Assets: Measurement

Aditi Rao 2560 Prachi Ahuja 2553 Priyanka Kori 2536 Rohit Yadav 2546 Shivam Jindal 2567 Varun Kalia 2528

Asset: Measurement
When analysing any firm, we would like to know the types of

assets that it owns, the values of these assets and the degree of uncertainty about these values. Accounting statements do a reasonably good job of categorizing the assets owned by a firm, a partial job of assessing the values of these assets and a poor job of reporting uncertainty about asset values. In this section, we will begin by looking at the accounting principles underlying asset categorization and measurement, and the limitations of financial statements in providing relevant information about assets.

Accounting Principles Underlying Asset Measurement

An asset is any resource that has the potential to

either generate future cash inflows or reduce future cash outflows. While that is a general definition broad enough to cover almost any kind of asset, accountants add a caveat that for a resource to be an asset. A firm has to have acquired it in a prior transaction and be able to quantify future benefits with reasonable precision. The accounting view of asset value is to a great extent grounded in the notion of historical cost, which is the original cost of the asset, adjusted upwards for improvements made to the asset since purchase and downwards for the loss in value associated with the aging of the asset. This historical cost is called the book value. While the generally accepted accounting principles for valuing an asset vary across different kinds of assets, three principles underlie the way assets are valued in accounting statements:-

An Abiding Belief in Book Value as the Best Estimate of Value

Accounting estimates of asset value begin with the book value. Unless a substantial reason is given to do otherwise, accountants view the historical cost as the best estimate of the value of an asset.

A Distrust of Market or Estimated Value

When a current market value exists for an asset that is different from the book value, accounting convention seems to view this market value with suspicion. The market price of an asset is often viewed as both much too volatile and too easily manipulated to be used as an estimate of value for an asset. This suspicion runs even deeper when values are is estimated for an asset based upon expected future cash flows.

A Preference for under estimating value rather than over estimating it

When there is more than one approach to valuing an asset, accounting convention takes the view that the more conservative (lower) estimate of value should be used rather than the less conservative (higher) estimate of value. Thus, when both market and book value are available for an asset, accounting rules often require that you use the lesser of the two numbers.

Measuring Asset Value

The financial statement in which accountants summarize

and report asset value is the balance sheet. To examine how asset value is measured, let us begin with the way assets are categorized in the balance sheet. First, there are the fixed assets, which include the long-term assets of the firm, such as plant, equipment, land and buildings. Next, we have the short-term assets of the firm, including inventory (including raw materials, work in progress and finished goods), receivables (summarizing moneys owed to the firm) and cash; these are categorized as current assets. We then have investments in the assets and securities of other firms, which are generally categorized as financial investments. Finally, we have what is loosely categorized as intangible assets . These include assets, such as patents and trademarks that presumably will create future earnings and cash flows, and also uniquely accounting assets such as goodwill that arise because of acquisitions made by the firm.

Accounting Standard(AS)1 Disclosure of Accounting Policies

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.

 In general, however, accounting policies are not always present regularly

and fully disclosed in all financial statements.

Many enterprises include in the Notes to 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.
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.

All

significant accounting policies adopted in the preparation and presentation of financial statements should be disclosed as part of the financial statements.

 Fundamental Accounting Assumptions

The following have been generally accepted as fundamental accounting assumptions: Going Concern The enterprise is normally viewed as a going concern, that is, as continuing in operation for the foreseeable future. Consistency It is assumed that accounting policies are consistent from one period to another. Accrual Revenues and costs are accrued, that is, recognized 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.

 Considerations in the Selection of Accounting Policies

Prudence

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.
Substance over Form

The accounting treatment and presentation in financial statements of transactions and events should be governed by their substance and not merely by the legal form.
Materiality

Financial statements should disclose all material items, i.e. items the knowledge of which might influence the decisions of the user of the financial statements.

Accounting Standard 2 Valuation of Inventories

Inventories are assets: 1.held for sale in ordinary course of business; 2.in the process of production for such sale (WIP); 3.in the form of materials or supplies to be consumed in the production process or in the rendering of services.
Measurement of Inventories:

Inventories Cost

Net Realizable Value

Inventories should be valued at the lower of cost and net realizable value

Net Realisable Value means the estimated selling price in ordinary course of business, at the time of valuation, less estimated cost of completion and estimated cost necessary to make the sale. The cost of inventories should comprise all costs of purchase costs of conversion other costs incurred in bringing the inventories to their present location and condition.

