AS 1 DISCLOSURE OF ACCOUNTING POLICIES

A change in accounting policy is made only if the adoption of a different accounting policy
is required (i) by statute or (ii) for compliance with an accounting standard or (iii) if it is considered that the change
would result in a more appropriate preparation or presentation of the financial statements of the enterprise.
A more appropriate presentation of events or transactions in the financial statements occurs when the new accounting
policy results in more relevant or reliable information about the financial position, performance or cash flows of the
enterprise.

Change in accounting policy may have a material effect on the items of financial
statements. Unless the effect of
such change in accounting policy is quantified, the financial statements may not help the
users of accounts. Therefore, it is necessary to quantify the effect of change in accounting policy on financial
statement items like assets, liabilities, profit / loss. For example, if depreciation method is changed from straight-line
method to
written-down value method, or if cost formula used for inventory valuation is changed
from weighted average to FIFO, or if interest is capitalized which was earlier not in practice, or if proportionate amount
of interest is changed to inventory which was earlier
not the practice, all these may increase or decrease the net profit.

Accounting Standard (AS) 1 recognizes three fundamental accounting assumptions. These are
as follows:
(i) Going Concern: The financial statements are normally prepared on the assumption that an enterprise will continue
its operations in the foreseeable future and neither there is
intention, nor there is need to materially curtail the scale of operations.
(ii) Consistency: The principle of consistency refers to the practice of using same
accounting policies for similar transactions in all accounting periods unless the change is
required (i) by a statute, (ii) by an accounting standard or (iii) for more appropriate
presentation of financial statements.
(iii) Accrual basis of accounting: Under this basis of accounting, transactions are
recognised as soon as they occur, whether or not cash or cash equivalent is actually
received or paid

AS 2 VALUATION OF INVENTORIES
As per para 5 of AS 2 on Valuation of Inventories, inventories should be valued at the
lower of cost and net realizable value. Inventories should be written down to net
realizable value on an item-by-item basis
As per Para 5 of AS 2 Valuation of Inventories, the inventories are to be valued at lower
of cost and net realizable value.
Items that are to be excluded in determination of the cost of inventories as per para 13 of AS 2
on Valuation of Inventories are:
(i) Abnormal amounts of wasted materials, labour or other production costs.
(ii) Storage costs unless those costs are necessary in the production process prior to a
further production stage.
(iii) Administrative overheads that do not contribute to bringing the inventories to their
present location and condition; and
(iv) Selling and distribution costs.
As per para 24 of AS 2 Valuation of Inventories, materials and other supplies held for
use in the production of inventories (HERE; inventories means Finished Goods) are not written down below cost if the
finished
products in which they will be incorporated are expected to be sold at or above cost.
However, when there has been a decline in the price of materials and it is estimated that
the cost of the finished products will exceed net realizable value, the materials are written
down to net realisable value. In such circumstances, the replacement cost of the
materials may be the best available measure of their net realisable value.
As per para 13 of AS 2 (Revised) Valuation of Inventories, abnormal amounts of wasted
materials, labour and other production costs are excluded from cost of inventories and
such costs are recognized as expenses in the period in which they are incurred.

AS 3 CASH FLOW STATEMENTS

According to Para 21 of AS 3 (Revised) Cash Flow Statements, an enterprise should
report separately major classes of gross cash receipts and gross cash payments arising
from investing and financing activities, except that cash flows described in
paragraphs 22 and 24 may be reported on a net basis. Acquisition and disposal of fixed
assets is not prescribed in para 22 and 24 of the standard.

