A PROJECT REPORT ON

STUDY OF ACCOUNTING PROCESS FOR THE GROWTH OF UTTARAKHAND JAL VIDYUT NIGAM LTD.
In the partial fulfillment for the award of degree of MASTER OF BUSINESS ADMINISTRATION (2012-14) Submitted To: Dr. N. S Bohra
KAUR

Submitted By:
GAGANDEEP

Lecturer

MBA 3rd Semester

GRAPHIC ERA UNIVERSITY DEHRADUN-248001

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PREFACE

Vocational training is one of the most important parts in the M.B.A course. Since, learning theory and doing it practically are two aspects of study, every student of management course is supposed to undergo forty five days training in an organization.

I was fortunate enough to get a chance to do my vocational training in one of the esteemed organization of India Uttrakhand Jal Vidyut Nigam Limited (UJVNL), Finance division, Dehradun. I was posted in the department as the routine schedule of training in UJVNL, Finance Division, Dehradun.

I have taken utmost care to prepare the report precisely and solution- oriented rather than theoretical and so I hope that my work will be beneficial to the UJVNL, Finance Division, Dehradun.

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ACKNOWLEDGEMENT
I am very much thankful to the officers of the UJVNL, Finance Division, Dehradun without whose help and encouragement this project would have been impossible. I am highly obliged as the officers spared their precious time and share the information required for my project. I would like to show my deepest sense of gratitude to Mr. Ashish Mishra, (SM. Training); Mr. Ajay Garg, (DGM); Mr. Rajat Prabat, (C.M, P&A); Mr. Arora, (Supervisor) whose guidance helped me in the completion of this project and I would also like to extent my sincere thanks to all the DGMs/CMs/SMs/DY.Managers & Managers and the employees who gave me their valuable time for me. My special thanks in this regard go to Dr. N. S. Bohra, of Graphic Era University, Dehradun. Who suggests and provides me the golden opportunity to make my project from this division. Thank you,

GAGANDEEP KAUR
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(MBA-3rd SEM)

CERTIFICATE
This is to certify that Miss Gagandeep Kaur has successfully completed summer training report on Detailed Study of Accounting Dehradun. Under my guidance, this also forms partial fulfillment to MBA Degree course. The produced report is genuine. I am fully satisfied and appreciated the work done on the project. I wish good luck for the bright future of the candidate. Process At Finance Division UJVNL,

Mr. Arora Internal Guide UJVNL, DEHRADUN

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DECLARATION
I hereby declare that the project report on the DETAIL STUDY OF ACCOUNTING PROCESS, Finance Division, UJVNL, Dehradun has been submitted in partial fulfillment of the requirement for the MASTERS DEGREE IN BUSINESS ADMINISTRATION to GRAPHIC ERA UNIVERSITY, DEHRADUN is my original work and is not submitted for the award of any other degree, diploma fellowship or other similar titles of prizes.

GAGANDEEP KAUR

MBA-3rd SEM (GEU) (DEHRADUN)

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Contents
A PROJECT REPORT .........................................................................................................1 ON ........................................................................................................................................1 Contents.....................................................................................................................................6 COMPANY PROFILE..........................................................................................................9 VISION, MISSION & VALUES........................................................................................10 Vision..................................................................................................................................10 Mission................................................................................................................................10 Values..................................................................................................................................10 Objectives............................................................................................................................11 Genesis:...............................................................................................................................13 Brief History of the UJVNL................................................................................................14 Board of Directors...............................................................................................................15 Top Management................................................................................................................15 Credentials...........................................................................................................................16 Power projects in India........................................................................................................17 Introduction of Hydro Power..............................................................................................18

.......................................................................................................................................18 Hydro Power Classification................................................................................................19 Performance Performance and Development of of SHPs SHPs: in Uttarakhand:

Importance of SHPs............................................................................................................19

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Integrated efforts by UJVNL have steadily increased the generation of SHP after 9.11.2001 and details are given below ..........................................................................................................................................24 Framework of Accounting..................................................................................................27 Introduction.........................................................................................................................27 Meaning of Accounting.......................................................................................................28 Objectives and Functions of Accounting............................................................................29 Advanced Financial Accounting & Reporting....................................................................29 Accounting concepts...........................................................................................................29 Accounting principles.........................................................................................................29 Accounting conventions......................................................................................................29 Fundamental Accounting Assumptions..............................................................................30 Framework of Accounting..................................................................................................30 Limitations of Accounting..................................................................................................30 Financial Statements...........................................................................................................31 The Objective of Financial Statements...............................................................................32 Qualitative Characteristics of Financial Statements...........................................................32 Accounting Standards.........................................................................................................33 Accounting Standards - Applicability, Interpretation, Scope and Compliance..................34 ACCOUNTING PROCESS-1.............................................................................................37 INTRODUCTION...............................................................................................................37 OBJECTIVE OF ACCOUNTING PROCESS....................................................................38 NATURE OF ACCOUNTING POLICIES........................................................................39 AREAS IN WHICH DIFFERING ACCOUNTING POLICIES ARE ENCOUNTERED 39 ACCOUNTING PROCESSS-SETTING IN INDIA..........................................................40 COMPOSITION OF THE ACCOUNTING PROCESS BOARD:.....................................41 THE ACCOUNTING PROCESSS-SETTING PROCESS.................................................41 THE PRINCIPLES GOVERNING SELECTION OF AN ACCOUNTING POLICY:.....42 THE FUNDAMENTAL ACCOUNTING ASSUMPTIONS.............................................43 PRINCIPLES FOLLOWING A NOT GOING CONCERN...........................................44 DIFFERENT ACCOUNTING POLICIES FOR SIMILAR ITEMS..................................44 DISCLOSURE OF ACCOUNTING PROCESS................................................................45 Methods of Accounting: .....................................................................................................46 7|Page

ACCOUNTING PROCESS AT .........................................................................................46 UTTARAKHAND JAL VIDYUT NIGAM LTD...............................................................46 ACCOUNTING FOR FIXED ASSETS.............................................................................49 OBJECTIVE AND SCOPE OF AS-10...............................................................................49 WHAT ARE FIXED ASSETS?..........................................................................................50 COMPONENTS OF COSTS OF FIXED ASSETS............................................................51 SELF-CONSTRUCTED FIXED ASSETS.........................................................................52 ACCOUNTING OF COST INCURRED DURING PROJECT DELAYS AND WASTAGES.......................................................................................................................52 NON MONETARY CONSIDERATION FOR FIXED ASSETS:.....................................52 SUBSEQUENT EXPENDITURE INCURRED ON FIXED ASSETS AFTER INITIAL CAPITALISATION ACCOUNTED..................................................................................53 BASIS FOR REVALUATION OF FIXED ASSETS AND USE OF REVALUATION RESERVE FOR DECLARING DIVIDENDS OR ISSUING BONUS SHARES.............54 PRINCIPLES FOR SELECTION OF FIXED ASSETS FOR REVALUATION..............55 ACCOUNTING TREATMENT FOR REVALUATION...................................................55 ACCOUNTING OF RETIREMENTS AND DISPOSALS................................................56 TREATMENT FOR JOINTLY OWNED FIXED ASSETS..............................................56 AMORTISATION/ DEPRECIATION OF GOODWILL..................................................57 DISCLOSURES OF FIXED ASSETS................................................................................58 SIGNIFICANT DIFFERENCES BETWEEN AS-10, IAS AND US GAAP.....................58 GOVERNMENT GRANTS...............................................................................................60 Data analysis.......................................................................................................................67 Sample Questionnaire.........................................................................................................67 Results and Analysis ..........................................................................................................69 Table Regression results ....................................................................................................69 Literature Review ...............................................................................................................71 Conclusions ........................................................................................................................72 Overview of the thesis and its major findings ....................................................................72 Recommendations...............................................................................................................74 Limitations of the research..................................................................................................75

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COMPANY PROFILE
Uttarakhand is renowned for its scenic beauty and rivers. India's two major rivers viz. Ganga and Yamuna start their journey from here. Besides these two rivers, Uttarakhand has a large network of rivers and canal which provides an immense scope for hydropower energy. One of the first hydro-power stations in India was commissioned at Galogi in 1907. More power stations were subsequently developed over a period of time. 12th February, 2001 - A new dawn in the Power Sector of Uttarakhand when UJVNL came into existence, with some promises to keep with the home state, to emerge as a Power Major and to make the state, so called "Urja Pradesh". Uttarakhand has a very high potential which is yet to be developed and to give impetus to power sector, Uttarakhand Jal Vidyut Nigam Limited (UJVNL) was formed. UJVNL is a wholly owned Corporation of the Government of Uttarakhand set up for managing hydro power generation at existing power stations and development, promotions of new hydro projects with the purpose of harnessing, the known, and yet to be known, hydro power resources of the State. Today, UJVNL operates hydropower plants ranging in capacity from 0.2 MW to 240 MW, totaling up to 1000 MW. Though the State is more or less sufficient in its energy generation to meet its own requirements, it is committed to develop its huge hydro power resources in an early and efficient manner for economic well-being and growth of the State and its people.

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VISION, MISSION & VALUES

Vision * To be an excellent & efficient organization on Strength of its Human Resources. * To be a significant player in the National Power Sector. * To induce adjacent infrastructure business that provides opportunities for growth. * To be the best corporate in Uttarakhand

Mission *Contribution to improvement in the quality of life in Uttarakhand. Values *Creation of value for all stakeholders. *Result oriented with professional work culture. *Earn trust through fair business practices with all. *Growth balanced with environmental protection & enrichment. *Law abiding.

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Objectives
The main objects to be pursued by the UJVNL for which it has been incorporated are as follows:

To establish takeover, operate and maintain Hydroelectric generating stations including mini & micro hydro electric generating station and tie-lines, substations and main transmission lines connected therewith.

To carry on its activities within the State of Uttarakhand or elsewhere as may be found feasible.

To make arrangements with any Company, Authority, Government or other persons or institutions for the operation and maintenance of any generating station owned by it (including transmission lines and other works connected therewith) on such terms and conditions as may be agreed upon between it and the Company.

To take such measures as in the opinion of the Company, are calculated to advance the development of water power in the State of Uttarakhand and may carry out power and Hydro metric survey work and cause to be made such maps, plans, sections and estimate as are necessary for any of the said purpose.

To carry out investigation and to prepare one or more schemes relating to the establishment or acquisition of generating stations, tie-lines, sub-stations and transmission lines for promoting the use of electricity within the State of Uttarakhand.

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To operate and maintain in the most efficient and economical manner the generating stations, tie-lines, sub-stations and main transmission lines, owned by the Company.

To enter into agreement with any licensee licensed under the Indian Electricity Act, 1910 or any other Act, Law of Regulation in force for the time being, or as modified from time to time or with any person for use of any transmission line, distribution line or main transmission line of that licensee or person for such time and upon such terms as may be agreed.

To enter into arrangement on such terms as my be agreed upon, for the sale of electricity generated by it to the State Electricity Company constituted for Uttarakhand or for the sale of electricity generated by it to any other state, body, person by itself with the consent of such person or persons duly authorized or licensed under prevalent Laws and Regulations or on its own account.

To avail such rights, exercise such powers and functions and to perform such duties as are conferred upon or expected of the company under the provisions of such Laws, legislation and regulations as are in force from time to time.

To do such other acts and things as are authorized to be done under the Electricity (Supply) Act, 1948, or any other Act, Laws or regulations in force or amended from time to time.