Determining Cost of Inventories

Specific identification method Specific identification method means directly linking the cost with specific item of inventories. This method has application in following conditions: In case of purchase of item specifically segregated for specific project and is not ordinarily interchangeable. In case of goods of services produced and segregated for specific project. Where Specific Identification method is not applicable The cost of inventories is valued by the following methods; FIFO ( First In First Out) Method Weighted Average Cost Method

Raw material valuation If the finished goods to which raw material is applied, is sold at profit, RAW MATERIAL is valued at cost irrespective of its NRV level being lower to its costs.

Accounting Standard 4
Contingencies and Events Occurring After the Balance Sheet Date
Contingency : A contingency is a condition or situation, the ultimate

outcome of which, gain or loss, will be known or determined only on the occurrence, or non-occurrence, of one or more uncertain future events.
Events occurring after the balance sheet date are those significant

events, that occur between the balance sheet date and the date on which the financial statements are approved by the Board of Directors in case of a company, and, by the corresponding approving authority in the case of any other entity.
Two types of events can be identified

Adjusting Event

Non-Adjusting Events

Adjusting Event: Those, which provide further evidence of conditions that, existed at the balance sheet date. Exceptions: 1] Although, not adjusting event, Proposed dividend are adjusted in books of account. 2] Adjustments are required for the events, which occur after balance sheet date that indicates that fundamental accounting assumption of going concern is no longer, appropriate. Non-Adjusting Events: Those, which are indicative of conditions that arose subsequent to the balance sheet date. No adjustments are required to be made for such events

Accounting Standard 5
Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies
The net profit or loss for the period comprises the following

components, each of which should be disclosed on the face of the statement of profit and loss: 1. Profit or loss from ordinary activities 2. Extraordinary items.
When items of income and expenses within profit or loss from

ordinary activities are of such size, nature that their disclosure is relevant to explain the performance of the enterprise for the period, the nature and amount of such items should be disclosed properly. Examples of such circumstances are: I. disposal of items of fixed assets II. litigation settlements III. disposal of long term investments

 Changes in Accounting Policy A change in an accounting policy

should be made only if the adoption of a different accounting policy is required: o by statute o for compliance with an accounting standard o if it is considered that the change would result in a more appropriate presentation of the financial statements of the enterprise Any change in accounting policy which has a material effect, should be disclosed. Such changes should be disclosed in the statement of profit and loss in a manner that their impact on profit or loss can be perceived.

Accounting Standard 6 DEPRECIATION ACCOUNTING

Depreciation is a measure of the wearing out, consumption or other

loss of value of a depreciable asset arising from use, passage of time or obsolescence through technology and market changes.
Depreciation is allocated so as to charge a fair proportion of the

depreciable amount in each accounting period during the expected useful life of the asset. Depreciation includes amortization of assets whose useful life is predetermined.
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.

Methods of Depreciation There are two method of depreciation: 1] Straight Line Method (SLM) 2] Written Down Value Method (WDVM)
The depreciation method selected should be applied consistently

from period to period.

The change in method of depreciation should be made 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 change would result in a more appropriate

preparation of financial statement

When there is change in method of depreciation, depreciation should be recalculated in accordance with the new method from the date of the assets coming into use. (i.e RETROSPECTIVELY)

ACCOUNTING STANDARD 7
CONSTRUCTION CONTRACT
A Construction contract is a contract specifically negotiated for the

construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use. Contract revenue should comprise: the initial amount of revenue agreed in the contract; and variations in amount to be received (Contract can of two kinds: Fixed Price contract and Cost Plus contract) Contract costs should comprise: costs that relate directly to the specific contract; costs that are attributable to contract activity in general and can be allocated to the contract.
Contract costs that relate to future activity, are recognized as an asset

provided it is probable that they will be recovered. Such asset is

Accounting Standard 9 Revenue Recognition

Revenue is the gross inflow of cash, receivables or other

consideration arising in the course of the ordinary activities of an enterprise from the sale of goods the rendering of services, and interest, royalties and dividends.
Sale of goods

Revenue from sales should be recognized when All significant risks and rewards of ownership have been transferred to the buyer from the seller. Ultimate realisability of receipt is reasonably certain.
Revenue from Interest :

Recognised on time proportion basis Recognised on accrual basis in accordance

Revenue from Royalties :

 Rendering of Services

Revenue from service transactions is usually recognized as the service is performed, either by proportionate completion method or by the completed service contract method.