AS 6 DEPRECIATION ACCOUNTING
As per para 21 of AS 6 on Depreciation Accounting, when a change in the method of
depreciation is made, depreciation should be recalculated in accordance with the new
method from the date of the asset coming into use. The deficiency or surplus arising from
retrospective recomputation of depreciation in accordance with the new method should
be adjusted in the accounts in the year in which the method of depreciation is changed.
As per paragraph 20 of AS 6 Depreciation Accounting, the depreciable amount of a
depreciable asset should be allocated on a systematic basis to each accounting period
during the useful life of the asset.
AS 6 on Depreciation Accounting, is not applicable in respect of following assets:
(1) Forest, plantations and similar regenerative natural resources.
(2) Goodwill.
(3) Livestock.
(4) Wasting assets or land (if it has unlimited useful life for the enterprise).
As per para 21 of AS 6 Depreciation Accounting, when a change in the method of
depreciation is made, depreciation should be re-calculated in accordance with the new
method from the date of the asset put to use. The deficiency or surplus arising from
retrospective re-computation of depreciation in accordance with the new method should
be adjusted in the accounts in the year in which the method of depreciation is changed.
As per para 21 of AS 6 Depreciation Accounting, an enterprise can change one method
of charging depreciation to another method only if the adoption of the new method is
required by statute or for compliance with an accounting standard or if it is considered
that the change would result in a more appropriate preparation or presentation of the
financial statements of the enterprise.
When such a change in the method of depreciation is made, depreciation should be
recalculated in accordance with the new method from the date of the asset coming into
use. The deficiency or surplus arising from retrospective recomputation of depreciation
in accordance with the new method should be adjusted in the accounts through
statement of profit and loss in the year in which the method of depreciation is changed. In
case the change in the method results in deficiency in depreciation in respect of past
years, the deficiency should be charged in the statement of profit and loss.
According to para no. 3.1 of AS 6, Depreciation Accounting, depreciation is a measure
of wearing out, consumption or other loss of value of a depreciable asset arising from
use, effluxion of time or obsolescence through technology and market changes.
Accordingly, depreciation may arise even when asset has not been used in the current
year but was ready for use in that year.
According to para 12 of AS 6 Deprecation Accounting, there are several methods of
allocating depreciation over the useful life of the assets. The management of a business
selects the most appropriate method(s) based on various important factors e.g., (i) type
of asset, (ii) the nature of the use of such asset and (iii) circumstances prevailing in the
business. A combination of more than one method is sometimes used. A company may
adopt different methods of depreciation for different types of assets, provided the same
methods are followed consistently.
The statute governing an enterprise may provide the basis for computation of the
depreciation. For example, the Companies Act lays down the rates of depreciation in
respect of various assets. Where the managements estimate of the useful life of an

asset of the enterprise is shorter than that envisaged under the provisions of the relevant
statute, the depreciation provision is appropriately computed by applying a higher rate
the Company can charge higher rates of depreciation based
on its estimate of the useful life of machinery, provided that such estimate is not less
than the rate prescribed by the Companies Act, for that class of assets. However, such
higher depreciation rates and/or the reduced useful lives of the assets should be
disclosed by way of notes to the accounts in the Financial Statements.
As per AS 6 Depreciation Accounting, depreciable assets are the assets which
(i) are expected to be used during more than one accounting period; and
(ii) have a limited useful life; and
(iii) are held by an enterprise for use in the production or supply of goods and services, for rental to others, or for
administrative purposes and not for the purpose of sale in the ordinary course of business.
AS 6 does not apply to land as land is considered to have unlimited useful life

AS 7 CONSTRUCTION CONTRACTS
As per paragraphs 31 and 35 of AS 7 on Construction Contracts, an expected loss on the
construction contract should be recognized as an expense immediately irrespective of (i)
whether or not the work has commenced on the contract; or (ii) the stage of completion of
the contract; or (iii) the amount of profits expected to arise in other contracts.
As per para 15 of AS 7 Construction Contracts (revised 2002), contract cost should
comprise:
(a) costs that relate directly to the specific contract;
(b) costs that are attributable to contract activity in general and can be allocated to the
contract; and
(c) such other costs as are specifically chargeable to the customer under the terms of
the contract.
According to para 21 of AS 7 Construction Contracts, when the outcome of a
construction contract can be estimated reliably, contract revenue and contract costs
associated with the construction contract should be recognised as revenue and expenses
respectively by reference to stage of completion of the contract activity at the reporting
date.
As per para 35 of AS 7 Construction Contracts, when it is probable that total contract
costs will exceed total contract revenue, the expected loss should be recognised as an
expense immediately