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Genesis:

UPSEB UPSEB Transfer Scheme Uttarakhand UP Reorganization Act UJVN 1956 Companies Act UJVN Ltd Ltd

Unbundled

14-01-2000

State

Created:

09-11-2000

formed

12-02-2001

Commenced

Operations:

Corporate Office in 2500 Sq ft Rented House. UJVN Ltd : took possessions of assets: Had no Cash on : Borrowed and Paid all employee dues and streamlined employee benefit : Sense of a new belongingness instilled in the people of UJVN Ltd :

09-11-2001 29-11-2000 09-11-2001 31-03-2002

Nov 01- Mar 02

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Brief History of the UJVNL

The history of Uttarakhand Jal Vidyut Nigam Limited can be traced back to erstwhile U.P. State Electricity Board (In short UPSEB). The erstwhile U.P. State Electricity Board was trifurcated pursuant to enactment of U.P. Electricity Reforms Act, 1999. U.P. State Electricity Reforms Transfer Scheme, 2000 was promulgated for execution of the trifurcation of erstwhile UPSEB into U.P. Power Corporation Ltd. (In short UPPCL), U.P. Jal Vidyut Nigam Ltd. (In short UPJVNL) and U.P. Rajya Vidyut Utpadan Nigam Ltd... By operation of the aforesaid Scheme all the Hydro Electric Projects earlier owned and operated by UPSEB were transferred to UPJVNL (a Govt. Company existing prior to the said trifurcation) in addition to other projects owned and operated by the UPJVNL previously. That UPJVNL was erstwhile known and setup as UP Alparthak Evam Laghu Jal Vidyut Nigam Limited, a Government Company which was incorporated in 1985 to own establish and operate small, mini and micro hydel projects. Later on the name of the company was changed to UP Laghu Jal Vidyut Nigam Limited and ultimately to UP Jal Vidyut Nigam Limited in 1996. The State of U.P. was bifurcated by enforcement of U.P. Reorganization Act, 2000 (In short Reorganization Act) as a result thereof the State of Uttarakhand came into existence. The Govt. of India issued an order dated 05-11-01 u/s 63(4)(a) of the Reorganization Act whereby assets and liabilities between UPJVNL and UJVNL were divided. By operation of this order all the Hydro Power Assets of UPJVNL located in the State of Uttarakhand were transferred to UJVNL. Since then UJVNL is operating all these hydro power plants. Uttarakhand Jal Vidyut Nigam was formed on 9 Nov 2001 with it main motto of developing and harnessing the hydro potential of Uttarakhand State. The Nigam has 34 projects under operation with an aggregated capacity of more than 1400 MW and more than 14 projects are under different stages of implementation.

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Board of Directors

1. Shri Utpal Kumar Singh Chairman & Secretary (Energy), GoU 2. Shri R.P. Thapliyal Managing Director 3. Shri Alok Kumar Jain Prinicipal Secretary (Finance), GoU Non-Executive Director 4. Shri P.C Sharma Prinicipal Secretary (Ind. Dev.), GoU, Non-Executive Director 5. Shri Nitesh Kumar Jha Additional Secretary (Energy), GoU Non-Executive Director 6. Dr. S. Ramesh Independent Director

7. Shri C.M. Vasudev Independent Director 8. Shri S.C. Sen Independent Director 9. Shri B.C.K. MISHRA Director (Operations) 10. Shri Jayant Kumar Director(Finance) 11. Shri K.K. Singh Director(Projects)

Top Management
1. Shri Utpal Kumar Singh Chairman & Secretary (Energy), Gou 2. Shri R.P. Thapliyal Managing Director 3. Shri B.C.K. Mishra Director (Operations) 4. Shri Jayant Kumar Director (Finance) 5. Shri K.K. Singh 15 | P a g e 8. Shri Chaturvedi General Manager (Yamuna Valley) 9. Shri Purshottam Singh General Manager (Ganga Valley) 10. Shri C P Madan General Manager (Accounts) 11. Shri S.K Chopra General Manager (P & IR) 12. Shri Arvind Kumar

Director(Projects) 6. Shri S.N. Verma Executive Director (E & M) 7. Shri Sandeep Singhal Executive Director (Civil)

General Manager (I/c) (SHP) 13. Shri Arun Sabharwal Company Secretary

Credentials
Largest pre-1910 plant located at Galogi, Uttarakhand (Dehradun-Mussoorie Road). North India's first underground power house at Chibro. India's first tandem operation of Chibro-Khodri Power Station. India's first 220 KV two tier switchyard at Chibro Power station. Trifurcation of H.R.T. (Partly) of Khodri Power Station due to Inter-Thrust Zone. Replacement of runner chamber by N.S. Grout & Epoxy filling at Chilla Power Station for the first time in India. 2000 engineer-years of hydropower O & M experience. International level Design & Research facilities at Irrigation Design Organization & Irrigation Research Institute at Roorkee. 220 kV switchyard. Annual generation of 1566 GWh. Generation Targets For The Year 2009-10 as Fixed By CEA Generation (MU) Since Formation of UJVNL. Generation (MU) - LHPs (00-01 to 08-09)

Maneri Bhali-II- Power Station of 4 units of 76 MW with Francis turbines along with a

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Power projects in India

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Introduction of Hydro Power

Hydro power is a non- polluting, renewable source of energy .It is perhaps the oldest renewable energy technique .Hydro power represents the use of water resources towards inflation free energy due to absence of fuel cost with mature technology characterized by highest primer moving efficiency and spectacular electricity efficiency. Small Hydro Projects are an important, appropriate and profitable that other energy supply options. Uttarakhand Jal Vidyut Nigam limited is primarily responsible for the Small Hydro development in Uttarakhand & is nodal agency to speed up this development. Formerly the small hydro projects were in Uttar Pradesh Laghu Jal Vidyut Nigam limited and thereafter transferred to UP Jal Vidyut Nigam but after formation of Uttarakhand these project came under UJVNL, since then UJVNL (Uttarakhand Jal Vidyut Nigam Limited) has shown serious interest in development of these projects.

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Hydro Power Classification

Hydro Power projects are generally classified in two parts i.e. Small hydro projects and large hydro projects. In India hydro projects up to 25 MW are considered as small hydro Projects where above 25 MW are considered as large hydro projects The small hydro projects are further classified as follows Class Micro Hydro Micro Hydro Small Hydro Capacity in KW Up to 100 100-2000 2000 to 25000

Performance

and

Development

of

SHPs

in

Uttarakhand:

Importance of SHPs Small hydro power Projects (SHPs) are an important, appropriate and profitable than other supply is a part menu of options in needs of more so and the hilly state of 19 | P a g e energy options and of the full energy to be considered meeting the rural people in the remote isolated locations in terrain of the Uttarakhand.

SHPs compare well with the alternative energy supply options and have an important niche in the range of decentralized energy supply options. This niche is tightly demonstrated defined by the availability of adequate small-scale resource and as sufficiently concentrated density of demand, consisting of a need combined with purchasing power, to take advantage of a centralized, albeit small, power plant. SHPs have a great social bearing as it can provide rural people with electricity and create a sense of belonging to the modern world besides providing energy that can assist in securing the livelihoods of marginalized people. The SHPs are financially sustainable under the following conditions:1. A high load factor 2. A financially sustainable usage. 3. Costs are contained by good design and management.

There is a constraint in that costs of SHPs rise with the remoteness of the location but the cost of alternative options particularly diesel generator) may rise faster. SHPs in Uttarakhand in short will play an important role as growth engines for developing the economy of rural area which is isolated and remotely located. Uttarakhand has an estimated capacity of 1478 MW of SHP out of approximately estimated capacity of 20263 MW. The estimated capacity of small hydro projects of Uttarakhand is 7.3% of total estimated capacity of Hydro power in Uttarakhand and 10.23% of targeted contribution of Hydro in 10th Five Year Plan. Uttarakhand Jal Vidyut Nigam Ltd. is primarily responsible for the development of Small Hydro power project in the state of Uttarakhand and is a nodal agency for the speedy development of the same. 20 | P a g e

In view of the above Government of Uttarakhand as well as Government of India are facilitating the development of small hydro projects in the state of Uttarakhand. The Small hydro projects have following distinct advantages: a. Hydro power involves a clean process of power generation. b. It is a renewable source of energy and contributes to the upliftment of the rural masses, especially projects located in remote and inaccessible areas. c. It is the most cost effective option for power supply because it does not suffer from the limitation on account of fuel consumption. d. Most small hydro projects in Uttarakhand are being developed in remote and backward areas where substantial support for economic development is actually needed. e. Small hydro power contributes in solving the low voltage problem in the remote hilly areas and helping reducing the losses in transmission and distribution. f. In certain cases projects are helpful in providing drinking water and irrigation facilities. g. It helps in promoting the local industries in remote areas. h. The development of small hydro projects requires minimum rehabilitation and resettlement as well as environmental problems. i. Small hydro projects help in generating self employment in remote areas of the state. j. Small hydro power projects helps in providing stable electricity supply at remote areas where such facility by other source shall be much costlier and unreliable.

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In Short we can say that SHPs are

Simple to operate Non Polluting Minimum Maintenance Environment friendly Utilizes local resources Take less time in construction Can be used at places where grid is not possible. The viability can be improved by incorporating the benefits of Carbon Trading

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Policy of UJVNL in the construction of Small Hydro Power Plants:

The SHP Plant wing of UJVNL was christened with the purpose of: 1. Improvement in civil design and relocation of project site. 2. Design and maintenance of Electrical Equipments at Nigamss level. 3. Monitoring of Daily Generation. 4. Operations of project by Nigam that were earlier operated by contractors. 5. Construction of new projects. 6. Increasing generation by completing the incomplete project. 7. Investigation & development of new projects. 8. To avail the CDM benefits under the Kyoto Protocol to make SHPs more viable.

UJVNL for early realization of the capacity in SHP would be focusing on the construction of the projects above 3 MW and accordingly the following policies has been adopted for the Implementation, operation & Maintenance of the SHP in the State: 1. Construction of small hydro projects of 3 MW and larger capacities in general. 2. Dry Leasing of all power stations up to 500 KW capacities to private entrepreneurs for operation & maintenance. 3. Operation of Power Stations by Nigam's staff.

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Performance of SHPs: Integrated efforts by UJVNL have steadily increased the generation of SHP after 9.11.2001 and details are given below

Year

200001

200102

200203

200304

200405

200506

200607

07-08

200809 to nov Up

Generation (in MU)

25.6494 30.1242 40.9361 36.3510 40.1692 46.2272 42.8374 42.2933 32.4304

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Future Plan of Capacity Addition:

A total 86,600 kW capacity addition has been targeted as under:

Project 1 Asiganga-I 2 Asiganga-II 3 Asiganga-III 4 Dunao 5 Shobla-I 6 Tankul 7 Kaliganga-I 8 Kaliganga-II 9 Madhyamaheshwar 10 Kalidigad 11 Sonegad 12 Suringad II 13 Urgam II 14 Painagad 15 Pilangad II

District Uttarkashi Uttarkashi Uttarkashi Pauri Garhwal Pithoragarh Pithoragarh Rudraprayag Rudraprayag Rudraprayag Uttarkashi Uttarkashi Pithoragarh Chamoli Pithoragarh Uttarkashi

Capacity(KW) 4500 4500 7300(under revision) 1500 8000 12000 4000 6000 10000 9000 3000 5000 3800 4000 4000 86,600

Year Completion 2009-10 2010-11 2010-11 2009-10 2010-11 2010-11 2009-10 2010-11 2009-10 2010-11 2010-11 2010-11 2010-11 2010-11 2010-11

of

The Setting up of SHPs in the state of Uttarakhand would help in the overall development of the state especially in the remote areas in the hills. It is a known fact that supplying improved energy services to people for the first time is difficult, supplying such services profitably to very poor people who live far away from roads and the electricity grid poses a particularly difficult challenge. Nevertheless, the access to electricity in the remote areas would generate livelihood and the impact can be spread to marginalized people and then to social activities. UJVNL is in the process of proposing new SHPs for CDM for earning Emission Reduction credits which will generate additional revenue for SHPs and make them financially viable. "It is easier to make the profitable social, than to make the social profitable" and UJVNL is aware that in planning SHP investments it is important to consider the plant for securing livelihood at an early stage and then to see how the impact can be spread to masses and for social activities. UJVNL is endeavoring to set up the SHPs so as bring about development in the remote areas of 25 | P a g e

Uttarakhand

there

by

facilitating

overall

development

of

the

state.

