Where the scheme of amalgamation sanctioned under a statute prescribes the
treatment to be given to the reserves of the transferor company after amalgamation,
the same should be followed. Where the scheme of amalgamation sanctioned under a
statute prescribes a different treatment to be given to the reserves of the transferor
company after amalgamation as compared to the requirements of this Standard that
would have been followed had no treatment been prescribed by the scheme, the
following disclosures should be made in the first financial statements following the
amalgamation:
(a) A description of the accounting treatment given to the reserves and the
reasons for following the treatment different from that prescribed in this
Standard.
(b) Deviations in the accounting treatment given to the reserves as prescribed by
the scheme of amalgamation sanctioned under the statute as compared to the
requirements of this Standard that would have been followed had no
treatment been prescribed by the scheme.
(c) The financial effect, if any, arising due to such deviation.
Paragraph 42 shall not apply to any scheme of amalgamation approved under the Companies Act, 2013.
Disclosure
43. For all amalgamations, the following disclosures should be made in the first
financial statements following the amalgamation:
(a) names and general nature of business of the amalgamating companies;
(b) effective date of amalgamation for accounting purposes;
(c) the method of accounting used to reflect the amalgamation; and
(d) particulars of the scheme sanctioned under a statute.
44. For amalgamations accounted for under the pooling of interests method, the
following additional disclosures should be made in the first financial statements
following the amalgamation:
(a) description and number of shares issued, together with the percentage of
each company's equity shares exchanged to effect the amalgamation;
(b) the amount of any difference between the consideration and the value of net
identifiable assets acquired, and the treatment thereof.
45. For amalgamations accounted for under the purchase method, the following
additional disclosures should be made in the first financial statements following the
amalgamation:
(a) consideration for the amalgamation and a description of the consideration
paid or contingently payable; and
(b) the amount of any difference between the consideration and the value of net
identifiable assets acquired, and the treatment thereof including the period
of amortisation of any goodwill arising on amalgamation.
Amalgamation after the Balance Sheet Date
46. When an amalgamation is effected after the balance sheet date but before the
issuance of the financial statements of either party to the amalgamation, disclosure
should be made in accordance with AS 4, `Contingencies and Events Occurring After
the Balance Sheet Date', but the amalgamation should not be incorporated in the
financial statements. In certain circumstances, the amalgamation may also provide
additional information affecting the financial statements themselves, for instance, by
allowing the going concern assumption to be maintained.
Accounting Standard (AS) 21
Consolidated Financial Statements1
1
It is clarified that AS 21 is mandatory if an enterprise presents consolidated financial statements. In other
words, the accounting standard does not mandate an enterprise to present consolidated financial statements but,
(This Accounting Standard includes paragraphs set in bold italic type and plain type,
which have equal authority. Paragraphs in bold italic type indicate the main principles.
This Accounting Standard should be read in the context of its objective and the General
Instructions contained in part A of the Annexure to the Notification.)
Objective
The objective of this Standard is to lay down principles and procedures for preparation
and presentation of consolidated financial statements. Consolidated financial statements
are presented by a parent (also known as holding enterprise) to provide financial
information about the economic activities of its group. These statements are intended to
present financial information about a parent and its subsidiary (ies) as a single economic
entity to show the economic resources controlled by the group, the obligations of the
group and results the group achieves with its resources.
Scope
1. This Standard should be applied in the preparation and presentation of consolidated
financial statements for a group of enterprises under the control of a parent.
2. This Standard should also be applied in accounting for investments in subsidiaries
in the separate financial statements of a parent.
3. In the preparation of consolidated financial statements, other Accounting Standards
also apply in the same manner as they apply to the separate statements.
4. This Standard does not deal with:
(a) methods of accounting for amalgamations and their effects on consolidation,
including goodwill arising on amalgamation (see AS 14, Accounting for
Amalgamations);
(b) accounting for investments in associates (at present governed by AS 13,
Accounting for Investments2 ); and
(c) accounting for investments in joint ventures (at present governed by AS 13,
Accounting for Investments3 ).
Definitions
5. For the purpose of this Standard, the following terms are used with the meanings
specified:
5.1 Control:
(a) the ownership, directly or indirectly through subsidiary(ies), of more than
if the enterprise presents consolidated financial statements for complying with the requirements of any statute
or otherwise, it should prepare and present consolidated financial statements in accordance with AS 21.
2
Accounting Standard (AS) 23, `Accounting for Investments in Associates in Consolidated Financial
Statements', specifies the requirements relating to accounting for investments in associates in Consolidated
Financial Statements.
3
Accounting Standard (AS) 27, `Financial Reporting of Interests in Joint Ventures', specifies the requirements
relating to accounting for investments in joint ventures.
one-half of the voting power of an enterprise; or
(b) control of the composition of the board of directors in the case of a company
or of the composition of the corresponding governing body in case of any
other enterprise so as to obtain economic benefits from its activities.
5.2 A subsidiary is an enterprise that is controlled by another enterprise (known as
the parent).
5.3 A parent is an enterprise that has one or more subsidiaries.
5.4 A group is a parent and all its subsidiaries.
5.5 Consolidated financial statements are the financial statements of a group
presented as those of a single enterprise.
5.6 Equity is the residual interest in the assets of an enterprise after deducting all its
liabilities.
5.7 Minority interest is that part of the net results of operations and of the net assets
of a subsidiary attributable to interests which are not owned, directly or indirectly
through subsidiary(ies), by the parent.
6. Consolidated financial statements normally include consolidated balance sheet,
consolidated statement of profit and loss, and notes, other statements and explanatory material
that form an integral part thereof. Consolidated cash flow statement is presented in case
a parent presents its own cash flow statement. The consolidated financial statements are
presented, to the extent possible, in the same format as that adopted by the parent for its
separate financial statements.
Explanation:
All the notes appearing in the separate financial statements of the parent enterprise and its
subsidiaries need not be included in the notes to the consolidated financial statements. For
preparing consolidated financial statements, the following principles may be observed in
respect of notes and other explanatory material that form an integral part thereof:
(a) Notes which are necessary for presenting a true and fair view of the
consolidated financial statements are included in the consolidated financial
statements as an integral part thereof.
(b) Only the notes involving items which are material need to be disclosed. Materiality
for this purpose is assessed in relation to the information contained in consolidated
financial statements. In view of this, it is possible that certain notes which are
disclosed in separate financial statements of a parent or a subsidiary would not be
required to be disclosed in the consolidated financial statements when the test of
materiality is applied in the context of consolidated financial statements.
(c) Additional statutory information disclosed in separate financial statements of
the subsidiary and/or a parent having no bearing on the true and fair view of the
consolidated financial statements need not be disclosed in the consolidated
financial statements. An illustration of such information in the case of
companies is attached to the Standard.
Presentation of Consolidated Financial Statements
7. A parent which presents consolidated financial statements should present these
statements in addition to its separate financial statements.
8. Users of the financial statements of a parent are usually concerned with, and need to be
informed about, the financial position and results of operations of not only the enterprise itself
but also of the group as a whole. This need is served by providing the users ­
(a) separate financial statements of the parent; and
(b) consolidated financial statements, which present financial information about
the group as that of a single enterprise without regard to the legal boundaries of
the separate legal entities.
Scope of Consolidated Financial Statements
9. A parent which presents consolidated financial statements should consolidate all
subsidiaries, domestic as well as foreign, other than those referred to in paragraph 11.