AS 9 REVENUE RECOGNITION
As per AS 9 Revenue Recognition, where the ability to assess the ultimate collection
with reasonable certainty is lacking at the time of raising any claim, the revenue
recognition is postponed to the extent of uncertainty inverted. In such cases, the
revenue is recognized only when it is reasonably certain that the ultimate collection will
be made.
As per AS 9 on Revenue Recognition, interest of `10 lakhs received in the year
2007-2008 should be recognized on the time basis, whereas royalty of ` 15 lakhs
received in the same year should be recognized on accrual basis as per the terms of
relevant agreement.
As per para 11 of AS 9 Revenue Recognition, revenue from sales should be recognized
only when requirements as to performance are satisfied provided that at the time of
performance it is not unreasonable to expect ultimate collection. These requirements
can be given as follows:
(i) the seller of goods has transferred to the buyer the property in the goods for a price
or all significant risks and rewards of ownership have been transferred to the buyer
and the seller retains no effective control of the goods transferred to a degree
usually associated with ownership; and
(ii) no significant uncertainty exists regarding the amount of the consideration that will
be derived from the sale of the goods.
Para 8.4 of AS 9 Revenue Recognition states that dividend from investments in shares
are not recognized in the statement of Profit and Loss until the right to receive dividend is
established.
As per AS 9 Revenue Recognition, revenue is the gross inflow of cash, receivable or
other consideration arising in the course of the ordinary activities of an enterprise from
the sale of goods. However, trade discounts and volume rebates given in the ordinary
course of business should be deducted in determining revenue. Revenue from sales
should be recognized at the time of transfer of significant risks and rewards. If the
delivery of the sales is not subject to approval from customers, then the transfer of
significant risks and rewards would take place when the sale is affected and goods are
dispatched.
As per para 12 of AS 9 Revenue Recognition, In a transaction involving the rendering of
services, performance should be measured either under the completed service contract
method or under the proportionate completion method, whichever relates the revenue to
the work accomplished.
income accrues when the related advertisement appears before public.

AS 10 ACCOUNTING FOR FIXED ASSETS

As per para 12.1 of AS 10 on Accounting for Fixed Assets, expenditure that increases the
future benefits from the existing asset beyond its previously assessed standard of
performance is included in the gross book value i.e capitalised, e.g., an increase in capacity.
As per Para 30 of AS 10 Accounting for Fixed Assets, an increase in net book value
arising on revaluation of fixed assets should be credited to owners interests under the head of revaluation reserve,
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 assets is charged directly to
profit and loss statement except that to the extent such a decrease is related to an
increase which was previously recorded as a credit to revaluation reserve and which has
not been subsequently reversed or utilized , it may be charged directly to that account.
As per paragraph 22 of AS 10 Accounting for Fixed Assets , fixed asset acquired in
exchange for shares or other securities in the enterprise should be recorded at its fair
market value, or the fair market value of the securities issued, whichever is more clearly
evident.
As per para 12.1 of AS 10 Accounting for Fixed Assets, expenditure that increases the
future benefits from the existing asset beyond its previously assessed standard of
performance is included in the gross book value, e.g., an increase in capacity.
As per para 11 of AS 10 Accounting for Fixed Assets, fixed asset acquired in exchange
for shares or other securities in the enterprise should be recorded at its fair market value,
or the fair market value of the securities issued, whichever is more clearly evident.
As per para no. 10.1 of AS 10, Accounting for Fixed Assets, clearly states that the gross
book value of the self constructed fixed asset includes the costs of construction that
relate directly to the specific asset and the costs that are attributable to the construction
activity in general can be allocated to the specific asset. If any internal profit is there it
should be eliminated.
Saving of ` 1,50,000 on account of using its on work force is an
unrealized/ internal profit, which should not be capitalized/recorded as per the standard
Internally booked profits should be eliminated in arriving at the cost of Fixed Assets.
As per para 16 of AS 10 Accounting for Fixed Assets goodwill is to be recorded
only when some consideration in money or moneys worth has been paid for it.

AS 13 ACCOUNITING FOR INVESTMENTS

As per para 7 and 8 of AS 13 on Accounting for Investments, there are two categories of
investments, viz., Current Investments and Long Term Investments. According to para
14 of the standard, the carrying amount for current investments is the lower of cost and
fair value whereas para 17 states that Long Term Investments are valued at cost less
permanent diminutions in value of investment. For current investments, para 16 of the
standard states that, any reduction to fair value and any reversals of such reductions are
included in the profit and loss statement.
If the investment is a long term investment than it will be shown at cost. However, if the investment is a current
investment, then it
will be shown at lower of cost or net realizable value
Recognition of reduction in value of investment would depend upon the nature of
investment and nature of decline as per Accounting Standard 13 Accounting for
Investments. As per provisions of the standard, if the investments were acquired for long
term and decline is temporary in nature, reduction in value will not be recognized and
investments would be carried at cost. If the decline is of permanent nature, it will be
charged to profit and loss account. If the investments are current investments, then the
reduction should be recognized and charged to Profit and Loss Account as the current
investments are carried at cost or fair value, whichever is less.
As per para 32 of AS 13 Accounting for Investments, investment classified as long term
investments should be carried in the financial statements at cost. However, provision for diminution shall be made to
recognise a decline, other than temporary, in the value of the
investments, such reduction being determined and made for each investment
individually. As per para 17 of the standard, indicators of the value of an investment are
obtained by reference to its market value, the investees assets and results and the
expected cash flows from the investment.
As per AS 13 Accounting for Investments, for investment in shares - if shares are
purchased with an intention to hold for short-term period then it will be shown at the
realizable value. However, if equity shares are acquired with an intention to hold for long term period then
it will be shown at cost. However,
provision for diminution shall be made to recognize a decline, if other than temporary, in
the value of shares. Gold and silver are generally purchased with an intention to hold it for long term period
untill and unless given otherwise.
As per AS 13 Accounting for Investments, where long-term investments are reclassified
as current investments, transfers are made at the lower of cost and carrying amount at
the date of transfer. And where investments are reclassified from current to long term,
transfers are made at lower of cost and fair value on the date of transfer.