Strategy for future capacity addition:

(a) Presently, UJVNL takes up the construction of the SHPs only after carrying out detailed survey(s), investigation(s) and engineering including cost optimization of various options. This requires collection of Hydrological and geological data besides synthesizing the same for arriving at a most economical engineering option. The entire work is outsourced to reputed agencies for timely completion besides maintaining the quality of work. Based on the past experience of the geology, metrology and the topography, safe designs have been adopted and 26 | P a g e

where ever found necessary power channels have been replaced by tunnels. (b) Some of the other improvements in the process of development of SHPs are that: I. Geological Surveys are being conducted in thorough manner so as to locate the power station at a safe place making it less prone to natural calamities. II. Power Channels are more prone to landslides/cloud bursting etc, therefore the water conductor system is being changed to tunnel as per site specific conditions. III. Machines of simple design are planned to be used for the power stations located in far off areas for their easy operation & maintenance. IV. Staff posted at these power stations is being given proper training in the operation & maintenance so as to minimize the break down time.

Framework of Accounting Introduction

Most of the worlds work is done through organizations - groups of people who work together to accomplish one or more objectives. In doing its work, an organization uses resources - labour, materials, various services, buildings, and equipment. These resources 27 | P a g e

need to be financed, or paid for. To work effectively, the people in organization need information about the amounts of these resources, the mean of financing them and the results achieved through using them. Parties outside the organization need similar information to make judgments about the organization. Accounting is a system that provides such information. Organizations can be classified broadly as either for-profit or non profit. As these names suggest, a dominant purpose of organizations in the former category is to earn a profit, whereas organizations in the latter category have other objectives, such as governing, providing social services, and providing education. Accounting is basically similar in both types of organizations.

Meaning of Accounting
The Committee on Terminology set up by the American Institute of Certified Public Accountants formulated the following definition of accounting in 1961: Accounting is the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character, and interpreting the result thereof. As per this definition, accounting is simply an art of record keeping. The process of accounting starts by first identifying the events and transactions which are of financial character and then be recorded in the books of account. This recording is done in Journal or subsidiary books, also known as primary books. Every good record keeping system includes suitable classification of transactions and events as well as their summarization for ready reference. After the transaction and events are recorded, they are transferred to secondary books. In ledger transactions and events are classified in terms of income, expense, assets and liabilities according to their characteristics and summarized in profit & loss account and balance sheet. Essentially the transactions and events are to be measured in terms of money. Measurement in terms of money means measuring at the ruling currency of a country, for example, rupee in India, dollar in the U.S.A. and like. The transactions and events must be least at par, financial characteristics. The inauguration of a new branch of a bank is an event without having financial character, while the business disposed of by the branch is an event having financial character. Accounting also interprets the recorded, classified and summarized transactions and events.

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Objectives and Functions of Accounting

The main objectives are Systematic recording of transactions, Ascertainment of results of recorded transactions and the financial position of the business, providing information to the users for rational decision-making and to know the solvency position. The functions of accounting are Measurement, Forecasting, Decision-making, Comparison & Evaluation, Control, Government Regulation and Taxation.

Advanced Financial Accounting & Reporting Accounting concepts

Accounting concepts define the assumptions on the basis of which financial statements of a business entity are prepared. Certain concepts are perceived, assumed and accepted in accounting to provide a unifying structure and internal logic to accounting process. The word concept means idea or notion, which has universal application. Financial transactions are interpreted in the light of the concepts, which govern accounting methods. Concepts are those basic assumptions and conditions, which form the basis upon which the accountancy has been laid. Unlike physical science, accounting concepts are only result of broad consensus. These accounting concepts lay the foundation on the basis of which the accounting principles are formulated.

Accounting principles
Accounting principles are a body of doctrines commonly associated with the theory and procedures of accounting serving as an explanation of current practices and as a guide for selection of conventions or procedures where alternatives exists. Accounting principles must satisfy the following conditions: 1. They should be based on real assumptions; 2. They must be simple, understandable and explanatory; 3. They must be followed consistently; 4. They should be able to reflect future predictions; 5. They should be informational for the users.

Accounting conventions
Accounting conventions emerge of accounting practices, commonly known as accounting, principles, adopted by various organizations above a period of time. These conventions are 29 | P a g e

derived by usage and practice. The accountancy bodies of the world may change any of the convention to improve the quality of accounting information. Accounting conventions need not have universal application.

Fundamental Accounting Assumptions

The Financial Statements are prepared with the following three Fundamental Accounting Assumptions. Unless otherwise specified the readers of the Financial Statements assume that the Financial Statements are prepared in line with these assumptions. They are Going Concern, Consistency & Accrual. Accounting Standard 1 describes them as follows Going Concern: The enterprise is normally viewed as a going concern, that is, as continuing in operation for the foreseeable future. It is assumed that the enterprise has neither the intention nor the necessity of liquidation or of curtailing materially the scale of the operations. Consistency It is assumed that accounting policies are consistent from one period to another. Accrual Revenues and costs are accrued, that is, recognised as they are earned or incurred (and not as money is received or paid) and recorded in the financial statements of the periods to which they relate. (The considerations affecting the process of matching costs with revenues under the accrual assumption are not dealt with in this Statement.)

Framework of Accounting Limitations of Accounting

The Financials Statements are prepared on the basis of the above-mentioned assumptions, conventions and the Accounting Principles which the accountant chooses to adopt. These bring in lot of subjectivity to the Financial Statements and hence these basis assumptions conventions and principles become the limitation of accounting. The Financial Statements as the name states accounts only for the items that can be measured by Money. There are lots of items that money cannot measure but still are the most valuable assets for the enterprise, like Human Resources, which the Financial Statements does not depict.

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The language of accounting has certain practical limitations and, therefore, the financial statements should be interpreted carefully keeping in mind all various factors influencing the true picture.

Financial Statements
Financial statements form part of the process of financial reporting. A complete set of financial statements normally includes a balance sheet, a statement of profit and loss (also known as income statement), a cash flow statement and those notes and other statements and explanatory material that are an integral part of the financial statements. They may also include supplementary schedules and information based on or derived from, and expected to be read with, such statements. Such schedules and supplementary information may deal, for example, with financial information about business and geographical segments, and disclosures about the effects of changing prices. Financial statements do not, however, include such items as reports by directors, statements by the chairman, discussion and analysis by management and similar items that may be included in a financial or annual report. Users and Their Information Needs The users of financial statements include present and potential investors, employees, lenders, suppliers and other trade creditors, customers, governments and their agencies and the public. They use financial statements in order to satisfy some of their information needs. These needs include the following: (a) Investors The providers of risk capital are concerned with the risk inherent in, and return provided by, their investments. They need information to help them determine whether they should buy, hold or sell. They are also interested in information which enables them to assess the ability of the enterprise to pay dividends. (b) Employees Employees and their representative groups are interested in information about the stability and profitability of their employers. They are also interested in information which enables them to assess the ability of the enterprise to provide remuneration, retirement benefits and employment opportunities. (c) Lenders Lenders are interested in information which enables them to determine whether their loans, and the interest attaching to them, will be paid when due. (d) Suppliers and other trade creditors 31 | P a g e

Suppliers and other creditors are interested in information which enables them to determine whether amounts owing to them will be paid when due. Trade creditors are likely to be interested in an enterprise over a shorter period than lenders unless they are dependent upon the continuance of the enterprise as a major customer. (e) Customers Customers have an interest in information about the continuance of an enterprise, especially when they have a long-term involvement with, or are dependent on, the enterprise. (f) Governments and their agencies Governments and their agencies are interested in the allocation of resources and, therefore, the activities of enterprises. They also require information in order to regulate the activities of enterprises and determine taxation policies, and to serve as the basis for determination of national income and similar statistics. (g) Public Enterprises affect members of the public in a variety of ways. For example, enterprises may make a substantial contribution to the local economy in many ways including the number of people they employ and their patronage of local suppliers. Financial statements may assist the public by providing information about the trends and recent developments in the prosperity of the enterprise and the range of its activities.

The Objective of Financial Statements

The objective of financial statements is to provide information about the financial position, performance and cash flows of an enterprise that is useful to a wide range of users in making economic decisions. Financial statements prepared for this purpose meet the common needs of most users. However, financial statements do not provide all the information that users may need to make economic decisions since (a) They largely portray the financial effects of past events, and (b) Do not necessarily provide non-financial information.

Qualitative Characteristics of Financial Statements

Qualitative characteristics are the attributes that make the information provided in financial statements useful to users. The qualitative characteristics are Understand ability Relevance Reliability 32 | P a g e

 Comparability. Faithful Representation Substance over Form Neutrality Prudence Completeness Among these characteristics most important are Prudence and Substance over form. Prudence The preparers of financial statements have to contend with the uncertainties that inevitably surround many events and circumstances, such as the collectability of receivables, the probable useful life of plant and machinery, and the warranty claims that may occur. Such uncertainties are recognised by the disclosure of their nature and extent and by the exercise of prudence in the preparation of the financial statements. Prudence is the inclusion of a degree of caution in the exercise of the judgements needed in making the estimates required under conditions of uncertainty, such that assets or income are not overstated and liabilities or expenses are not understated. However, the exercise of prudence does not allow, for example, the creation of hidden reserves or excessive provisions, the deliberate understatement of assets or income, or the deliberate overstatement of liabilities or expenses, because the financial statements would then not be neutral and, therefore, not have the quality of reliability. Substance over Form If information is to represent faithfully the transactions and other events that it purports to represent, it is necessary that they are accounted for and presented in accordance with their substance and economic reality and not merely their legal form. The substance of transactions or other events is not always consistent with that which is apparent from their legal or contrived form. For example, where rights and beneficial interest in an immovable property are transferred but the documentation and legal formalities are pending, the recording of acquisition/disposal (by the transferee and transferor respectively) would in substance represent the transaction entered into.

Accounting Standards
Accounting standards codify acceptable accounting practices. They are the primary source of the Generally Accepted Accounting Principles (GAAP) and, therefore, they are at the top in 33 | P a g e

the hierarchy of GAAP. Other sources of GAAP are technical pronouncements issued by various professional bodies, regulating the accounting and auditing profession, that stipulate accounting principles and methods. Accounting standards are issued by institutions that are authorized to set accounting standards. The standard-setting body that issues accounting standards is constituted by representatives from various stake holders such as the accounting profession, the industry and regulators. The process of formulating standards is a long due-diligence process. The process is somewhat akin to a political process because the objective is to establish accounting standards. (a) That are practical in the sense that those can be implemented with reasonable costs and efforts; and (b) That is acceptable to all stake holders. Most countries have their own accounting standard setting bodies. In USA Statements of Financial Accounting Standards (SFAS) are issued by the Financial Accounting Standards Board (FASB). In India accounting standards are issued by the Institute of Chartered Accountants of India (ICAI). With globalization of capital markets, a trend towards convergence of accounting practices in different territories emerged in 1970s. The International Account Standards Committee (IASC) was formed in 1973 to formulate International Accounting Standards (IAS). In 2001 IASC was restructured and now it is known as International Accounting Standards Board (IASB). Accounting standards issued by IASB are called International Financial Reporting Standards (IFRS). Each territory (a country or a group of countries like European Union) has initiated actions to harmonise its accounting practices with accounting principles and methods stipulated in IAS / IFRS. Many countries use IAS / IFRS without modification. Details of Indian Accounting Standards, US GAAP and IFRS are discussed in the ensuing Sections.