Where an enterprise does not have a subsidiary but has an associate and/or a joint
venture such an enterprise should also prepare consolidated financial statements in
accordance with Accounting Standard (AS) 23, Accounting for Associates in
Consolidated Financial Statements, and Accounting Standard (AS) 27, Financial
Reporting of Interests in Joint Ventures respectively.
10. The consolidated financial statements are prepared on the basis of financial
statements of parent and all enterprises that are controlled by the parent, other than those
subsidiaries excluded for the reasons set out in paragraph 11. Control exists when the
parent owns, directly or indirectly through subsidiary(ies), more than one-half of the
voting power of an enterprise. Control also exists when an enterprise controls the
composition of the board of directors (in the case of a company) or of the corresponding
governing body (in case of an enterprise not being a company) so as to obtain economic
benefits from its activities. An enterprise may control the composition of the governing
bodies of entities such as gratuity trust, provident fund trust etc. Since the objective of
control over such entities is not to obtain economic benefits from their activities, these
are not considered for the purpose of preparation of consolidated financial statements.
For the purpose of this Standard, an enterprise is considered to control the composition
of:
(i) the board of directors of a company, if it has the power, without the consent or
concurrence of any other person, to appoint or remove all or a majority of
directors of that company. An enterprise is deemed to have the power to appoint
a director, if any of the following conditions is satisfied:
(a) a person cannot be appointed as director without the exercise in his favour
by that enterprise of such a power as aforesaid; or
(b) a person's appointment as director follows necessarily from his
appointment to a position held by him in that enterprise; or
(c) the director is nominated by that enterprise or a subsidiary thereof.
(ii) the governing body of an enterprise that is not a company, if it has the power,
without the consent or the concurrence of any other person, to appoint or
remove all or a majority of members of the governing body of that other
enterprise. An enterprise is deemed to have the power to appoint a member, if
any of the following conditions is satisfied:
(a) a person cannot be appointed as member of the governing body without
the exercise in his favour by that other enterprise of such a power as
aforesaid; or
(b) a person's appointment as member of the governing body follows necessarily
from his appointment to a position held by him in that other enterprise; or
(c) the member of the governing body is nominated by that other enterprise.
Explanation:
It is possible that an enterprise is controlled by two enterprises ­ one controls by virtue
of ownership of majority of the voting power of that enterprise and the other controls, by virtue
of an agreement or otherwise, the composition of the board of directors so as to obtain
economic benefits from its activities. In such a rare situation, when an enterprise is controlled
by two enterprises as per the definition of `control', the first mentioned enterprise will be
considered as subsidiary of both the controlling enterprises within the meaning of this
Standard and, therefore, both the enterprises need to consolidate the financial statements of
that enterprise as per the requirements of this Standard.
11. A subsidiary should be excluded from consolidation when:
(a) control is intended to be temporary because the subsidiary is acquired and
held exclusively with a view to its subsequent disposal in the near future; or
(b) it operates under severe long-term restrictions which significantly impair its
ability to transfer funds to the parent.
In consolidated financial statements, investments in such subsidiaries should be
accounted for in accordance with Accounting Standard (AS) 13, Accounting for
Investments. The reasons for not consolidating a subsidiary should be disclosed in the
consolidated financial statements.
Explanation:
(a) Where an enterprise owns majority of voting power by virtue of ownership of
the shares of another enterprise and all the shares are held as `stock -in-trade'
and are acquired and held exclusively with a view to their subsequent disposal
in the near future, the control by the first mentioned enterprise is considered
to be temporary within the meaning of paragraph 11(a).
(b) The period of time, which is considered as near future for the purposes of this
Standard primarily depends on the facts and circumstances of each case.
However, ordinarily, the meaning of the words `near future' is considered as not
more than twelve months from acquisition of relevant investments unless a longer
period can be justified on the basis of facts and circumstances of the case. The
intention with regard to disposal of the relevant investment is considered at the
time of acquisition of the investment. Accordingly, if the relevant investment is
acquired without an intention to its subsequent disposal in near future, and
subsequently, it is decided to dispose off the investment, such an investment is not
excluded from consolidation, until the investment is actually disposed off.
Conversely, if the relevant investment is acquired with an intention to its
subsequent disposal in near future, but, due to some valid reasons, it could not be
disposed off within that period, the same will continue to be excluded from
consolidation, provided there is no change in the intention.
12. Exclusion of a subsidiary from consolidation on the ground that its business
activities are dissimilar from those of the other enterprises within the group is not justified
because better information is provided by consolidating such subsidiaries and disclosing
additional information in the consolidated financial statements about the different
business activities of subsidiaries. For example, the disclosures required by Accounting
Standard (AS) 17, Segment Reporting, help to explain the significance of different
business activities within the group.
Consolidation Procedures
13. In preparing consolidated financial statements, the financial statements of the
parent and its subsidiaries should be combined on a line by line basis by adding
together like items of assets, liabilities, income and expenses. In order that the
consolidated financial statements present financial information about the group as that
of a single enterprise, the following steps should be taken:
(a) the cost to the parent of its investment in each subsidiary and the parent's
portion of equity of each subsidiary, at the date on which investment in each
subsidiary is made, should be eliminated;
(b) any excess of the cost to the parent of its investment in a subsidiary over the
parent's portion of equity of the subsidiary, at the date on which investment
in the subsidiary is made, should be described as goodwill to be recognised as
an asset in the consolidated financial statements;
(c) when the cost to the parent of its investment in a subsidiary is less than the
parent's portion of equity of the subsidiary, at the date on which investment
in the subsidiary is made, the difference should be treated as a capital reserve
in the consolidated financial statements;
(d) minority interests in the net income of consolidated subsidiaries for the reporting
period should be identified and adjusted against the income of the group in order
to arrive at the net income attributable to the owners of the parent; and
(e) minority interests in the net assets of consolidated subsidiaries should be
identified and presented in the consolidated balance sheet separately from
liabilities and the equity of the parent's shareholders. Minority interests in
the net assets consist of:
(i) the amount of equity attributable to minorities at the date on which
investment in a subsidiary is made; and
(ii) the minorities' share of movements in equity since the date the parent -
subsidiary relationship came in existence.
Where the carrying amount of the investment in the subsidiary is different from
its cost, the carrying amount is considered for the purpose of above computations.
Explanation:
(a) The tax expense (comprising current tax and deferred tax) to be shown in the
consolidated financial statements should be the aggregate of the amounts of
tax expense appearing in the separate financial statements of the parent and
its subsidiaries.
(b) The parent's share in the post-acquisition reserves of a subsidiary, forming
part of the corresponding reserves in the consolidated balance sheet, is not
required to be disclosed separately in the consolidated balance sheet keeping
in view the objective of consolidated financial statements to present financial
information of the group as a whole. In view of this, the consolidated reserves
disclosed in the consolidated balance sheet are inclusive of the parent's share
in the post-acquisition reserves of a subsidiary.
14. The parent's portion of equity in a subsidiary, at the date on which investment is
made, is determined on the basis of information contained in the financial statements of
the subsidiary as on the date of investment. However, if the financial statements of a
subsidiary, as on the date of investment, are not available and if it is impracticable to draw
the financial statements of the subsidiary as on that date, financial statements of the
subsidiary for the immediately preceding period are used as a basis for consolidation.
Adjustments are made to these financial statements for the effects of significant
transactions or other events that occur between the date of such financial statements and
the date of investment in the subsidiary.