Proportionate Completion method Completed service contract method

This is a method of accounting, which recognises revenue in the statement of profit and loss proportionately with degree of completion of services under a contract.

This is a method of accounting, which recognises revenue in the statement of profit and loss only when the rendering of services under a contract is completed or substantially completed..

Accounting Standard 10 Accounting for 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. (It is expected to be used for more than one accounting period.)
The cost of fixed asset includes:
a. Purchase price b. Import Duties and other non-refundable taxes c. Direct cost incurred to bring the asset to its working condition

d. Installation cost
e. Professional fees like fees of architects f. Any expenses before the commercial production g. Any expenses before the asset is ready for use not put to use

When fixed asset is acquired in exchange for another asset, the cost of the asset acquired should be recorded I. either at, fair market value, or II. the net book value of the assets given up

Valuation of Assets
Fixed assets
Stocks (inventories)

Debtors debts
-Valuation according to bills

-At first Historical price -At first Historical (purchase or production) price (purchase or -Annual depreciation of production) tangible assets -Then revaluation - Annual revaluation of- only if the market price Investment property, goes down biological active, fixed -Calculation of costs at assets for sales the moment of writing --Revaluation of other off fixed assets is possible under certain conditions

-Revaluation according to probability to receive money back

-Hopeless and unreliable debts must be written off

Revaluation
Revaluation

of fixed assets is a technique to accurately describe the true value of fixed assets owned by a business.

It can be upward revaluation or downward revision

(i.e. impairment) in the book values of assets.

When the fixed assets are revalued, these assets are

shown at revalued price. Revaluation of fixed assets should be restricted to the net recoverable amount of fixed asset.
When a fixed asset is revalued, an entire class of

assets should be revalued.

Reasons for Revaluation

To show the true rate of return on capital employed. To conserve adequate funds in the business for replacement

of fixed assets at the end of their useful lives. Provision for depreciation based on historic cost will show inflated profits and lead to payment of excessive dividends. To show the fair market value of assets which have considerably appreciated since their purchase such as land and buildings. To negotiate fair price for the assets of the company before merger with or acquisition by another company. To get fair market value of assets, in case of sale and leaseback transaction. When the company intends to take a loan from banks/financial institutions by mortgaging its fixed assets. Proper revaluation of assets would enable the company to get a higher amount of loan.

Accounting treatment of revaluation under different situation

When revaluation is made upward

Fixed Assets A/c Dr

When revaluation is made downward

P&L A/c To Fixed Assets Dr

To Revaluation Reserve

When revaluation is made upward subsequent to previous upward revaluation

Fixed Assets A/c Dr

When revaluation is made downward subsequent to previous downward revaluation

P& L A/c To Fixed Assets Dr

To Revaluation Reserve

When revaluation is made upward subsequent to previous downward revaluation

Fixed assets A/c To P&L A/c (Previous downward revaluation) To Revaluation Reserve (Balancing Figure) Dr

When revaluation is made downward subsequent to previous upward revaluation

Revaluation Reserve A/c P&L A/c (Balancing Figure) To Fixed assets Dr Dr

(To the extent of carrying amount of R.R)

Disposal of Fixed Assets

In financial statements, gains or losses arising on disposal are generally

recognised in the profit and loss statement. Bank A/c P & L A/c To Fixed Assets To P & L A/c Dr Dr

(If Loss) (If Profit)

On sale of previously revalued fixed asset

Difference between net disposal proceeds and net book value is credited

to P&L account. In case loss 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 is 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 reserve.

Loss
Bank A/c Dr Revaluation Reserve A/c Dr P& L A/c Dr To Fixed Assets

Profit
Bank A/c Dr To Fixed Assets A/c
To P/L A/c

Revaluation Reserve A/c Dr To General Reserve

Revaluation Reserve A/c Dr To General Reserve

 In the case of fixed assets owned by the enterprise jointly

with others, the extent of the enterprises share in such assets, and the proportion of the original cost, accumulated depreciation and WDV should be stated in the B/S.
Alternatively, the pro rata cost of such jointly owned

assets may be grouped together with similar fully owned assets.

Only purchased goodwill should be recorded in books.

Asset Distortions
Distortions in asset values arise due to

ambiguity about whether:

The firm owns or controls the economic resources in question The economic resources are likely to provide future economic

benefits that can be measured with reasonable certainty The fair value of assets fall below their book values

Overstated Assets
Overstatement of assets arise when managers have incentives

to increase reported earnings. Requires adjustments to the income statement in the form of increased expenses or reduced revenues. Common forms of asset overstatement:
Delays in writing down current assets: If current assets

become impaired, they are to be written down to their fair values. Impairment also affect earnings , therefore, deferring current asset write downs is one way to boost reported profits.