Accounting Standards - Applicability, Interpretation, Scope and Compliance

Introduction Accounting standards are written, policy documents issued by expert accounting body or by Government or other regulatory authorities covering the aspects of recognition, measurement, treatment, presentation and disclosure of accounting transaction in the financial statement. 34 | P a g e

The main purpose of formulating accounting standard is to standardize the diverse accounting policies with a view to eliminate to the extent possible the incomparability of information provided in financial statements and add reliability to such financial statements. To discuss on whether such standards are necessary in present days it will be beneficial to go through the advantages and disadvantages which they are said to provide. ADVANTAGES: 1. It provides the accountancy profession with useful working rules. 2. It assists in improving quality of work performed by accountant. 3. It strengthens the accountants resistance against the pressure from directors to use accounting policy which may be suspect in that situation in which they perform their work. 4. It ensures the various users of financial statements to get complete crystal information on more consistent basis from period to period. 5. It helps the users compare the financial statements of two or more organisations engaged in same type of business operation. DISADVANTAGES: 1. Users are likely to think that said statements prepared using accounting standard are infallible. 2. They have been derived from social pressures which may reduce freedom. 3. The working rules may be rigid or bureaucratic to some user of financial statement. 4. The more standards there are, the more costly the financial statements are to produce. Accounting Title of Accounting Standard AS-1 Disclosure of Accounting Policies AS-2 Valuation of Inventories (Revised) AS- 3 Cash Flow Statements (Revised) AS-4 Contingencies and Events (Occurring after the Balance Sheet Date) AS-5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies (Revised) AS-6 Depreciation Accounting AS-7 Construction Contracts (Revised) AS- 8 Accounting for Research and Development (stands withdrawn after introduction of AS-26) AS-9 Revenue Recognition AS-10 Accounting for Fixed Assets. 35 | P a g e

AS-11 the Effect of Changes in Foreign Exchange Rates (Revised) AS-12 Accounting for Government Grants AS-13 Accounting for Investments AS-14 Accounting for Amalgamations AS-15 Employee Benefits (Revised) AS-16 Borrowing Cost AS-17 Segment Reporting AS-18 Related Party Disclosures AS-19 Leases AS-20 Earnings Per Share AS-21 Consolidated Financial Statements AS-22 Accounting for Taxes on Income AS-23 Accounting for Investment in Associates in Consolidated Financial Statements AS-24 Discontinuing Operations AS-25 Interim Financial Reporting AS-26 Intangible Assets AS-27 Financial Reporting of Interests in Joint Venture AS-28 Impairment of Assets AS-29 Provisions, Contingent Liabilities and Contingent Assets AS-30 Financial Instruments: Recognition and Measurement AS 31 Financial Instruments: Presentation AS 32 Financial Instruments: Disclosures Applicability of Accounting Standards: A three tier classification has been framed to ensure compliance of accounting standards for reporting enterprises. Level 1 Enterprises: Enterprises whose equity or debt securities are listed whether in India or outside India. Enterprises which are in the process of listing their equity or debt securities as evidenced by the Board resolution in this regard. Banks including co-operative banks Financial institutions Enterprises carrying insurance business Enterprises whose turnover exceeds Rs.50 crores 36 | P a g e

 Enterprises having borrowings in excess of Rs.10 crores at any time during the accounting period.

ACCOUNTING PROCESS-1
Accounting is the art of recording transactions in the best manner possible, so as to enable the reader to arrive at judgments/come to conclusions, and in this regard it is utmost necessary that there are set guidelines. These guidelines are generally called accounting policies. The intricacies of accounting policies permitted Companies to alter their accounting principles for their benefit. This made it impossible to make comparisons. In order to avoid the above and to have a harmonized accounting principle, Process needed to be set by recognized accounting bodies. This paved the way for Accounting Process to come into existence. Accounting Process in India is issued By the Institute of Chartered Accountants of India (ICAI). At present there are 30 Accounting Process issued by ICAI.

INTRODUCTION
1. This statement deals with the disclosure of significant accounting policies followed in preparing and presenting financial statements. 2. The view presented in the financial statements of an enterprise of its state of affairs and of the profit or loss can be significantly affected by the accounting policies followed in the preparation and presentation of the financial statements. The accounting policies followed vary from enterprise to enterprise. Disclosure of significant accounting policies followed is necessary if the view presented is to be properly appreciated. 3. The disclosure of some of the accounting policies followed in the preparation and presentation of the financial statements is required by law in some cases. 4. The Institute of Chartered Accountants of India has, in Statements issued by it, recommended the disclosure of certain accounting policies, e.g., translation policies in respect of foreign currency items.

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5.A few enterprises in India have adopted the practice of including in their annual reports to shareholders a separate statement of accounting policies followed in preparing and presenting the financial statements. 6. In general, however, accounting policies are not at present regularly and fully disclosed in all financial statements. Many enterprises include in the Notes on the Accounts, descriptions of some of the significant accounting policies. But the nature and degree of disclosure vary considerably between the corporate and the non-corporate sectors and between units in the same sector. 7. Even among the few enterprises that presently include in their annual reports a separate statement of accounting policies, considerable variation exists. The statement of accounting policies forms part of accounts in some cases while in others it is given as supplementary information. 8. The purpose of this Statement is to promote better understanding of financial statements by establishing through an accounting process the disclosure of significant accounting policies and the manner in which accounting policies are disclosed in the financial statements. Such disclosure would also facilitate a more meaningful comparison between financial statements of different enterprises.

OBJECTIVE OF ACCOUNTING PROCESS

Objective of Accounting Process is to processes the diverse accounting policies and practices with a view to eliminate to the extent possible the non-comparability of financial statements and the reliability to the financial statements. Accounting Process is formulated with a view to harmonize different accounting policies and practices in use in a country. The objective of Accounting Process is, therefore, to reduce the accounting alternatives in the preparation of financial statements within the bounds of rationality, thereby ensuring comparability of financial statements of different enterprises with a view to provide meaningful information to various users of financial statements to enable them to make informed economic decisions. The Companies Act, 1956, as well as many other statutes in India requires that the financial statements of an enterprise should give a true and fair view of its financial position and working results. This requirement is implicit even in the absence of a specific statutory provision to this effect. The Accounting Process are issued with a view to describe the accounting principles and the methods of applying these principles in the preparation and 38 | P a g e

presentation of financial statements so that they give a true and fair view. The Accounting Process not only prescribe appropriate accounting treatment of complex business transactions but also foster greater transparency and market discipline. Accounting Process also helps the regulatory agencies in benchmarking the accounting accuracy.

NATURE OF ACCOUNTING POLICIES

1. The accounting policies refer to the specific accounting principles and the methods of applying those principles adopted by the enterprise in the preparation and presentation of financial statements. 2. There is no single list of accounting policies which are applicable to all circumstances. The differing circumstances in which enterprises operate in a situation of diverse and complex economic activity make alternative accounting principles and methods of applying those principles acceptable. The choice of the appropriate accounting principles and the methods of applying those principles in the specific circumstances of each enterprise calls for considerable judgment by the management of the enterprise. 3. The various statements of the Institute of Chartered Accountants of India combined with the efforts of government and other regulatory agencies and progressive managements have reduced in recent years the number of acceptable alternatives particularly in the case of corporate enterprises. While continuing efforts in this regard in future are likely to reduce the number still further, the availability of alternative accounting principles and methods of applying those principles is not likely to be eliminated altogether in view of the differing circumstances faced by the enterprises.

AREAS IN WHICH DIFFERING ACCOUNTING POLICIES ARE ENCOUNTERED

The following are examples of the areas in which different accounting policies may be adopted by different enterprises. Methods of depreciation, depletion and amortization Treatment of expenditure during construction Conversion or translation of foreign currency items Valuation of inventories Treatment of goodwill 39 | P a g e

 Valuation of investments Treatment of retirement benefits Recognition of profit on long-term contracts Valuation of fixed assets Treatment of contingent liabilities. The above list of examples is not intended to be exhaustive. Accounting Process establish rules relating to recognition, measurement and disclosures, thereby ensuring that all enterprises that follow them are and that their financial statements are true, fair and transparent. High quality accounting process is a necessary and important element of a sound capital market system. In Public capital markets such as those in United States, high quality accounting process reduce uncertainty and increase overall efficiency.

ACCOUNTING PROCESSS-SETTING IN INDIA

The institute of Chartered Accountants of India, recognizing the need to harmonize the diverse accounting policies and practices, constituted at Accounting Process Board (ASB) on 21st April, 1977. The Institute of Chartered Accountants of India (ICAI) being a member body of the IASC, constituted the Accounting Process Board (ASB) on 21st April, 1977, with a view to harmonize the diverse accounting policies and practices in use in India. After the avowed adoption of liberalization and globalization as the corner stones of Indian economic policies in early 90s, and the growing concern about the need of effective corporate governance of late, the Accounting Process have increasingly assumed importance. While formulating accounting process, the ASB takes into consideration the applicable laws, customs, usages and business environment prevailing in the country. The ASB also gives due consideration to International Financial Reporting Process (IFRSs)/ International Accounting Process (IASs) issued by IASB and tries to integrate them, to the extent possible, in the light of conditions and practices prevailing in India.

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COMPOSITION OF THE ACCOUNTING PROCESS BOARD:

The composition of the ASB is broad-based with a view to ensuring participation of all interest groups in the process-setting process. These interest-groups include industry, representatives of various departments of government and regulatory authorities, financial institutions and academic and professional bodies. Industry is represented on the ASB by their apex level associations, viz., Associated Chambers of Commerce & Industry (ASSOCHAM), Confederation of Indian Industries (CII) and Federation of Indian Chambers of Commerce and Industry (FICCI). As regards government departments and regulatory authorities, Reserve Bank of India, Ministry of Company Affairs, Comptroller & Auditor General of India, Controller General of Accounts and Central Board of Excise and Customs are represented on the ASB. Besides these interest-groups, representatives of academic and professional institutions such as Universities, Indian Institutes of Management, Institute of Cost and Works Accountants of India and Institute of Company Secretaries of India are also represented on the ASB. Apart from these interest groups, certain elected members of the Central Council of ICAI are also on the ASB.

THE ACCOUNTING PROCESSS-SETTING PROCESS

The accounting process setting, by its very nature, involves reaching an optimal balance of the requirements of financial information for various interest-groups having a stake in financial reporting. With a view to reach consensus, to the extent possible, as to the requirements of the relevant interest-groups and thereby bringing about general acceptance of the Accounting Process among such groups, considerable research, consultations and discussions with the representatives of the relevant interest-groups at different stages of process formulation becomes necessary. The process-setting procedure of the ASB, as briefly outlined below, is designed in such a way so as to ensure such consultation and discussions: 1. Identification of the broad areas by the ASB for formulating the Accounting Process. 2. Constitution of the study groups by the ASB for preparing the preliminary drafts of the proposed Accounting Process. 3. Consideration of the preliminary draft prepared by the study group by the ASB and revision, if any, of the draft on the basis of deliberations at the ASB. 41 | P a g e

4. Circulation of the draft, so revised, among the Council members of the

ICAI and 12

specified outside bodies such as Standing Conference of Public Enterprises (SCOPE), Indian Banks Association, Confederation of Indian Industry (CII), Securities and Exchange Board of India (SEBI), Comptroller and Auditor General of India (C& AG), and Department of Company Affairs, for comments. 4. Meeting with the representatives of specified outside bodies to ascertain their views on the draft of the proposed Accounting Process. 5. Finalization of the Exposure Draft of the proposed Accounting Process 6. Issuance of the Exposure Draft inviting public comments. Consideration of the comments received on the Exposure Draft and finalization of the draft Accounting Process by the ASB for submission to the Council of the ICAI for its consideration and approval for issuance. on the basis of comments received and discussion with the representatives of specified outside bodies.