15. If an enterprise makes two or more investments in another enterprise at different dates
and eventually obtains control of the other enterprise, the consolidated financial statements are
presented only from the date on which holding-subsidiary relationship comes in existence. If
two or more investments are made over a period of time, the equity of the subsidiary at the
date of investment, for the purposes of paragraph 13 above, is generally determined on a step-
by-step basis; however, if small investments are made over a period of time and then an
investment is made that results in control, the date of the latest investment, as a practicable
measure, may be considered as the date of investment.
16. Intragroup balances and intragroup transactions and resulting unrealised profits
should be eliminated in full. Unrealised losses resulting from intragroup transactions
should also be eliminated unless cost cannot be recovered.
17. Intragroup balances and intragroup transactions, including sales, expenses and dividends,
are eliminated in full. Unrealised profits resulting from intragroup transactions that are
included in the carrying amount of assets, such as inventory and fixed assets, are eliminated
in full. Unrealised losses resulting from intragroup transactions that are deducted in arriving
at the carrying amount of assets are also eliminated unless cost cannot be recovered.
18. The financial statements used in the consolidation should be drawn up to the same
reporting date. If it is not practicable to draw up the financial statements of one or more
subsidiaries to such date and, accordingly, those financial statements are drawn up to
different reporting dates, adjustments should be made for the effects of significant
transactions or other events that occur between those dates and the date of the parent's
financial statements. In any case, the difference between reporting dates should not be
more than six months.
19. The financial statements of the parent and its subsidiaries used in the preparation of
the consolidated financial statements are usually drawn up to the same date. When the
reporting dates are different, the subsidiary often prepares, for consolidation purposes,
statements as at the same date as that of the parent. When it is impracticable to do this,
financial statements drawn up to different reporting dates may be used provided the
difference in reporting dates is not more than six months. The consistency principle
requires that the length of the reporting periods and any difference in the reporting dates
should be the same from period to period.
20. Consolidated financial statements should be prepared using uniform accounting
policies for like transactions and other events in similar circumstances. If it is not
practicable to use uniform accounting policies in preparing the consolidated financial
statements, that fact should be disclosed together with the proportions of the items in
the consolidated financial statements to which the different accounting policies have
been applied.
21. If a member of the group uses accounting policies other than those adopted in the
consolidated financial statements for like transactions and events in similar
circumstances, appropriate adjustments are made to its financial statements when they
are used in preparing the consolidated financial statements.
22. The results of operations of a subsidiary are included in the consolidated financial
statements as from the date on which parent-subsidiary relationship came in existence. The
results of operations of a subsidiary with which parent-subsidiary relationship ceases to exist
are included in the consolidated statement of profit and loss until the date of cessation of the
relationship. The difference between the proceeds from the disposal of investment in a
subsidiary and the carrying amount of its assets less liabilities as of the date of disposal is
recognised in the consolidated statement of profit and loss as the profit or loss on the disposal
of the investment in the subsidiary. In order to ensure the comparability of the financial
statements from one accounting period to the next, supplementary information is often
provided about the effect of the acquisition and disposal of subsidiaries on the financial
position at the reporting date and the results for the reporting period and on the
corresponding amounts for the preceding period.
23. An investment in an enterprise should be accounted for in accordance with
Accounting Standard (AS) 13, Accounting for Investments, from the date that the
enterprise ceases to be a subsidiary and does not become an associate 1.
24. The carrying amount of the investment at the date that it ceases to be a subsidiary is
regarded as cost thereafter.
25. Minority interests should be presented in the consolidated balance sheet separately
from liabilities and the equity of the parent's shareholders. Minority interests in the
income of the group should also be separately presented.
26. The losses applicable to the minority in a consolidated subsidiary may exceed the
minority interest in the equity of the subsidiary. The excess, and any further losses applicable
to the minority, are adjusted against the majority interest except to the extent that the minority
has a binding obligation to, and is able to, make good the losses. If the subsidiary subsequently
reports profits, all such profits are allocated to the majority interest until the minority's share
of losses previously absorbed by the majority has been recovered.
27. If a subsidiary has outstanding cumulative preference shares which are held outside
1
Accounting Standard (AS) 23, `Accounting for Investments in Associates in Consolidated Financial
Statements', defines the term `associate' and specifies the requirements relating to accounting for investments
in associates in consolidated Financial Statements.
the group, the parent computes its share of profits or losses after adjusting for the
subsidiary's preference dividends, whether or not dividends have been declared.
Accounting for Investments in Subsidiaries in a Parent's Separate
Financial Statements
28. In a parent's separate financial statements, investments in subsidiaries should be
accounted for in accordance with Accounting Standard (AS) 13, Accounting for
Investments.
Disclosure
29. In addition to disclosures required by paragraph 11 and 20, following disclosures
should be made:
(a) in consolidated financial statements a list of all subsidiaries including the
name, country of incorporation or residence, proportion of ownership interest
and, if different, proportion of voting power held;
(b) in consolidated financial statements, where applicable:
(i) the nature of the relationship between the parent and a subsidiary, if the
parent does not own, directly or indirectly through subsidiaries, more
than one-half of the voting power of the subsidiary;
(ii) the effect of the acquisition and disposal of subsidiaries on the financial
position at the reporting date, the results for the reporting period and on
the corresponding amounts for the preceding period; and
(iii) the names of the subsidiary(ies) of which reporting date(s) is/are
different from that of the parent and the difference in reporting dates.
Transitional Provisions
30. On the first occasion that consolidated financial statements are presented,
comparative figures for the previous period need not be presented. In all subsequent
years full comparative figures for the previous period should be presented in the
consolidated financial statements.
Illustration
Note: This illustration does not form part of the Accounting Standard. Its purpose is to
assist in clarifying the meaning of the Accounting Standard.
In the case of companies, the information such as the following given in the notes to
the separate financial statements of the parent and/or the subsidiary, need not be included
in the consolidated financial statements:
(i) Source from which bonus shares are issued, e.g., capitalisation of profits or
Reserves or from Share Premium Account.
(ii) Disclosure of all unutilised monies out of the issue indicating the form in which
such unutilised funds have been invested.
(iii) The name(s) of small scale industrial undertaking(s) to whom the company owe
any sum together with interest outstanding for more than thirty days.
(iv) A statement of investments (whether shown under "Investment" or under
"Current Assets" as stock-in-trade) separately classifying trade investments and
other investments, showing the names of the bodies corporate (indicating
separately the names of the bodies corporate under the same management) in
whose shares or debentures, investments have been made (including all
investments, whether existing or not, made subsequent to the date as at which
the previous balance sheet was made out) and the nature and extent of the
investment so made in each such body corporate.
(v) Quantitative information in respect of sales, raw materials consumed, opening
and closing stocks of goods produced/ traded and purchases made, wherever
applicable.
(vi) A statement showing the computation of net profits in accordance with section
198 of the Companies Act, 2013, with relevant details of the calculation of the
commissions payable by way of percentage of such profits to the directors
(including managing directors) or manager (if any).
(vii) In the case of manufacturing companies, quantitative information in regard to
the licensed capacity (where licence is in force); the installed capacity; and the
actual production.
(viii)Value of imports calculated on C.I.F. basis by the company during the financial
year in respect of :
(a) raw materials;
(b) components and spare parts;
(c) capital goods.
(ix) Expenditure in foreign currency during the financial year on account of royalty,
know-how, professional, consultation fees, interest, and other matters.
(x) Value of all imported raw materials, spare parts and components consumed
during the financial year and the value of all indigenous raw materials, spare
parts and components similarly consumed and the percentage of each to the
total consumption.