 Underestimated reserves (e.g., allowances for bad debts or loan

losses): If the value of expected customer defaults on receivable & loans is underestimated, assets & earnings will be overstated.
Accelerated recognition of revenues (increasing receivables): This

boosts the reported earnings for the period & the accounts receivable and earnings will then be overstated.
Delayed write-downs of long-term assets: Managers can use their

reporting judgment to delay write-down on the balance sheet & avoid showing impairment charges in the income statement.
Understated depreciation/ amortization on long-term assets:

Optimistic estimates of asset lives, salvage values & amortization schedules for depreciable long-term assets results in overstatement.

Understated Assets
Understatement of assets arise when managers have incentives to

deflate reports earnings. Common forms of asset overstatement:

Overstated write-downs of current assets: To show lower future

expenses, boosting earnings in years of sub-par performance or when a turn-around is needed.

Overestimated reserves (e.g., allowances for bad debts or loan

losses): If the reserves for bad debts or loan losses are overestimated, accounts receivable & loans will be understated.

 Overstated write-downs of long-term assets: Overly pessimistic

estimates of long-term asset impairments reduce current period earnings & boost earnings in future periods.
Overstated depreciation/ amortization on long-term assets:

Amortizing assets more rapidly given the assets economic usefulness, leads to long-term asset understatements

Accounting Standard(AS) 12 Accounting for Government Grants

Accounting Treatment of Government Grants

Approaches capital approach (part of shareholders funds) income approach (income over one or more periods)

Grants related to Depreciable assets: Government grants related to depreciable fixed assets may be treated as deferred income which should be recognised 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.

Accounting Standard 13 Accounting for Investments

Investments are classified as Long Term Investments and Short Term

Investments.
Current Investment is intended to be held for not more than one year and

readily realisable.

Long term Investment is an investment other than a current investment.

Any reduction in value of investment is adjusted through P&L A/c.

Cost of Investments:

The cost of an investment should include acquisition charges such as brokerage, fees and duties.

Investment property:
is investment in land or buildings that is not intended to be occupied

substantially for use by the investing enterprise. An investment property is classified as long-term investment. Disposal of Investments: On disposal, the difference between the carrying amount and the disposal

AS 16 Borrowing Costs
Borrowing Costs include:

a)
b) c) d)

Interest and commitment charges on borrowings Amortization of discounts or premiums relating to borrowings Amortization of ancillary costs incurred in connection with the arrangement of borrowings Finance charges in respect of assets acquired under finance leases or under other similar arrangements

Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset should be capitalised as part of the cost of that asset. Qualifying Asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale.

Examples of qualifying assets includea) b) c) d) Fixed assets Intangible assets during development phase Investment properties Inventories that require a substantial period of time to bring them to a saleable condition

Other borrowing costs should be recognised as an expense in the period in which they are incurred As per AS 16, borrowing cost can be capitalised up to the date of completion of qualifying asset for the purpose of use or sale. If borrowing cost has been incurred after completion of qualifying asset then such amount should be transferred to P&L statement. Capitalisation of borrowing costs should be suspended during extended periods in which active development is interrupted. Borrowing cost during such interruption should be transferred to P&L statement provided such interruption is not temporary in nature.

Accounting Standard 19 Leases

A lease is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time.
Finance Lease : All risks and rewards incident to ownership of an asset is transferred. Operating Lease : Lease other than finance lease; i.e. which does not transfer all the risk and reward incidental to ownership

Minimum Lease Payments = Total Lease rent to be paid over the lease term + Any Guaranteed Residual Value by or on behalf of Lessee + Residual Value Guaranteed by Third Party (For lesser) (-) Contingent Rent (-) Cost for Service and tax to be paid by and reimbursed to lessor

Accounting for Finance Lease In the books of lessee The lessee should recognize the lease as an asset at lower of the following Fair Value of the leased asset Present value of minimum lease payments The discount rate can be: interest rate implicit in the lease If implicit rate is not known, the lessees incremental borrowing rate should be used. The lessor should recognize the transaction as sale with the cash price