THE PRINCIPLES GOVERNING SELECTION OF AN ACCOUNTING POLICY:

The primary consideration in the selection of accounting policies by an enterprise is that the financial statements prepared and presented on the basis of such accounting policies should present a true and fair view of the state of affairs of the enterprise as at the balance sheet date and of the profit and loss for the period ended on that date. For this purpose, the major considerations governing the selection and application of accounting policies are: 1. PRUDENCE In the view of the uncertainty attached to future event, profits are not anticipated but recognized only when realized though not necessarily in cash. Provision is made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information. 2. SUBSTANCE AND FORM The accounting treatment and presentation in financial statements of transactions and events should be governed by their substance and merely by the legal form. A typical example where substance takes precedence over form is in the case of finance leases. In finance leases, the lessee in substance is the owner of the asset whilst the less or is merely the legal 42 | P a g e

owner. The accounting of finance leases is based on the substance rather than form of the transaction. 3. MATERIALITY Financial statements should disclose all material items, i.e. items the statements. The concept of materiality recognizes that some matters individually or in the aggregate, are important for the fair presentation of the financial statements taken as a whole. The IASC (International Accounting Process Committee) defines audit materiality as follows: Information is its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statement. Materiality depends on the size of the item or error judged in the particular circumstances of its omission or misstatement. Thus materiality provides a threshold or cut-off point rather being primary qualitative characteristics which information must have, if it is to be useful. There are no hard and fast rules for determining materiality. What is material is a matter of professional judgment. For example, an amount material to the financial statements of one entity may not be material to financial statements of another entity of a difference size or nature. Further, what is material to the financial statements of a particular entity might change from one period to another.

THE FUNDAMENTAL ACCOUNTING ASSUMPTIONS

Certain fundamentals accounting assumptions underlie the preparations and presentation of financial statements. They are usually not specifically stated because there acceptance and use are assumed. Disclosure is necessary if they are not followed, otherwise disclosure is not required. The following have been generally accepted as fundamental accounting assumptions: A. Going Concern The enterprise is normally viewed as going concern, that is, as continuing in operation for the foreseeable future. It is assumed the enterprise has neither the intention nor the necessity of liquidation or of curtailing materiality the scale of the operations. B. Consistency It is assumed that accounting policies are consistent from one period to another. C. Accrual Revenues and cost are accrued, that is, recognised as they are earned or incurred (and not as money received or paid) and recorded in the financial statements of the period which they relate. The accrual concept forces the matching of revenues against relevant cost, for 43 | P a g e

example, though warranty expenses are incurred much after the turnover takes place; it has to be estimated and provided for when the turnover is affected, as it is a cost incurred to achieve that turnover.

PRINCIPLES FOLLOWING A NOT GOING CONCERN

The company should prepare the accounts on the basis that it is not a going concern or that it will be closed in the near future. All the assets of such a company should be valued as its net realizable value. All the liabilities should be valued at the expected settlement price. In addition, further liabilities may have to be provided in respect of employee termination or premature termination of various contracts including the lease of the premises. Adequate disclosure/adjustments should be made in financial statements about the impending closure and the fact that accounts are prepared on the basis. Since the accounts would be true and fair, there no need for the auditor to make a qualification. The auditor should however add a paragraph in his report detailing the going situation (matter of emphasis and not qualification). If the financial statement is not prepared on the above basis, the auditor will have to qualify the financial statements.

DIFFERENT ACCOUNTING POLICIES FOR SIMILAR ITEMS

This is the contrary to the fundamental accounting assumptions of consistency, which require use consistence policies year after year and also in the same year for all similar items. In the case of depreciation, Expert Advisory Committee (EAC) of ICAI has given an opinion that different methods of depreciation for the for the same class of assets used in different plants of company can be applied if the management considers it appropriate to do so after taking into account important factors such as the type of assets, the nature of the use of such assets and circumstances prevailing in the business. Whilst such exceptions may be justifiable it would be difficult to justify valuing the same type of inventory at to different factories by applying to different accounting policies.

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DISCLOSURE OF ACCOUNTING PROCESS

To ensure proper understanding of financial statements, it is necessary that all significant accounting policies adopted in the preparation and presentation of financial statements should be disclosed. Such disclosure should form part of the financial statements. It would be helpful to the reader of financial statements if they are all disclosed as such in one place instead of being scattered over several statements, schedules and notes. Examples of matters in respect of which disclosure of accounting policies adopted will be required are contained in paragraph 14. This list of examples is not, however, intended to be exhaustive. Any change in an accounting policy which has a material effect should be disclosed. The amount by which any item in the financial statements is affected by such change should also be disclosed to the extent ascertainable. Where such amount is not ascertainable, wholly or in part, the fact should be indicated. If a change is made in the accounting policies which has no material effect on the financial statements for the current period but which is reasonably expected to have a material effect in later periods, the fact of such change should be appropriately disclosed in the period in which the change is adopted. Disclosure of accounting policies or of changes therein cannot remedy a wrong or inappropriate treatment of the item in the accounts. All significant accounting policies adopted in the preparation and presentation of financial statements should be disclosed. The disclosure of the significant accounting policies as such should form part of the financial statements and the significant accounting policies should normally be disclosed in one place. Any change in the accounting policies which has a material effect in the current period or which is reasonably expected to have a material effect in later periods should be disclosed. In the case of a change in accounting policies which has a material effect in the current period, the amount by which any item in the financial statements is affected by such change should also be disclosed to the extent ascertainable. Where such amount is not ascertainable, wholly or in part, the fact should be indicated. If the fundamental accounting assumptions, viz. Going Concern, Consistency and Accrual are followed in financial statements, specific disclosure is not required. If a fundamental accounting assumption is not followed, the fact should be disclosed

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Methods of Accounting: ACCOUNTING PROCESS AT UTTARAKHAND JAL VIDYUT NIGAM LTD

Pooling of Interest Method (In the nature of merger) i. The assets, liabilities and reserves of the transferor company are to be recorded at their existing carrying amounts and in the same form as it was appearing in the books of the transferor company. ii. The identity of the reserves of the transferor company is to be kept intact in the balance sheet of the transferee company. iii. Difference between the amounts of share capital issued plus any other additional consideration paid by the transferee company and the amount of the share capital of the transferor company should be adjusted in Reserves. Preparation of Company Accounts under Various Circumstances Purchase Method: i. The assets and the liabilities of the transferor company are to be recorded at their existing carrying amounts or, alternatively, the consideration should be allocated to individual assets and liabilities on the basis of fair values at the date of amalgamation while preparing the financial statements of the transferee company. ii. The identity of the reserves of the transferor company other than the statutory reserves is not preserved. The identity of the statutory reserves is preserved in the same form and is recorded in the books of the transferee company by a corresponding debit to the amalgamation adjustment a/c. iii. Excess or shortfall of consideration over the value of net assets acquired should be credited/ debited as capital reserve/goodwill, as the case may be. iv. It is appropriate to amortize goodwill over a period of not exceeding 5 years unless a longer period is justified. The accounting treatment as specified in AS-14 needs to be followed for accounting of reserves. In case the scheme of amalgamation sanctioned prescribes a separate treatment to be given to the reserves of the transferor company on amalgamation, it can be followed.

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However the Institute of Chartered Accountants of India has issued a general clarification wherein the following disclosure is to be made in case the accounting treatment for reserves is different from that specified in AS-14: i. Description of the accounting treatment given to reserves; ii. Deviation in the Accounting Treatment and the reasons for following a treatment different from that prescribed in the AS-14; iii. The financial effect, if any, arising due to such deviation is to be disclosed. Iv. Other Disclosure Requirements A. General Names and general nature of business of the amalgamating companies Effective date of amalgamation for accounting purposes Method of accounting used to reflect the amalgamation and Exchange Ratio Particulars of the scheme sanctioned by the Court B. If Pooling of Interest Method is used Description and number of shares issued, together with the percentage of each companys equity shares exchanged. The amount of any difference between the consideration and the value of net identifiable assets acquired and the treatment thereof. 57 Advanced Financial Accounting & Reporting C. If Purchase Method is used Consideration for the amalgamation and description of consideration paid/payable The amount of difference between the consideration and the value of net identifiable assets acquired and the treatment thereof including the period of amortization of any goodwill arising on amalgamation ENTRIES IN BOOKS OF VENDOR COMPANY 1. Transfer to Realisation A/c. Particulars Debit Credit a. Assets taken over by purchasing Company at Book values. Realisation A/c Dr. XXX To Liquidator of a Ltd. A/c XXX b. Liabilities taken over by Purchasing Company at Balance Sheet value. 47 | P a g e

Liabilities A/c Dr XXX To Realisation A/c XXX 2. Purchase Consideration Purchase consideration represents consideration paid by Transferee Company to shareholders (equity and preference) in any form viz., cash, shares, debentures etc. Particulars Debit Credit A. Due Entry for consideration Transfer Company A/c Dr. XXX To Realisation A/c XXX b. Receipt of Consideration Shares/Securities of transferee company A/c Dr. XXX Bank A/c Dr. XXX To Transferee company A/c XXX 3. Sale of Assets not taken over (Assuming Profits) Particulars Debit Credit Bank A/c (Sale proceeds) Dr. XXX To Assets A/c (Book value) XXX To Realisation A/c (Profits) XXX Preparation of Company Accounts under Various Circumstances 4. Settlement of liabilities not taken over (Assuming at a discount) Particulars Debit Credit Liabilities A/c (book value) Dr. XXX To Bank A/c XXX To Realisation A/c (discount) XXX 5. Realisation expenses Particulars Debit Credit a. Incurred by Transferor Company Realisation A/c Dr. XXX To Bank A/c XXX b. Incurred by Transferee Company No Entry c. Incurred by Transferor Company reimbursed by Transferee Company 48 | P a g e

i. On incurring the expenses Transferee Company A/c Dr. XXX To Bank XXX Ii. On reimbursement Bank A/c Dr. XXX To Transferee company A/c XXX 6. Amount due to the equity Share holders Particulars Debit Credit a. Transfer of share capital and reserves to Shareholders account Equity Share Capital A/c Dr. XXX Reserves A/c Dr. XXX To Shareholders A/c XXX 7. Settlement to Share holders by transfer of consideration received : Particulars Debit Credit Shareholders A/c Dr. XXX To Shares/Securities of transferee company A/c XXX To Bank A/c XXX

ACCOUNTING FOR FIXED ASSETS OBJECTIVE AND SCOPE OF AS-10

Fixed Assets often comprise a significant portion of the total assets of an enterprise, and therefore are important in the presentation of financial position. Furthermore, the determination of whether expenditure represents an assets or an expense can have a material effect on an enterprises reported results of operations. This process is mandatory in nature. The provisions relating to borrowing costs, intangible assets and leases that were originally contained in this process were withdrawn once new accounting process were developed in these areas. This statement does not deal with accounting for the following items to which special consideration apply; Forests, plantations and similar regenerative natural resources; 49 | P a g e

Wasting assets including mineral rights, expenditure on exploration for and extraction of minerals, oil, natural gas and similar non-regenerative resources; Expenditure on real estate development; and Livestock Expenditure on individual items of fixed assets used to develop or maintain the activities covered in (i) to (IV) above, but separable from those activities, are to be accounted for in accordance with this statement.

WHAT ARE FIXED ASSETS?