(xi) The amount remitted during the year in foreign currencies on account of
dividends, with a specific mention of the number of non-resident shareholders,
the number of shares held by them on which the dividends were due and the
year to which the dividends related.
(xii) Earnings in foreign exchange classified under the following heads, namely:
(a) export of goods calculated on F.O.B. basis;
(b) royalty, know-how, professional and consultation fees;
(c) interest and dividend;
(d) other income, indicating the nature thereof.
Accounting Standard (AS) 29
Provisions, Contingent Liabilities and Contingent Assets
(This Accounting Standard includes paragraphs set in bold italic type and plain type, which have equal authority.
Paragraphs set in bold italic type indicate the main principles. This Accounting Standard should be read in the context
of its objective and the General Instructions contained in part A of the Annexure to the Notification.)
Pursuant to this Accounting Standard coming into effect, all paragraphs of Accounting Standard (AS) 4, Contingencies and
Events Occurring After the Balance Sheet Date, that deal with contingencies (viz., paragraphs 1 (a), 2, 3.1, 4 (4.1 to 4.4), 5
(5.1 to 5.6), 6, 7 (7.1 to 7.3), 9.1 (relevant portion), 9.2, 10, 11, 12 and 16), stand withdrawn except to the extent they deal
with impairment of assets not covered by other Indian Accounting Standards.
Objective
The objective of this Standard is to ensure that appropriate recognition criteria and measurement bases are applied to
provisions and contingent liabilities and that sufficient information is disclosed in the notes to the financial statements
to enable users to understand their nature, timing and amount. The objective of this Standard is also to lay down
appropriate accounting for contingent assets.
Scope
1. This Standard should be applied in accounting for provisions and contingent liabilities and in dealing with
contingent assets, except:
(a) those resulting from financial instruments9 that are carried at fair value;
(b) those resulting from executory contracts, except where the contract is onerous; Explanation :
(i) An `onerous contract' is a contract in which the unavoidable costs of meeting the obligations under the
contract exceed the economic benefits expected to be received under it. Thus, for a contract to qualify as
an onerous contract, the unavoidable costs of meeting the obligation under the contract should exceed
the economic benefits expected to be received under it. The unavoidable costs under a contract reflect the
least net cost of exiting from the contract, which is the lower of the cost of fulfilling it and any
compensation or penalties arising from failure to fulfill it.
(ii) If an enterprise has a contract that is onerous, the present obligation under the contract is
recognised and measured as a provision as per this Statement.
The application of the above explanation is illustrated in Illustration 10 of Illustration C attached to
the Standard.
(c) those arising in insurance enterprises from contracts with policy-holders; and
(d) those covered by another Accounting Standard.
2. This Standard applies to financial instruments (including guarantees) that are not carried at fair value.
3. Executory contracts are contracts under which neither party has performed any of its obligations or both parties
have partially performed their obligations to an equal extent. This Standard does not apply to executory contracts
unless they are onerous.
4. This Standard applies to provisions, contingent liabilities and contingent assets of insurance enterprises other
than those arising from contracts with policy-holders.
5. Where another Accounting Standard deals with a specific type of provision, contingent liability or contingent asset, an
enterprise applies that Standard instead of this Standard. For example, certain types of provisions are also addressed in
Accounting Standards on:
(a) construction contracts (see AS 7, Construction Contracts);
(b) taxes on income (see AS 22, Accounting for Taxes on Income);
9
For the purpose of this Standard, the term `financial instruments' shall have the same meaning as in Accounting Standard (AS) 20, Earnings Per
Share
(c) leases (see AS 19, Leases) . However, as AS 19 contains no specific requirements to deal with operating
leases that have become onerous, this Statement applies to such cases; and
(d) retirement benefits (see AS 15, Accounting for Retirement Benefits in the Financial Statements of
Employers).
6. Some amounts treated as provisions may relate to the recognition of revenue, for example where an enterprise gives
guarantees in exchange for a fee. This Standard does not address the recognition of revenue. AS 9, Revenue Recognition,
identifies the circumstances in which revenue is recognised and provides practical guidance on the application of the
recognition criteria. This Standard does not change the requirements of AS 9.
7. This Standard defines provisions as liabilities which can be measured only by using a substantial degree of estimation.
The term `provision' is also used in the context of items such as depreciation, impairment of assets and doubtful debts:
these are adjustments to the carrying amounts of assets and are not addressed in this Standard.
8. Other Accounting Standards specify whether expenditures are treated as assets or as expenses. These issues are not
addressed in this Standard. Accordingly, this Standard neither prohibits nor requires capitalisation of the costs recognised
when a provision is made.
9. This Standard applies to provisions for restructuring (including discontinuing operations). Where a restructuring
meets the definition of a discontinuing operation, additional disclosures are required by AS 24, Discontinuing
Operations.
Definitions
10. The following terms are used in this Standard with the meanings specified:
10.1 A provision is a liability which can be measured only by using a substantial degree of estimation.
10.2 A liability is a present obligation of the enterprise arising from past events, the settlement of which is expected
to result in an outflow from the enterprise of resources embodying economic benefits.
10.3 An obligating event is an event that creates an obligation that results in an enterprise having no realistic
alternative to settling that obligation.
10.4 A contingent liability is:
(a) a possible obligation that arises from past events and the existence of which will be confirmed only by
the occurrence or non occurrence of one or more uncertain future events not wholly within the control
of the enterprise; or
(b) a present obligation that arises from past events but is not recognised because:
(i) it is not probable that an outflow of resources embodying economic benefits will be required to settle
the obligation; or
(ii) a reliable estimate of the amount of the obligation cannot be made.
10.5 A contingent asset is a possible asset that arises from past events the existence of which will be confirmed only
by the occurrence or nonoccurrence of one or more uncertain future events not wholly within the control of the
enterprise.
10.6 Present obligation - an obligation is a present obligation if, based on the evidence available, its existence at the balance
sheet date is considered probable, i.e., more likely than not.
10.7 Possible obligation - an obligation is a possible obligation if, based on the evidence available, its existence at
the balance sheet date is considered not probable.
10.8 A restructuring is a programme that is planned and controlled by management, and materially changes either:
(a) the scope of a business undertaken by an enterprise; or
(b) the manner in which that business is conducted.
11. An obligation is a duty or responsibility to act or perform in a certain way. Obligations may be legally enforceable as a
consequence of a binding contract or statutory requirement. Obligations also arise from normal business practice,
custom and a desire to maintain good business relations or act in an equitable manner.
12. Provisions can be distinguished from other liabilities such as trade payables and accruals because in the
measurement of provisions substantial degree of estimation is involved with regard to the future expenditure required
in settlement. By contrast:
(a) trade payables are liabilities to pay for goods or services that have been received or supplied and have been
invoiced or formally agreed with the supplier; and
(b) accruals are liabilities to pay for goods or services that have been received or supplied but have not been
paid, invoiced or formally agreed with the supplier, including amounts due to employees. Although it is
sometimes necessary to estimate the amount of accruals, the degree of estimation is generally much less
than that for provisions.
13. In this Standard, the term `contingent' is used for liabilities and assets that are not recognised because their
existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not
wholly within the control of the enterprise. In addition, the term `contingent liability' is used for liabilities that do not
meet the recognition criteria.
Recognition
Provisions
14. A provision should be recognised when:
(a) an enterprise has a present obligation as a result of a past event;
(b) it is probable that an outflow of resources embodying economic benefits will be required to settle the
obligation; and
(c) a reliable estimate can be made of the amount of the obligation.