AS14 AMALGAMATION
As per AS 14 on Accounting for Amalgamations, there are two main methods of
accounting for amalgamations:
(i) The Pooling of Interest Method: Under this method, the assets, liabilities and reserves of the transferor company
are recorded by the transferee company at their
existing carrying amounts (after making the necessary adjustments).
If at the time of amalgamation, the transferor and the transferee companies have
conflicting accounting policies, a uniform set of accounting policies is adopted
following the amalgamation. The effects on the financial statements of any changes
in accounting policies are reported in accordance with AS 5 on Net Profit or Loss
for the Period, Prior Period Items and Changes in Accounting Policies.
(ii) The Purchase Method: Under the purchase method, the transferee company
accounts for the amalgamation either by incorporating the assets and liabilities at
their existing carrying amounts or by allocating the consideration to individual
identifiable assets and liabilities of the transferor company on the basis of their fair
values at the date of amalgamation. The identifiable assets and liabilities may
include assets and liabilities not recorded in the financial statements of the
transferor company.
Where assets and liabilities are restated on the basis of their fair values, the
determination of fair values may be influenced by the intentions of the transferee
company.
According to AS 14 Accounting for Amalgamations, Amalgamation in the nature of
merger is an amalgamation which satisfies all the following conditions:
Para 24 of AS 14 Accounting for Amalgamations states that for all amalgamations
(whether for amalgamations accounted for under the pooling of interests method or
amalgamations accounted for under the purchase method), the following disclosures are
considered appropriate in the first financial statements following the amalgamation:
(a) Names and general nature of business of the amalgamating companies;
(b) Effective date of amalgamation for accounting purposes;
(c) The method of accounting used to reflect the amalgamation; and
(d) Particulars of the scheme sanctioned under a statute.
As per AS 14, Accounting for Amalgamations there are two types of amalgamation. In
first type of amalgamation there is a genuine pooling not merely of assets and liabilities
of the amalgamating companies but also of the shareholders interests and of the
businesses of the companies. Such amalgamations are amalgamations which are in the
nature of merger and the accounting treatment of such amalgamations should ensure
that the resultant figures of assets, liabilities, capital and reserves more or less represent
the sum of the relevant figures of the amalgamating companies.
In the second category are those amalgamations which are in effect a mode by which
one company acquires another company and, as a consequence, the share holders of
the company which is acquired normally do not continue to have a proportionate share in
the equity of the combined company, or the business of the company which is acquired is
not intended to be continued. Such amalgamations are amalgamations in the nature of
purchase.
An amalgamation may be either an amalgamation in the nature of merger, or an
amalgamation in the nature of purchase. The selection of method of accounting for
amalgamation (pooling of interests or purchase method) is to be judged after considering
the intentions of the both the companies.

If genuine pooling of all assets, liabilities, shareholders interest is intended; separate

businesses of both the companies are continued and their amalgamation scheme
satisfies all the conditions necessary for merger as specified in AS 14 Accounting for
Amalgamations, pooling of interests method is adopted.
However, if B Ltd. or A Ltd. wants to acquire the other company, then purchase method
needs to be adopted. In that case, the shareholders of the acquired company dont
continue to have proportional share in equity of the combined company and the business
of the acquired company is not intended to be continued. The object of the purchase
method is to account for the amalgamation by applying the same principles as are
applied in the normal purchase of assets.
Thus choice of accounting method depends on the fact whether B Ltd. wants to continue
its business or not.