Fixed asset is an asset held with the intention of being used for the purpose of producing or providing goods or services and is not held for sale in the normal course of business. This statement deals with accounting for fixed assets such as land, buildings, plant and machinery, vehicles, furniture and fittings, goodwill, patents, trademarks and designs. This statement however does not deal with specialized aspects of accounting for fixed assets that arise under a comprehensive system reflecting the effects of changing prices but applies to financial statements prepared on historical cost bases. It may be appropriate to aggregate individually insignificant items, such as moulds, tools and dies, and to apply the criteria to the aggregate value. ACCOUNTING FOR MACHINERY SPARES The accounting of machinery spares is done in accordance with this statement and not in accordance with AS-2 on Inventories. Stand-by equipment and servicing equipment are normally capitalized. Machinery spares are usually charged to the profit and loss statement as and when consumed. However, if such spares can be used only in connection with an item of fixed asset and their use is expected to be irregular, it may be appropriate to allocate the total cost on a systematic basis over a period not exceeding the useful life of the principal item. In certain circumstances, the accounting for an item of fixed asset may be improved if the total expenditure thereon is allocated to its component parts, provided they are in practice separable, and estimates are made of the useful lives of these components. For example, 50 | P a g e

rather than treat an aircraft and its engines as one unit, it may be better to treat the engines as a separate unit if it is likely that their useful life is shorter than that of the aircraft as a whole

COMPONENTS OF COSTS OF FIXED ASSETS

The cost of an item of fixed asset comprise its purchase price, including import duties and other non-refundable taxes or levies and any directly attributable cost of bringing the asset to its working condition for its intended use; any trade discounts and rebates are deducted in arriving at the purchase price. MODVAT credit can be considered to be of the nature of a refundable tax. Therefore, MODVAT credit should be reduced from the purchase cost of capital goods concerned. Examples of directly attributable cost are Sites preparation; Initial delivery and handling costs; Installation costs, such as special foundation for plant; and Professional fees; e.g. fees of architects and engineers. The cost of a fixed asset may undergo changes subsequent to its acquisition or construction on account of exchange fluctuations, price adjustments, change in duties of similar factors. Administration and other general overhead expenses are usually excluded from the cost of fixed assets because they do not relate to a specific fixed asset. However, in some circumstances, such expenses as are specifically attributable to construction of a project or to the acquisition of a fixed asset or bringing it to its working condition, may be included as part of the cost of the construction project or as a part of the cost of the fixed asset. The expenditure incurred on start-up and commissioning of the project, including the expenditure incurred on test runs and experimental production is usually capitalized as an indirect element of the construction cost. However, the expenditure incurred after the plant has begun commercial production, i.e. production intended for sale or captive consumptions, is not capitalized and is treated as revenue expenditure even though the contract may stipulate that the plant will not be finally taken over until after the satisfactory completion of the guarantee period. Amount paid for know-how for the plans, layout and designs of buildings and/or design of the machinery should be capitalized under the relevant asset heads such as buildings, plants and machinery, etc. Depreciation should be calculated on the total cost of those assets, 51 | P a g e

including the cost of the know-how capitalized. Know-how related to the manufacturing process is usually expensed in the year in which it is incurred. Where the amount paid for know-how is a composite sum in respect of the manufacturing process as well as plans, drawings and designs for buildings, plant and machinery, etc., the management should apportion such consideration into two parts on reasonable bases. If the said costs are not directly attributable to bringing the assets concerned to their working condition for their intended use, it should not be capitalized as part of the cost the asset.

SELF-CONSTRUCTED FIXED ASSETS

In arriving at the gross book value of self-constructed fixed assets, the above principles apply. Included in the gross book value are costs of construction that relate directly to the specific asset and cost that are attributable to the construction activity in general and can be allocated to the specific asset. Any internal profits are eliminated in arriving at such costs.

ACCOUNTING OF COST INCURRED DURING PROJECT DELAYS AND WASTAGES

If the interval between the date a project is ready to commence commercial production and the date at which commercial production actually begins is prolonged, all expenses (other than borrowing costs) incurred during this period are charged to the profit and loss statement. However, the expenditure incurred during this period is also sometimes treated as deferred revenue expenditure to be amortized over a period not exceeding to 3 to 5 years after the commencement of commercial production. Normal wastages are capitalized. Abnormal wastages are not capitalized but charged to the profit and loss account.

NON MONETARY CONSIDERATION FOR FIXED ASSETS:

When a fixed asset is acquired in exchange for another asset, its cost is usually determined by reference to the fair market value of the consideration given. Fair market value is the price that would be agreed to in an open and unrestricted market between knowledgeable 52 | P a g e

and willing parties dealing at arms length who are fully informed and are not under any compulsion to transact. It may be appropriate to consider also the fair market value of the asset acquired if this is more clearly evident. An alternative accounting treatment that is sometimes used for an exchange of assets, particularly when the assets exchanges are similar, is to record the asset acquired at eh net book value of the asset given up in each case; an adjustment is made for any balancing receipt or payment of cash or other consideration. When a fixed asset is acquired in exchange for share or other securities in the enterprise, it is usually recorded at its fair market value, or the fair market value of the securities issued, whichever is more clearly evident.

SUBSEQUENT EXPENDITURE INCURRED ON FIXED ASSETS AFTER INITIAL CAPITALISATION ACCOUNTED

Frequently, it is difficult to determine whether subsequent expenditure related to fixed asset represents improvements that ought to be added to the gross book value or repair that ought to be charged to the profit and loss statement. Only expenditure that increases the future benefits from the existing asset beyond its previously assessed process of performance is included in the gross book value, e.g., an increase in capacity or structural alteration to a building that increases the strength of the building beyond its original strength. Examples of improvements which result in increased future economic benefits include: Modification of an item of plant to extend its useful life, including an increase in its capacity; Upgrading machine parts to achieve a substantial improvement in the quality of output; and Adoption of new production processes enabling a substantial reduction in previously assessed operating costs While deciding whether subsequent expenditure resulted in an increase in the future benefits from the asset or not, recognition should be given both to the increase in the benefits per annum as well as increase in benefits through extension of the life of the asset. Thus, even if there was no increase in the annual capacity, but the life of the asset was substantially increased, it would be taken as an increase in the future benefits from the concerned asset beyond its previously assessed process of performance. The expenditure on regular overhauling only results in maintaining the previously estimated process of performance and it does not have the effect of improving the previously assessed of performance. Lets 53 | P a g e

consider an example, where a land right is in dispute when it was acquired by an enterprise. The enterprise subsequently incurred legal expenses and got all the land rights transferred in its favor. This expenditure should be capitalized because it increases the value of the land beyond its original assessed process of performance. Lets consider another example. An enterprise purchases a land on which there is not dispute. Subsequent to the acquisition there is encroachment of land. The enterprise incurs legal expenses to vacate the encroachers. This expenditure cannot be capitalized because it does not increase the value of the land beyond its original assessed process of performance. The cost of an addition or extension to an existing asset which is of a capital nature and which becomes an integral part of the existing asset is usually added to its gross books value. Expenditure on repairs or maintenance of property, plant and equipment is made to restore or maintain the future economic benefits that an enterprise can expect from the originally assessed process of performance of the asset. As such, it is usually recognized as an expense when incurred. For example, the cost of servicing or overhauling plant and equipment is usually an expense since it restores, rather than increase, the originally assessed process performance.

BASIS FOR REVALUATION OF FIXED ASSETS AND USE OF REVALUATION RESERVE FOR DECLARING DIVIDENDS OR ISSUING BONUS SHARES
Sometimes financial statements that are otherwise prepared on a historical cost basis include part or all of the fixed assets at a valuation in substitution for historical costs and depreciation is calculated accordingly. A commonly accepted and preferred method of restating assets is by appraisal, normally undertaken by competent valuers. Other methods are used are indexation and reference o the current prices which when applied across checked periodically by appraisal method. According to Schedule VI of Companies Act, every balance sheet subsequent to revaluation shall disclose the increased figure with the date of increase in place of original cost for all the first 5 years. The fact of revaluation will be disclosed in all the future balance sheets till such time the revalued assets appear in the companys balance sheet. Revaluation reserve is a reserve that represents the excess of the estimated replacement cost or estimated market values over the book values thereof. As the revaluation reserve is a not a 54 | P a g e

realized gain, it is not available for distribution of dividends or issue of bonus shares , or writing off accumulated losses or profit and loss debit balance or clearing backlog of depreciation of arrears etc. SEBI also prohibits use of revaluation reserve for purpose of declaring bonus shares.

PRINCIPLES FOR SELECTION OF FIXED ASSETS FOR REVALUATION

When a fixed asset is revalued in financial statements, an entire class of assets should be revalued, or the selection of assets for revaluation should be made on a systematic basis. This basis should be disclosed. Selective revaluation of assets can lead to unrepresentative amounts being reported in financial statements. Accordingly, when revaluations do not cover all assets of given class, it is appropriate that the selection of assets to be made on a systematic basis. E.g. an enterprise may be revalued a whole class of assets within a unit.

ACCOUNTING TREATMENT FOR REVALUATION

It is not appropriate for the revaluation of a class of assets to result in the net book value of that class being greater than the recoverable amount of the assets of that class. Therefore revaluation would be restricted to the recoverable amount of the fixed assets. The revalued amounts of fixed assets are presented in financial statements either by restating both the gross book value and accumulated depreciation so as to give a net book value equal to the net revalued amount or by restating the net book value by adding therein the net increase on account revaluation. An upward revaluation does not provide a basis for crediting to the profit and loss statement the accumulated depreciation existing at the date of revaluation. As increase in net book value arising on revaluation of fixed assets should credited directly to owners interests under the head of revaluation reserves, except that, to the extent that such increase is related to and not greater than a decrease arising on revaluation previously recorded as a charge to the profit and loss statement, it may be credited to the profit and loss statement. A decrease in net book value arising on revaluation of fixed asset should be charged directly to the profit and loss statement except that to the extent that such a decrease is related to an increase which was previously recorded as a credit to revaluation reserve and 55 | P a g e

which has not been subsequently reserved or utilized, it may be charged directly to that account. Depreciation under AS-6 should be provided on the total value of the fixed asset including the revalued portion. Depreciation on the revalued portion of the fixed asset can either be charged to the profit and loss account or alternatively charged to the profit and loss account and at the same time compensated from the revaluation reserve such that the net charge to the profit and loss account is nil.

ACCOUNTING OF RETIREMENTS AND DISPOSALS

Fixed asset should be eliminated from the financial statements on disposal or when no further benefit is expected from its use and disposal. Items of fixed assets that have been retired from active use and are held for disposal are stated at the lower of their net book value and realizable value and are shown separately in the financial statements. Any expected loss is recognized immediately in the profit and loss statements. In historical cost financial statements, gains or losses arising on disposal are recognized in the profit and loss statement. Paragraph 24 of Accounting Process (AS) 10, Accounting for Fixed Assets states that Material items retired from active use and held for disposal should be stated at the lower of their net book value and net realizable value and shown separately in the financial statements. The fixed assets which are retired from active use and dismantled and are not actually sold off, should be disclosed appropriately at the lower of net realizable value and net book value in the Schedule of Fixed Assets or on the face of the balance sheet under the head Fixed Assets. These items cannot be disclosed under the caption inventories On disposal of a previously revalued item of fixed asset, the difference between net disposal proceeds and the net book value should be charged or credited to the profit and loss statement except that to the extent that such a loss is related to an increase which was previously recorded or utilized, it may be charged directly to that account. The amount standing in revaluation reserve following the retirement or disposal of an asset which relates to that asset may be transferred to general reserves.

TREATMENT FOR JOINTLY OWNED FIXED ASSETS

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Where an enterprise owns fixed assets jointly with other (otherwise than as a part in a firm), the extent of its share in such assets, and the proportion in the original cost, accumulated depreciation and written down values are stated in the balance sheet. Alternatively, the pro rata cost of such jointly owned assets is grouped together with similar fully owned assets with an appropriate disclosure thereof. Details of such jointly owned assets are indicated separately in the fixed assets register.