If these conditions are not met, no provision should be recognised.
Present Obligation
15. In almost all cases it will be clear whether a past event has given rise to a present obligation. In rare cases, for
example in a lawsuit, it may be disputed either whether certain events have occurred or whether those events result in
a present obligation. In such a case, an enterprise determines whether a present obligation exists at the balance sheet
date by taking account of all available evidence, including, for example, the opinion of experts. The evidence
considered includes any additional evidence provided by events after the balance sheet date. On the basis of such
evidence:
(a) where it is more likely than not that a present obligation exists at the balance sheet date, the enterprise
recognises a provision (if the recognition criteria are met); and
(b) where it is more likely that no present obligation exists at the balance sheet date, the enterprise discloses a
contingent liability, unless the possibility of an outflow of resources embodying economic benefits is remote
(see paragraph 68).
Past Event
16. A past event that leads to a present obligation is called an obligating event. For an event to be an obligating event,
it is necessary that the enterprise has no realistic alternative to settling the obligation created by the event.
17. Financial statements deal with the financial position of an enterprise at the end of its reporting period and not its
possible position in the future. Therefore, no provision is recognised for costs that need to be incurred to operate in
the future. The only liabilities recognised in an enterprise's balance sheet are those that exist at the balance sheet date.
18. It is only those obligations arising from past events existing independently of an enterprise's future actions (i.e.
the future conduct of its business) that are recognised as provisions. Examples of such obligations are penalties or
clean-up costs for unlawful environmental damage, both of which would lead to an outflow of resources embodying
economic benefits in settlement regardless of the future actions of the enterprise. Similarly, an enterprise recognises a
provision for the decommissioning costs of an oil installation to the extent that the enterprise is obliged to rectify
damage already caused. In contrast, because of commercial pressures or legal requirements, an enterprise may intend
or need to carry out expenditure to operate in a particular way in the future (for example, by fitting smoke filters in a
certain type of factory). Because the enterprise can avoid the future expenditure by its future actions, for example by
changing its method of operation, it has no present obligation for that future expenditure and no provision is
recognised.
19. An obligation always involves another party to whom the obligation is owed. It is not necessary, however, to
know the identity of the party to whom the obligation is owed -- indeed the obligation may be to the public at large.
20. An event that does not give rise to an obligation immediately may do so at a later date, because of changes in the
law. For example, when environmental damage is caused there may be no obligation to remedy the consequences.
However, the causing of the damage will become an obligating event when a new law requires the existing damage to
be rectified.
21. Where details of a proposed new law have yet to be finalised, an obligation arises only when the legislation is
virtually certain to be enacted. Differences in circumstances surrounding enactment usually make it impossible to
specify a single event that would make the enactment of a law virtually certain. In many cases it will be impossible to
be virtually certain of the enactment of a law until it is enacted.
Probable Outflow of Resources Embodying Economic Benefits
22. For a liability to qualify for recognition there must be not only a present obligation but also the probability of an outflow of
resources embodying economic benefits to settle that obligation. For the purpose of this Standard 10 , an outflow of resources or
other event is regarded as probable if the event is more likely than not to occur, i.e., the probability that the event will occur is
greater than the probability that it will not. Where it is not probable that a present obligation exists, an enterprise discloses a
contingent liability, unless the possibility of an outflow of resources embodying economic benefits is remote (see
paragraph 68).
23. Where there are a number of similar obligations (e.g. product warranties or similar contracts) the probability that
an outflow will be required in settlement is determined by considering the class of obligations as a whole. Although
the likelihood of outflow for any one item may be small, it may well be probable that some outflow of resources will
be needed to settle the class of obligations as a whole. If that is the case, a provision is recognised (if the other
recognition criteria are met).
Reliable Estimate of the Obligation
24. The use of estimates is an essential part of the preparation of financial statements and does not undermine their
reliability. This is especially true in the case of provisions, which by their nature involve a greater degree of estimation
than most other items. Except in extremely rare cases, an enterprise will be able to determine a range of possible
outcomes and can therefore make an estimate of the obligation that is reliable to use in recognising a provision.
25. In the extremely rare case where no reliable estimate can be made, a liability exists that cannot be recognised. That
liability is disclosed as a contingent liability (see paragraph 68).
Contingent Liabilities
26. An enterprise should not recognise a contingent liability.
27. A contingent liability is disclosed, as required by paragraph 68, unless the possibility of an outflow of resources
embodying economic benefits is remote.
28. Where an enterprise is jointly and severally liable for an obligation, the part of the obligation that is expected to
be met by other parties is treated as a contingent liability. The enterprise recognises a provision for the part of the
obligation for which an outflow of resources embodying economic benefits is probable, except in the extremely rare
circumstances where no reliable estimate can be made (see paragraph 14).
29. Contingent liabilities may develop in a way not initially expected. Therefore, they are assessed continually to
determine whether an outflow of resources embodying economic benefits has become probable. If it becomes probable
10
The interpretation of `probable' in this Standard as `more likely than not' does not necessarily apply in other Accounting Standards
that an outflow of future economic benefits will be required for an item previously dealt with as a contingent liability,
a provision is recognised in accordance with paragraph 14 in the financial statements of the period in which the change
in probability occurs (except in the extremely rare circumstances where no reliable estimate can be made).
Contingent Assets
30. An enterprise should not recognise a contingent asset.
31. Contingent assets usually arise from unplanned or other unexpected events that give rise to the possibility of an inflow
of economic benefits to the enterprise. An example is a claim that an enterprise is pursuing through legal processes, where
the outcome is uncertain.
32. Contingent assets are not recognised in financial statements since this may result in the recognition of income that may
never be realised. However, when the realisation of income is virtually certain, then the related asset is not a contingent
asset and its recognition is appropriate.
33. A contingent asset is not disclosed in the financial statements. It is usually disclosed in the report of the approving
authority (Board of Directors in the case of a company, and, the corresponding approving authority in the case of any
other enterprise), where an inflow of economic benefits is probable.
34. Contingent assets are assessed continually and if it has become virtually certain that an inflow of economic
benefits will arise, the asset and the related income are recognised in the financial statements of the period in which
the change occurs.
Measurement
Best Estimate
35. The amount recognised as a provision should be the best estimate of the expenditure required to settle the
present obligation at the balance sheet date. The amount of a provision should not be discounted to its present
value except in case of decommissioning, restoration and similar liabilities that are recognised as cost of Property,
Plant and Equipment. The discount rate (or rates) should be a pre-tax rate (or rates) that reflect(s) current market
assessments of the time value of money and the risks specific to the liability. The discount rate(s) should not reflect
risks for which future cash flow estimates have been adjusted. Periodic unwinding of discount should be recognised
in the statement of profit and loss.
36. The estimates of outcome and financial effect are determined by the judgment of the management of the
enterprise, supplemented by experience of similar transactions and, in some cases, reports from independent experts.
The evidence considered includes any additional evidence provided by events after the balance sheet date.
37. The provision is measured before tax; the tax consequences of the provision, and changes in it, are dealt with
under AS 22, Accounting for Taxes on Income.
Risks and Uncertainties
38. The risks and uncertainties that inevitably surround many events and circumstances should be taken into account
in reaching the best estimate of a provision.