AMORTISATION/ DEPRECIATION OF GOODWILL

Goodwill, in general, is recorded in the books only when some consideration in money or moneys worth has been paid for it. Whenever, a business is acquired for a price (payable either in cash or in shares or otherwise) which is in excess of the value of the net assets of the business taken over, the excess is termed as goodwill. Goodwill arises from business connections, trade name or reputation of an enterprise or from other intangible benefits enjoyed by an enterprise. Where several fixed assets are purchased for a consolidated price, the consideration should be apportioned to the various assets on a fair basis as determined by competent value. As a matter of financial prudence, goodwill is written off over a period of 3-5 years.

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DISCLOSURES OF FIXED ASSETS

In addition to disclosures required to be made under AS-1 and AS-6, further disclosures under AS-10 are as follows: Gross and net book values of fixed assets at the beginning and end of an accounting period showing additions, disposals, acquisitions and other movements; Expenditure incurred on account of fixed assets in the course of construction or acquisition; and Revalued amount substituted for historical costs of fixed assets, the basis of selection of fixed assets for revaluation, the method adopted to compute the revalued amount, the nature of any indices used, the year of any appraisal made, and whether an external valuer was involved, in case where fixed assets are stated at revalued amounts. For purposes of Schedule VI, the revalued amounts of each class of fixed assets are presented in the balance sheet separately, by restating both the gross book value and accumulated depreciation so as to give a net book value to a new revalued amount. It is not correct to net off the increase/decrease in net-book value arising from revaluation of various classes of fixed assets, for example, machinery and building.

SIGNIFICANT DIFFERENCES BETWEEN AS-10, IAS AND US GAAP

Fixed assets are more elaborately defined under IAS and US GAAP. For example according to IAS-16, an item of property, plant and equipment should be recognized as an asset when (a) it is probable that future economic benefits associated with the asset will flow to the enterprise; and (b) the cost of the asset to the enterprise can be measured reliably. Though these provisions not contained in AS-10 it is assumed that they would apply even in the Indian situation. US GAAP does not permit revaluation of fixed assets. As regards upward revaluation of fixed assets, IAS-16 permits it as an alternative treatment. Revaluation is also permitted under AS-10, such as (a) IAS provides more detail guidelines than AS-10 on revaluation principles (b) Under IAS-16, revaluations are required to be done with sufficient regularity such that their carrying amount do not differ materially from the fair values. There is no such requirement in AS-10. IAS-16 also states that annual revaluations are important where fixed 58 | P a g e

asset fair values are subject to significant volatility, otherwise a revaluation every three or five year is sufficient. Under AS-10 if the interval between the date a project is ready to commence commercial production and the date at which commercial production actually begins is prolonged, all expenses (other than borrowing costs) incurred during this period are charged to the profit and loss statement. However, the expenditure incurred during this period is also sometimes treated as deferred revenue expenditure to be amortized over a period not exceeding 3 to 5 years after the commencement of commercial production. Under IAS/US GAAP deferral of expenditure is not permitted, and all expenses incurred in these circumstances are charged to the profit and loss account.

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GOVERNMENT GRANTS

Accounting for Government Grants Capital Approach versus Income Approach Recognition of Government Grants Non-monetary Government Grants Presentation of Grants Related to Specific Fixed Assets Presentation of Grants Related to Revenue Presentation of Grants of the nature of Promoters contribution Refund of Government Grants Disclosure Statements of Accounting Process The following is the text of the Accounting Process (AS) 12 issued by the Council of the Institute of Chartered Accountants of India on Accounting for Government Grants. The Process comes into effect in respect of accounting periods commencing on or after 1.4.1992 and will be recommendatory in nature for an initial period of two years. Accordingly, the Guidance Note on Accounting for Capital Based Grants issued by the Institute in 1981 shall stand with drawn from this date. This Process will become mandatory in respect of accounts for periods commencing on or after 1.4.1994.2 This Statement deals with accounting for government grants. Government grants are sometimes called by other names such as subsidies, cash incentives, duty drawbacks, etc. This Statement does not deal with: The special problems arise in accounting for government grants in financial statements reflecting the effects of changing prices. Accounting Process is intended to apply only to items which are material. Reference may be made to the section titled Announcements of the Council Regarding status of various documents issued by the Institute of Chartered Accountants of India appearing at the beginning of this Compendium for a detailed discussion on the implications of the mandatory status of an accounting process.

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Definitions The following terms are used in this Statement with the meanings Specified: Government refers to government, government agencies and similar bodies whether local, national or international. Government grants are assistance by government in cash or kind to an enterprise for past or future compliance with certain conditions. They exclude those forms of government assistance which cannot reasonably have a value placed upon them and transactions with government which cannot be distinguished from the normal trading transactions of the enterprise. Explanation The receipt of government grants by an enterprise is significant for Preparation of the financial statements for two reasons. Firstly, if a government grant has been received, an appropriate method of accounting there for is necessary. Secondly, it is desirable to give an indication of the extent to which the enterprise has benefited from such grant during the reporting period. This facilitates comparison of an enterprises financial statements with those of prior periods and with those of other enterprises. Accounting Treatment of Government Grants Capital Approach versus Income Approach Two broad approaches may be followed for the accounting treatment of government grants: the capital approach, under which a grant is treated as part of shareholders funds, and the income approach, under which a grant is taken to income over one or more periods. Those in support of the capital approach argue as follows: Many government grants are in the nature of promoters contribution, i.e., they are given with reference to the total investment in an undertaking or by way of contribution towards its total capital outlay and no repayment is ordinarily expected in the case of such grants. These should, therefore, be credited directly to shareholders funds. It is inappropriate to recognize government grants in the profit and loss statement, since they are not earned but represent an incentive provided by government without related costs.

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Arguments in support of the income approach are as follows: Government grants are rarely gratuitous. The enterprise earns them through compliance with their conditions and meeting the envisaged obligations. They should therefore be taken to income and matched with the associated costs which the grant is intended to compensate. As income tax and other taxes are charges against income, it is logical to deal also with government grants, which are an extension of fiscal policies, in the profit and loss statement. In case grants are credited to shareholders funds, no correlation is done between the accounting treatment of the grant and the accounting treatment of the expenditure to which the grant relates. It is generally considered appropriate that accounting for government grant should be based on the nature of the relevant grant. Grants which have the characteristics similar to those of promoters contribution should be treated as part of shareholders funds. Income approach may be more appropriate in the case of other grants. It is fundamental to the income approach that government grants be recognized in the profit and loss statement on a systematic and rational basis over the periods necessary to match them with the related costs. Income recognition of government grants on a receipts basis is not in accordance with the accrual accounting assumption.

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Recognition of Government Grants Government grants available to the enterprise are considered for inclusion in accounts: Where there is reasonable assurance that the enterprise will comply with the conditions attached to them; and Where such benefits have been earned by the enterprise and it is reasonably certain that the ultimate collection will be made. Mere receipt of a grant is not necessarily a conclusive evidence that condition attaching to the grant have been or will be fulfilled. Non-monetary Government Grants Government grants may take the form of non-monetary assets, such as land or other resources, given at concessional rates. In these circumstances, it is usual to account for such assets at their acquisition cost. Non-monetary assets given free of cost are recorded at a nominal value. Presentation of Grants Related to Specific Fixed Assets Grants related to specific fixed assets are government grants whose primary condition is that an enterprise qualifying for them should purchase, construct or otherwise acquire such assets. Other conditions may also be attached restricting the type or location of the assets or the periods during which they are to be acquired or held. Two methods of presentation in financial statements of grants (or the appropriate portions of grants) related to specific fixed assets are regarded as acceptable alternatives. Less than one method, the grant is shown as a deduction from the gross value of the asset concerned in arriving at its book value. The grant is thus recognized in the profit and loss statement over the useful life of a depreciable asset by way of a reduced depreciation charge. Where the grant equals the whole, or virtually the whole, of the cost of the asset, the asset is shown in the balance sheet at a nominal value. Under the other method, grants related to depreciable assets are treated 4 AS 5 have been revised in February 1997. The title of revised AS 5 is Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies. as deferred income which is recognized in the profit and loss statement on a systematic and rational basis over the useful life of the asset. Such allocation to income is usually made over the periods and in the proportions in which depreciation on related assets is charged. Grants related to nondepreciable assets are credited to capital reserve under this method, as there is usually no charge to income in respect of such assets. However, if a grant related to a non-depreciable 63 | P a g e

asset requires the fulfillment of certain obligations, the grant is credited to income over the same period over which the cost of meeting such obligations is charged to income. The deferred income is suitably disclosed in the balance sheet pending its apportionment to profit and loss account. For example, in the case of a company, it is shown after Reserves and Surplus but before Secured Loans with a suitable description. The purchase of assets and the receipt of related grants can cause major movements in the cash flow of an enterprise. For this reason and in order to show the gross investment in assets, such movements are often disclosed as separate items in the statement of changes in financial position regardless of whether or not the grant is deducted from the related asset for the purpose of balance sheet presentation. Presentation of Grants Related to Revenue Grants related to revenue are sometimes presented as a credit in the profit and loss statement, either separately or under a general heading such as Other Income. Alternatively, they are deducted in reporting the related expense. Supporters of the first method claims hat it is inappropriate to net income and expense items and that separation of the grant from the expense facilitate comparison with other expenses not affected by a grant. For the second method, it is argued that the expense might well not have been incurred by the enterprise if the grant had not been available and presentation of the expense without offsetting the grant may therefore be misleading. Presentation of Grants of the nature of Promoters contribution Where the government grants are of the nature of promoters contribution, i.e., they are given with reference to the total investment in an undertaking or by way of contribution towards its total capital outlay (for example, central investment subsidy scheme) and no repayment is ordinarily expected in respect thereof, the grants are treated as capital reserve which can be neither distributed as dividend nor considered as deferred income. Refund of Government Grants Government grants sometimes become refundable because certain conditions are not fulfilled. A government grant that becomes refundable is treated as an extraordinary item (see Accounting Process (AS) 5, Prior Period and Extraordinary Items and Changes in Accounting Policies5). The amount refundable in respect of a government grant related to revenue is applied first against any unamortized deferred credit remaining in respect of the grant. To the extent that

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the amount refundable exceeds any such deferred credit, or where no deferred credit exists, the amount is charged immediately to profit and loss statement. The amount refundable in respect of a government grant related to a specific fixed asset is recorded by increasing the book value of the asset or by reducing the capital reserve or the deferred income balance, as appropriate, by the amount refundable. In the first alternative, i.e., where the book value of the asset is increased, depreciation on the revised book value is provided prospectively over the residual useful life of the asset. Where a grant which is in the nature of promoters contribution becomes refundable, in part or in full, to the government on non-fulfillment of some specified conditions, the relevant amount recoverable by the government is reduced from the capital reserve. Disclosure The following disclosures are appropriate: The accounting policy adopted for government grants, including the methods of presentation in the financial statements; the nature and extent of government grants recognized in the financial statements, including grants of non-monetary assets given at a concessional rate or free of cost. Government grants should not be recognized until there is reasonable assurance that (i) the enterprise will comply with the conditions attached to them, and (ii) the grants will be received. Government grants related to specific fixed assets should be presented in the balance sheet by showing the grant as a deduction from the gross value of the assets concerned in arriving at their book value. Where the grant related to a specific fixed asset equals the whole or virtually the whole, of the cost of the asset, the asset should be shown in the balance sheet at a nominal value. Alternatively, government grants related to depreciable fixed assets may be treated as deferred income which should be recognized in the profit and loss statement on a systematic and rational basis over the useful life of the asset, i.e., such grants should be allocated to income over the periods and in the proportions in which depreciation on those assets is charged. Grants related to non-depreciable assets should be credited to capital reserve under this method. However, if a grant related to a non-depreciable asset requires the fulfillment of certain obligations, the grant should be credited to income over the same period over which the cost of meeting such obligations is charged to income. The deferred income balance should be separately disclosed in the financial statements.

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Government grants related to revenue should be recognized on a systematic basis in the profit and loss statement over the periods necessary to match them with the related costs which they are intended to compensate. Such grants should either be shown separately under other income or deducted in reporting the related expense. Government grants of the nature of promoters contribution should be credited to capital reserve and treated as a part of shareholders funds. Government grants in the form of non-monetary assets, given at a concessional rate, should be accounted for on the basis of their acquisition cost. In case a non-monetary asset is given free of cost, it should be recorded at a nominal value. Government grants that are receivable as compensation for expenses or losses incurred in a previous accounting period or for the purpose of giving immediate financial support to the enterprise with no further related costs, should be recognized and disclosed in the profit and loss statement of the period in which they are receivable, as an extraordinary item if appropriate. A contingency related to a government grant, arising after the grant has been recognized, should be treated in accordance with Accounting Process (AS) 4, Contingencies and Events Occurring after the Balance Sheet Date.7 Government grants that become refundable should be accounted for as an extraordinary item. The amount refundable in respect of a grant related to revenue should be applied first against any unamortized deferred credit remaining in respect of the grant. To the extent that the amount refundable exceeds any such deferred credit, or where no deferred credit exists, the amount should be charged to profit and loss statement. The amount refundable in respect of a grant related to a specific fixed asset should be recorded by increasing the book value of the asset or by reducing the capital reserve or the deferred income balance, as appropriate, by the amount refundable. In the first alternative, i.e., where the book value of the asset is increased, depreciation on the revised book value should be provided prospectively over the residual useful life of the asset. Government grants in the nature of promoters contribution that become refundable should be reduced from the capital reserve.

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Data analysis Sample Questionnaire

Section I: Background 1. What is your level of education? Diploma Bachelor degree Masters or above Others Please specify............................................. 2. What is your current position in the company? Manager Owner/manager Sales person Others Please specify.......................................... 3. How long have you been working in this position Less than one year 1-5 years 5-10years More than 10 years 4. What is your main business activity? Manufacturing Trade Services Others Please specify......................................... 5. Your business is: Sole proprietorship Partnership Private Limited company Others Please specify................................... 67 | P a g e

6. How long has your organization been in business? Less than one year 1-5 years 5-10years More than 10 years 7. How many employees (both permanent and temporary) work for your enterprise? 1-10 11-20 21-50 51-100 More than100 employees 8. over the last 3 years how was the level of market competition in the area that your business is engaged in No competition Moderate competition Strong competition Severe competition 9 Does your organization have access to financial resources from banks needed for developing your business? Yes No Small and Medium Enterprises growth Does your organization have access to financial resources from microfinance institutions needed for developing your business? Yes No If the answer for question is No, what do you think the reasons for not having access to financial resources (multiple answers are possible)? Inadequate collateral No need for credit Fear of inability to repay Process too difficult 68 | P a g e

High borrowing cost Others Please specify............................................. Apart from financial services offered by the microfinance institutions, how do microfinance institutions helps you (multiple answers are possible) Set business plans and regular control of business Saving and Payment services Reschedule/restructuring loans Insurance services Others Please specify.............................................................................

Results and Analysis

It was used annual sales as a measure of firm growth as dependent variable and measured by the growth rate in percentage terms. Sales growth is significantly influenced by the following set of variables: external finance (percentage change in total borrowed capital from bank and MFIs), firm size (percentage change in employees), age of firms, and process of accounting.

Table Regression results

Dependent Variable: Percentage change in Sales Method: Panel Least Squares Sample (adjusted): 2005/6 2009/10 Cross-sections included: 149
Variable Coefficient T-Statistic Prob. Constant 35.46062 0.169297 0.8656 Percentage change in debt 0.449794 16.86151 0.0000 Percentage change in employment 0.445895 2.171338 0.0304 Age 2.412629

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0.020923 0.9833 Internationalization 31.43836 2.732537 0.0065 R squared 0.617728 Mean dependent variable 83 .48759 Adjusted R-squared 0.483064 S.D. dependent variable 263.5878 F-statistic 4.587179 Hannan-Quinn criter. 13.99430 Prob. (F-statistic) 0.000000 Durbin Watson stat 2.027297

To ensure the statistical adequacy of the model (to satisfy the assumption of classical linear regression model), diagnostic tests were performed and violations were also detected. The adjusted R value indicates that 48 percent of the total variability of growth (percentage change in sales) about their mean value was explained by the model. For a cross sectional regression, this is fairly high (Brooks, 2008). The Durbin-Watson statistics of 2.03 indicating no evidence for autocorrelation between the independent variables of the regressions model (Brooks, 2008). This chapter has separately presented the results of different methods adopted. Specifically, the results of survey of UTTARAKHAND JAL VIDYUT NIGAM LTD, documentary analysis and interviews with UTTARAKHAND JAL VIDYUT NIGAM LTD employees. In order to address the research problems and achieve research objective, the results of the different data collection methods were jointly analyzed. The analyses were based on the results obtained and literature guide. The next section, presents the analysis of each of these methods of inquiry to address each of the research questions and hypothesis.

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Literature Review
This chapter reviews the theoretical and empirical literature on the role of financial accounting in the growth of UTTARAKHAND JAL VIDYUT NIGAM LTD. This review of the literature establishes the framework for the current study and provides the deficiencies of the previous studies, which in turn, help in clearly identifying the gap in the literature and formulating research questions for the study. The review has two sections. Section one presents a theoretical review of role of financial accounting and UTTARAKHAND JAL VIDYUT NIGAM LTD development. This is followed by a review of the relevant empirical studies on financial institutions role in the development of SMEs. Finally, conclusions and knowledge gaps are presented in section three.

Theoretical studies
This section briefly sketches different types of financial department which has proven effective in providing services to UTTARAKHAND JAL VIDYUT NIGAM LTD. The section opens with an overview of financial department. This shows the various services that financial department has and explains the theoretical role of accounting for the development of firms. These give an idea on how financial accounting contributes to the development of UTTARAKHAND JAL VIDYUT NIGAM LTD. Finally, the concern is to show the nature, importance, measures of growth and constraints of UTTARAKHAND JAL VIDYUT NIGAM LTD.

Indicators of Growth
Hoy et al. (1992) stress that a consensus has been reached among academics that sales growth is the best growth measure. It reflects both short and long term changes in the firm and is easily obtained. Furthermore these authors maintain that sales growth is the most common performance indicator among firms themselves. The growth process as such provides further arguments for advocating sales growth. A growth process is likely to be driven by increased demand for the firms products or services. That is, sales increases first and thus allow the acquisition of additional resources such as employment or other assets (Ardishvili, et al., 1998). It is also possible to increase sales, by outsourcing the increased sales volume, without acquiring resources or employing additional staff. In this case, only sales would increase. Thus, sales growth has high generality. 71 | P a g e

On the other hand, there is a widespread interest in the creation of new employment. This makes employment growth. Another important aspect to capture in the process of rationalization; it is possible to replace employees with capital investment. In other words, there is to some extent an inverse relationship between capital investment and employment growth, as a consequence, assets are another important measure of growth. Measuring growth in terms of assets is often considered problematic in the service sector (welnzimmer et al, 1998). This appears to be mainly an accounting problem. While intangible assets indeed may expand in a growing service firms, this is not reflected in the firm balance sheet. There are two basic approaches to measure growth: absolute and relative. Measures of absolute growth examine the actual difference in firm size from one observation to another. Growth rates refers to relative changes in size, that is size changes are related to initial size of the firm typically, by dividing the absolute growth by the initial growth of the firm.

Conclusions
The purpose of this last chapter is to summarize the whole thesis and highlight implications and future research directions. Accordingly, section one presents an overview of the thesis and its major findings. The second section discusses the implications to the policy makers and financial departments. Finally, the limitations and future research directions are presented in section three.

Overview of the thesis and its major findings

The thesis began with an elaboration of financial accounting role in general and to

UTTARAKHAND JAL VIDYUT NIGAM LTD in particular. It was noted that access to
financial accounting products and services is a crucial element for the development of

UTTARAKHAND JAL VIDYUT NIGAM LTD. Thus their sustainable growth will largely
depend on the capacity of finances to mobilize resources from low valued to high valued and invest in firms activities. The thesis reviewed literature on the theoretical recognition and empirical evidence of the role of financial institutions in enterprises growth, particularly in UTTARAKHAND JAL VIDYUT

NIGAM LTD growth. The review highlighted overall role of financial department. Also this
shows the various roles that financial institutions, particularly, banks and MFIs, play in the development of UTTARAKHAND JAL VIDYUT NIGAM LTD.

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With regard to firm, the literature review revealed the its role in ameliorating information problems and monitoring investments, inter-temporal smoothing of risk, corporate governance, and financing working capital and investment requirements. In respect of accounting process, the literature review showed that accounting processes were established to fill the gap existed between people or business entrepreneurs and then increased the amount of undertaken productive projects. Apart from this the review revealed MFIs products and services package available to enterprises such as financial services, social intermediation or non financial services and enterprises development services. Further, the literature review showed the nature and importance of financial accounting in economic development and employment. The review indicated the different definition of finance across nation and business categories. Concerning the definition it was pointed out that there is no single demarcation line to categorize enterprises as micro, small, medium and large. Even though every nation has different definition, finance play important role in its economic activities. Apart from nature and importance of financial accounting process, the literature review highlighted the general constraints to UTTARAKHAND JAL VIDYUT NIGAM LTD growth. The review showed the input, output, regulation and management constraints.

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Recommendations
The goal of financial accounting is to support the competitiveness and long-term growth of enterprises, and then the economic development of a country. This will be accomplished through support for enhancing the private delivery of services. In this context the following five main measures were suggested to the UTTARAKHAND JAL VIDYUT NIGAM LTD. 1. Creation of a level playing field : In order to promote the development and growth of UTTARAKHAND JAL VIDYUT NIGAM LTD the institutional biases should be reduced so as to include the small business into the system. This will enable them to get access to the financial institutions especially banks, products and services. 2. Lowering transactional costs of business : To the extent that it is practical, financial institutions programs should lower financial and economic transaction costs. It is recognized that the fixed costs of doing business are less easily absorbed by smaller firms than by large ones. Therefore, actions to reduce bureaucratic procedures, enhance access to credit, eliminate unnecessary requirements, and expand the availability services will benefit UTTARAKHAND JAL VIDYUT NIGAM LTD to a greater degree. 3. Targeted programs : Eliminating institutional biases and lowering transactions costs are necessary, but not sufficient steps to promote UTTARAKHAND JAL VIDYUT NIGAM LTD. In cases where UTTARAKHAND JAL VIDYUT NIGAM LTD do not have access to the necessary inputs because of the failure of the market to provide them, the Banks and MFIs can promote the provision of services and information that fill these gaps. 5. Financial institutions should develop wide range financial as well as non financial products/services to the needs of UTTARAKHAND JAL VIDYUT NIGAM LTD.

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Limitations of the research

As a research this thesis is not without limitations and exhaustive. Thus, this section briefly discuses these limitations and also indicates possible future research directions. One of the limitations of this thesis is inadequacy of time and scarcity of money so as to carry out a thorough/ detailed research. Further, the thesis also ignores other functions of accounting for large enterprises and economic growth. From this it was apparent that such issues as role of accounting on other segments of the company were not examined. Finally, this research thesis was not being entirely about UTTARAKHAND JAL VIDYUT NIGAM LTD instead, it only investigate the contribution of accounting and finance for the growth of UTTARAKHAND JAL VIDYUT NIGAM LTD. These limitations lead to possible future research directions. This thesis only focused on role of accounting in UTTARAKHAND JAL VIDYUT NIGAM LTD growth. Investigating the role of accounting and finance in large enterprises provides another area of future research.

Bibliography Compendium of Accounting Process ICAI Institute of Chartered Accountants of India Student Guide to Indian Accounting Process & GAAP www.icai.org

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