39. Risk describes variability of outcome. A risk adjustment may increase the amount at which a liability is measured.
Caution is needed in making judgments under conditions of uncertainty, so that income or assets are not overstated and
expenses or liabilities are not understated. However, uncertainty does not justify the creation of excessive provisions or a
deliberate overstatement of liabilities. For example, if the projected costs of a particularly adverse outcome are estimated
on a prudent basis, that outcome is not then deliberately treated as more probable than is realistically the case. Care is needed
to avoid duplicating adjustments for risk and uncertainty with consequent overstatement of a provision.
40. Disclosure of the uncertainties surrounding the amount of the expenditure is made under paragraph 67(b).
Future Events
41. Future events that may affect the amount required to settle an obligation should be reflected in the amount of
a provision where there is sufficient objective evidence that they will occur.
42. Expected future events may be particularly important in measuring provisions. For example, an enterprise may
believe that the cost of cleaning up a site at the end of its life will be reduced by future changes in technology. The
amount recognised reflects a reasonable expectation of technically qualified, objective observers, taking account of all
available evidence as to the technology that will be available at the time of the clean-up. Thus, it is appropriate to include,
for example, expected cost reductions associated with increased experience in applying existing technology or the expected
cost of applying existing technology to a larger or more complex clean-up operation than has previously been carried out.
However, an enterprise does not anticipate the development of a completely new technology for cleaning up unless it is
supported by sufficient objective evidence.
43. The effect of possible new legislation is taken into consideration in measuring an existing obligation when
sufficient objective evidence exists that the legislation is virtually certain to be enacted. The variety of circumstances
that arise in practice usually makes it impossible to specify a single event that will provide sufficient, objective
evidence in every case. Evidence is required both of what legislation will demand and of whether it is virtually certain
to be enacted and implemented in due course. In many cases sufficient objective evidence will not exist until the new
legislation is enacted.
Expected Disposal of Assets
44. Gains from the expected disposal of assets should not be taken into account in measuring a provision.
45. Gains on the expected disposal of assets are not taken into account in measuring a provision, even if the expected
disposal is closely linked to the event giving rise to the provision. Instead, an enterprise recognises gains on expected
disposals of assets at the time specified by the Accounting Standard dealing with the assets concerned.
Reimbursements
46. Where some or all of the expenditure required to settle a provision is expected to be reimbursed by another party,
the reimbursement should be recognised when, and only when, it is virtually certain that reimbursement will be received
if the enterprise settles the obligation. The reimbursement should be treated as a separate asset. The amount recognised
for the reimbursement should not exceed the amount of the provision.
47. In the statement of profit and loss, the expense relating to a provision may be presented net of the amount
recognised for a reimbursement.
48. Sometimes, an enterprise is able to look to another party to pay part or all of the expenditure required to settle a
provision (for example, through insurance contracts, indemnity clauses or suppliers' warranties). The other party may
either reimburse amounts paid by the enterprise or pay the amounts directly.
49. In most cases, the enterprise will remain liable for the whole of the amount in question so that the enterprise
would have to settle the full amount if the third party failed to pay for any reason. In this situation, a provision is
recognised for the full amount of the liability, and a separate asset for the expected reimbursement is recognised when
it is virtually certain that reimbursement will be received if the enterprise settles the liability.
50. In some cases, the enterprise will not be liable for the costs in question if the third party fails to pay. In such a
case, the enterprise has no liability for those costs and they are not included in the provision.
51. As noted in paragraph 28, an obligation for which an enterprise is jointly and severally liable is a contingent
liability to the extent that it is expected that the obligation will be settled by the other parties.
Changes in Provisions
52. Provisions should be reviewed at each balance sheet date and adjusted to reflect the current best estimate. If it is no
longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation, the
provision should be reversed.
Use of Provisions
53. A provision should be used only for expenditures for which the provision was originally recognised.
54. Only expenditures that relate to the original provision are adjusted against it. Adjusting expenditures against a
provision that was originally recognised for another purpose would conceal the impact of two different events.
Application of the Recognition and Measurement Rules
Future Operating Losses
55. Provisions should not be recognised for future operating losses.
56. Future operating losses do not meet the definition of a liability in paragraph 10 and the general recognition criteria
set out for provisions in paragraph 14.
57. An expectation of future operating losses is an indication that certain assets of the operation may be impaired.
An enterprise tests these assets for impairment under Accounting Standard (AS) 28, Impairment of Assets.
Restructuring
58. The following are examples of events that may fall under the definition of restructuring:
(a) sale or termination of a line of business;
(b) the closure of business locations in a country or region or the relocation of business activities from one
country or region to another;
(c) changes in management structure, for example, eliminating a layer of management; and
(d) fundamental re-organisations that have a material effect on the nature and focus of the enterprise's
operations.
59. A provision for restructuring costs is recognised only when the recognition criteria for provisions set out in
paragraph 14 are met.
60. No obligation arises for the sale of an operation until the enterprise is committed to the sale, i.e., there is a
binding sale agreement.
61. An enterprise cannot be committed to the sale until a purchaser has been identified and there is a binding sale
agreement. Until there is a binding sale agreement, the enterprise will be able to change its mind and indeed will have to
take another course of action if a purchaser cannot be found on acceptable terms. When the sale of an operation is envisaged
as part of a restructuring, the assets of the operation are reviewed for impairment under Accounting Standard (AS) 28,
Impairment of Assets.
62. A restructuring provision should include only the direct expenditures arising from the restructuring, which
are those that are both:
(a) necessarily entailed by the restructuring; and
(b) not associated with the ongoing activities of the enterprise.
63. A restructuring provision does not include such costs as:
(a) retraining or relocating continuing staff;
(b) marketing; or
(c) investment in new systems and distribution networks.
These expenditures relate to the future conduct of the business and are not liabilities for restructuring at the
balance sheet date. Such expenditures are recognised on the same basis as if they arose independently of a
restructuring.
64. Identifiable future operating losses up to the date of a restructuring are not included in a provision.
65. As required by paragraph 44, gains on the expected disposal of assets are not taken into account in measuring a
restructuring provision, even if the sale of assets is envisaged as part of the restructuring.
Disclosure
66. For each class of provision, an enterprise should disclose:
(a) the carrying amount at the beginning and end of the period;
(b) additional provisions made in the period, including increases to existing provisions;
(c) amounts used (i.e. incurred and charged against the provision) during the period; and
(d) unused amounts reversed during the period.
Provided that a Small and Medium-sized Company, as defined in the Notification, may not comply with
paragraph 66 above.
67. An enterprise should disclose the following for each class of provision:
(a) a brief description of the nature of the obligation and the expected timing of any resulting outflows of
economic benefits;
(b) an indication of the uncertainties about those outflows. Where necessary to provide adequate
information, an enterprise should disclose the major assumptions made concerning future events, as
addressed in paragraph 41; and
(c) the amount of any expected reimbursement, stating the amount of any asset that has been recognised for
that expected reimbursement.
Provided that a Small and Medium-sized Company, as defined in the Notification, may not comply with
paragraph 67 above.
68. Unless the possibility of any outflow in settlement is remote, an enterprise should disclose for each class of
contingent liability at the balance sheet date a brief description of the nature of the contingent liability and, where
practicable:
(a) an estimate of its financial effect, measured under paragraphs 35-45;
(b) an indication of the uncertainties relating to any outflow; and
(c) the possibility of any reimbursement.
69. In determining which provisions or contingent liabilities may be aggregated to form a class, it is necessary to consider
whether the nature of the items is sufficiently similar for a single statement about them to fulfill the requirements of
paragraphs 67 (a) and (b) and 68 (a) and (b). Thus, it may be appropriate to treat as a single class of provision amounts
relating to warranties of different products, but it would not be appropriate to treat as a single class amounts relating to
normal warranties and amounts that are subject to legal proceedings.
70. Where a provision and a contingent liability arise from the same set of circumstances, an enterprise makes the
disclosures required by paragraphs 66-68 in a way that shows the link between the provision and the contingent liability.
71. Where any of the information required by paragraph 68 is not disclosed because it is not practicable to do so, that
fact should be stated.
72. In extremely rare cases, disclosure of some or all of the information required by paragraphs 66-70 can be expected
to prejudice seriously the position of the enterprise in a dispute with other parties on the subject matter of the provision
or contingent liability. In such cases, an enterprise need not disclose the information, but should disclose the general
nature of the dispute, together with the fact that, and reason why, the information has not been disclosed.
Transitional Provisions
73. All the existing provisions for decommissioning, restoration and similar liabilities (see paragraph 35) should
be discounted prospectively, with the corresponding effect to the related item of property, plant and equipment.
Illustration A
Tables - Provisions, Contingent Liabilities and Reimbursements
The purpose of this illustration is to summarise the main requirements of the Accounting Standard. It does not form part of
the Accounting Standard and should be read in the context of the full text of the Accounting Standard.
Provisions and Contingent Liabilities
Where, as a result of past events, there may be an outflow of resources embodying future economic benefits in settlement
of: (a) a present obligation the one whose existence at the balance sheet date is considered probable; or (b) a possible
obligation the existence of which at the balance sheet date is considered not probable.
There is a present obligation There is a possible obligation There is a possible
that probably requires an or a present obligation that obligation or a present
outflow of resources and a may, but probably will not, obligation where the
reliable estimate can be made require an outflow of likelihood of an outflow
of the amount of obligation. resources. of resources is remote.
A provision is recognised No provision is recognised No provision is reco
(paragraph 14). (paragraph 26). gnised (paragraph 26).
Disclosures are required for the Disclosures are required for the No disclosure is required
provision (paragraphs 66 and 67) contingent liability (paragraph 68). (paragraph 68).
Reimbursements
Some or all of the expenditure required to settle a provision is expected to be reimbursed by another party.
The enterprise has no obligation The obligation for the amount The obligation for the amount
for the part of the expenditure expected to be reimbursed expected to be reimbursed
to be reimbursed by the remains with the enterprise remains with the enterprise
other party. and it is virtually certain and the reimbursement is not
that reimbursement virtually certain if the
will be received if the enterprise settles the
enterprise settles the provision. provision.
The enterprise has no liability The reimbursement is The expected reimbursement
for the amount to be reimbursed recognised as a separate asset in is not recognised as an asset
(paragraph 50). the balance sheet and may be (paragraph 46).
offset against the expense in the
statement of profit and loss. The
amount recognised for the
expected reimbursement does
not exceed the liability
(paragraphs 46 and 47).
No disclosure is required. The reimbursement is The expected reimbursement is
disclosed together with the disclosed (paragraph 67(c)).
amount recognised for the
reimbursement (paragraph 67(c)).
Illustration B
Decision Tree
The purpose of the decision tree is to summarise the main recognition requirements of the Accounting Standard for
provisions and contingent liabilities. The decision tree does not form part of the Accounting Standard and should be
read in the context of the full text of the Accounting Standard.
Start
Possible No
Present obligation as a No obligation?
result of an obligating
event?
Yes Yes
Probable outflow? No Remote? Yes
Yes
Reliable estimate?
Yes No (rare)
Provide Disclose contingent Do nothing
liability
Note: in rare cases, it is not clear whether there is a present obligation. In these cases, a past event is deemed to give rise to a present
obligation if, taking account of all available evidence, it is more likely than not that a present obligation exists at the balance sheet date
(paragraph 15 of the Standard).
Illustration C
Illustration: Recognition
This illustration illustrates the application of the Accounting Standard to assist in clarifying its meaning. It does not
form part of the Accounting Standard.
All the enterprises in the Illustrations have 31 March year ends. In all cases, it is assumed that a reliable estimate can
be made of any outflows expected. In some Illustrations the circumstances described may have resulted in impairment
of the assets ­ this aspect is not dealt with in the examples.
The cross references provided in the Illustrations indicate paragraphs of the Accounting Standard that are
particularly relevant. The illustration should be read in the context of the full text of the Accounting Standard.
Illustration 1: Warranties
A manufacturer gives warranties at the time of sale to purchasers of its product. Under the terms of the contract for
sale the manufacturer undertakes to make good, by repair or replacement, manufacturing defects that become apparent
within three years from the date of sale. On past experience, it is probable (i.e. more likely than not) that there will be
some claims under the warranties.
Present obligation as a result of a past obligating event -The obligating event is the sale of the product with a
warranty, which gives rise to an obligation.
An outflow of resources embodying economic benefits in settlement - Probable for the warranties as a whole (see
paragraph 23).
Conclusion - A provision is recognised for the best estimate of the costs of making good under the warranty products sold
before the balance sheet date (see paragraphs 14 and 23).
Illustration 2: Contaminated Land -Legislation Virtually Certain to be Enacted
An enterprise in the oil industry causes contamination but does not clean up because there is no legislation requiring
cleaning up, and the enterprise has been contaminating land for several years. At 31 March 2005 it is virtually certain
that a law requiring a clean-up of land already contaminated will be enacted shortly after the year end.
Present obligation as a result of a past obligating event -The obligating event is the contamination of the land
because of the virtual certainty of legislation requiring cleaning up.
An outflow of resources embodying economic benefits in settlement - Probable.
Conclusion - A provision is recognised for the best estimate of the costs of the clean-up (see paragraphs 14 and 21).
Illustration 3: Offshore Oil field
An enterprise operates an offshore oil field where its licensing agreement requires it to remove the oil rig at the end
of production and restore the seabed. Ninety per cent of the eventual costs relate to the removal of the oil rig and
restoration of damage caused by building it, and ten per cent arise through the extraction of oil. At the balance sheet
date, the rig has been constructed but no oil has been extracted.
Present obligation as a result of a past obligating event -The construction of the oil rig creates an obligation under
the terms of the licence to remove the rig and restore the seabed and is thus an obligating event. At the balance sheet
date, however, there is no obligation to rectify the damage that will be caused by extraction of the oil.
An outflow of resources embodying economic benefits in settlement ­ Probable.
Conclusion -A provision is recognised for the best estimate of ninety per cent of the eventual costs that relate to the
removal of the oil rig and restoration of damage caused by building it (see paragraph 14). These costs are included as
part of the cost of the oil rig. The ten per cent of costs that arise through the extraction of oil are recognised as a
liability when the oil is extracted.
Illustration 4: Refunds Policy
A retail store has a policy of refunding purchases by dissatisfied customers, even though it is under no legal obligation
to do so. Its policy of making refunds is generally known.
Present obligation as a result of a past obligating event -The obligating event is the sale of the product, which gives
rise to an obligation because obligations also arise from normal business practice, custom and a desire to maintain
good business relations or act in an equitable manner.
An outflow of resources embodying economic benefits in settlement
Probable, a proportion of goods are returned for refund (see paragraph 23).
Conclusion - A provision is recognised for the best estimate of the costs of refunds (see paragraphs 11, 14 and 23).
Illustration 5: Legal Requirement to Fit Smoke Filters
Under new legislation, an enterprise is required to fit smoke filters to its factories by 30 September 2005. The
enterprise has not fitted the smoke filters.
(a) At the balance sheet date of 31 March 2005
Present obligation as a result of a past obligating event -There is no obligation because there is no obligating event
either for the costs of fitting smoke filters or for fines under the legislation.
Conclusion - No provision is recognised for the cost of fitting the smoke filters (see paragraphs 14 and 16-18).
(b) At the balance sheet date of 31 March 2006
Present obligation as a result of a past obligating event -There is still no obligation for the costs of fitting smoke
filters because no obligating event has occurred (the fitting of the filters). However, an obligation might arise to pay
fines or penalties under the legislation because the obligating event has occurred (the non-compliant operation of the
factory).
An outflow of resources embodying economic benefits in settlement - Assessment of probability of incurring fines
and penalties by non-compliant operation depends on the details of the legislation and the stringency of the
enforcement regime.
Conclusion - No provision is recognised for the costs of fitting smoke filters. However, a provision is recognised for
the best estimate of any fines and penalties that are more likely than not to be imposed (see paragraphs 14 and 16-18).
Illustration 6: Staff Retraining as a Result of Changes in the Income Tax System
The government introduces a number of changes to the income tax system. As a result of these changes, an enterprise
in the financial services sector will need to retrain a large proportion of its administrative and sales work force in order
to ensure continued compliance with financial services regulation. At the balance sheet date, no retraining of staff has
taken place.
Present obligation as a result of a past obligating event -There is no obligation because no obligating event
(retraining) has taken place.
Conclusion - No provision is recognised (see paragraphs 14 and 16-18).
Illustration 7: A Single Guarantee
During 2004-05, Enterprise A gives a guarantee of certain borrowings of Enterprise B, whose financial condition at
that time is sound. During 200506, the financial condition of Enterprise B deteriorates and at 30 September 2005
Enterprise B goes into liquidation.
(a) At 31 March 2005
Present obligation as a result of a past obligating event -The obligating event is the giving of the guarantee, which
gives rise to an obligation.
An outflow of resources embodying economic benefits in settlement
No outflow of benefits is probable at 31 March 2005.
Conclusion -No provision is recognised (see paragraphs 14 and 22). The guarantee is disclosed as a contingent
liability unless the probability of any outflow is regarded as remote (see paragraph 68).
(b) At 31 March 2006
Present obligation as a result of a past obligating event -The obligating event is the giving of the guarantee, which
gives rise to a legal obligation.
An outflow of resources embodying economic benefits in settlement - At 31 March 2006, it is probable that an
outflow of resources embodying economic benefits will be required to settle the obligation.
Conclusion -A provision is recognised for the best estimate of the obligation (see paragraphs 14 and 22).
Note: This example deals with a single guarantee. If an enterprise has a portfolio of similar guarantees, it will assess that
portfolio as a whole in determining whether an outflow of resources embodying economic benefit is probable (see paragraph
23). Where an enterprise gives guarantees in exchange for a fee, revenue is recognised under AS 9, Revenue
Recognition.
Illustration 8: A Court Case
After a wedding in 2004-05, ten people died, possibly as a result of food poisoning from products sold by the
enterprise. Legal proceedings are started seeking damages from the enterprise but it disputes liability. Up to the date
of approval of the financial statements for the year 31 March 2005, the enterprise's lawyers advise that it is probable
that the enterprise will not be found liable. However, when the enterprise prepares the financial statements for the
year 31 March 2006, its lawyers advise that, owing to developments in the case, it is probable that the enterprise will
be found liable.
(a) At 31 March 2005
Present obligation as a result of a past obligating event -On the basis of the evidence available when the financial
statements were approved, there is no present obligation as a result of past events.
Conclusion - No provision is recognised (see definition of `present obligation' and paragraph 15). The matter is
disclosed as a contingent liability unless the probability of any outflow is regarded as remote (paragraph 68).
(b) At 31 March 2006
Present obligation as a result of a past obligating event -On the basis of the evidence available, there is a present
obligation.
An outflow of resources embodying economic benefits in settlement - Probable.
Conclusion - A provision is recognised for the best estimate of the amount to settle the obligation (paragraphs 14-15).
Illustration 9A: Refurbishment Costs -No Legislative Requirement
A furnace has a lining that needs to be replaced every five years for technical reasons. At the balance sheet date, the
lining has been in use for three years.
Present obligation as a result of a past obligating event -There is no present obligation.
Conclusion - No provision is recognised (see paragraphs 14 and 16-18).
The cost of replacing the lining is not recognised because, at the balance sheet date, no obligation to replace the lining
exists independently of the company's future actions - even the intention to incur the expenditure depends on the
company deciding to continue operating the furnace or to replace the lining.
Illustration 9B: Refurbishment Costs -Legislative Requirement
An airline is required by law to overhaul its aircraft once every three years.
Present obligation as a result of a past obligating event -There is no present obligation.
Conclusion - No provision is recognised (see paragraphs 14 and 16-18).
The costs of overhauling aircraft are not recognised as a provision for the same reasons as the cost of replacing the
lining is not recognised as a provision in illustration 9A. Even a legal requirement to overhaul does not make the costs
of overhaul a liability, because no obligation exists to overhaul the aircraft independently of the enterprise's future
actions - the enterprise could avoid the future expenditure by its future actions, for example by selling the aircraft.
Illustration 10: An onerous contract
An enterprise operates profitably from a factory that it has leased under an operating lease. During December 2005
the enterprise relocates its operations to a new factory. The lease on the old factory continues for the next four years,
it cannot be cancelled and the factory cannot be re-let to another user.
Present obligation as a result of a past obligating event -The obligating event occurs when the lease contract
becomes binding on the enterprise, which gives rise to a legal obligation.
An outflow of resources embodying economic benefits in settlement - When the lease becomes onerous, an outflow of
resources embodying economic benefits is probable. (Until the lease becomes onerous, the enterprise accounts for the lease
under AS 19, Leases).
Conclusion -A provision is recognised for the best estimate of the unavoidable lease payments.
Illustration D
Illustration: Disclosures
This illustration does not form part of the Accounting Standard. Its purpose is to illustrate the application of the
Accounting Standard to assist in clarifying its meaning. An illustration of the disclosures required by paragraph 67
is provided below.
Illustration 1 Warranties
A manufacturer gives warranties at the time of sale to purchasers of its three
product lines. Under the terms of the warranty, the manufacturer undertakes to
repair or replace items that fail to perform satisfactorily for two years from the
date of sale. At the balance sheet date, a provision of Rs. 60,000 has been
recognised. The following information is disclosed:
A provision of Rs. 60,000 has been recognised for expected warranty claims on
products sold during the last three financial years. It is expected that the
majority of this expenditure will be incurred in the next financial year, and all
will be incurred within two years of the balance sheet date.
An illustration is given below of the disclosures required by paragraph 72 where some of the information required is
not given because it can be expected to prejudice seriously the position of the enterprise.
Illustration 2 Disclosure Exemption
An enterprise is involved in a dispute with a competitor, who is alleging that the enterprise
has infringed patents and is seeking damages of Rs. 1000 lakhs. The enterprise recognises a
provision for its best estimate of the obligation, but discloses none of the information
required by paragraphs 66 and 67 of the Standard. The following information is disclosed:
Litigation is in process against the company relating to a dispute with a
competitor who alleges that the company has infringed patents and is seeking
damages of Rs. 1000 lakhs. The information usually required by AS 29,
Provisions, Contingent Liabilities and Contingent Assets is not disclosed on the
grounds that it can be expected to prejudice the interests of the company. The
directors are of the opinion that the claim can be successfully resisted by the
company.