Accounting Standard 22 Accounting for Taxes on Income

Objective

Prescribe accounting treatment for taxes on income in accordance with the matching concept:
Matching of taxes with the corresponding revenue and expenses since

taxable income significantly varies with the accounting income

Reasons
Difference between items of Revenue and expense as per profit & Loss

account and those considered for tax purpose

Difference between the amount of the items of Revenue and expenses as

per profit and loss account and those considered for tax purpose

A recent call for corporate tax reform has highlighted the disparity between financial and income tax reporting, a broad-based measure that appears to capture cross-sectional variation in tax aggressiveness. The firms appear to be using cushion to smooth earnings. It is mainly used to smooth earnings by firms with larger implicit claims and equity financing Depreciation method is one of the ways: Normal depreciation Accelerated depreciation: the company claims $200 in depreciation for the first five years, and nothing for the last five years. For the first five years, it has no taxable profit and pays no gains tax. For the last five years, the company has a gain of $200, and pays $40 per year in tax, for a total of $200. The deferral of taxes to a later period is favourable according to the time value of money principle.

Deferred tax is the tax effect of timing differences. Model journal entries to be passed in books of account should be as under:

Current Tax A/c ..Dr To Provision for Current Tax Deferred Tax A/c Dr To Deferred Tax Liability A/c OR Deferred Tax Assets A/c .Dr To Deferred Tax A/c Tax Expense A/cDr Deferred Tax A/cDr To Current Tax A/c To Deferred Tax A/c P/L A/cDr To Current Tax A/c

(In case DTA is created) (In case DTL is created)

Recognition
Tax expense (Accrued tax) = Current tax + Deferred Tax Tax expense should be included in the determination of net profit or

loss for the period

Tax effects of timing difference are included in tax expenses and as

deferred tax assets or as deferred tax liability This has to be done for all the timing differences

Deferred tax assets are recognized subject to the consideration of

prudence i.e. there is reasonable certainty that sufficient future taxable income will be available against which deferred tax asset can be realized Past record of the enterprise should be referred. assets or deferred tax liabilities.

Tax effects of permanent difference do not result in deferred tax

Re-assessment of Unrecognized Deferred Tax Assets Re-assessment of unrecognized Deferred tax assets has to be done at each balance sheet date Recognize previously unrecognized deferred tax asset to the extent it is reasonably certain Measurement Current tax should be measured at the amount expected to be paid to (recovered from) the taxation authorities, using the applicable tax rates and tax laws. Deferred tax assets and liabilities should be measured using the tax rates and tax laws that have been enacted or substantively enacted by the balance sheet date. For different tax rates for levels of income average rates should be used for deferred tax assets and liabilities Deferred tax assets and liabilities should not be discounted to their present value

Accounting Standard 24 Discontinuing operation

A discontinuing operation is a component of an enterprise:

a) that the enterprise, pursuant to a single plan, is disposing of

substantially in its entirety, disposing of piecemeal (selling and settling assets and liabilities one by one), terminating through abandonment b) that represents a separate major line of business or geographical area of operations c) that can be distinguished operationally and for financial reporting purposes.

Examples of activities that may not satisfy criteria (a) above but that can be discontinuing operations in combination with other circumstances include: gradual or evolutionary phasing out of a product line or class of service; discontinuing, even if relatively abruptly, several products within an ongoing line of business.

A component that can be distinguished operationally and for financial reporting purposes -- if all the following conditions are met:
1. the operating assets and liabilities of the component can be directly

attributed to it; 2. its revenue can be directly attributed to it; 3. at least a majority of its operating expenses can be directly attributed to it.

An enterprise should include the following information relating to a discontinuing operation in its financial statements beginning with the financial statements for the period in which the initial disclosure event occurs and up to and including the period in which discontinuance is completed.

INITIAL DISCLOSURE: A description of the discontinuing operations; the business or geographical segment in which it is reported. the date and nature of the initial disclosure event; the date or period in which the discontinuance is expected to be

 the carrying amounts, as of the balance sheet date, of the total assets to

be disposed of and the total liabilities to be settled;

revenue and expenses from such discontinuing operation in current

reporting period;
pre-tax profit/loss from discontinuing operation during the current

financial reporting period, and income tax expense.

net cash flows attributable to the operating, investing, and financing

activities of the discontinuing operation during the current financial reporting period. With respect to a discontinuing operation, the initial disclosure event is the occurrence of one of the following, whichever occurs earlier -- the enterprise has entered into a binding sale agreement for substantially all of the assets of the discontinuing operation; or -- the enterprises board of directors or similar governing body has both (i) approved a formal plan; and (ii) made an announcement of the plan.

Other Disclosures When an enterprise disposes of assets or settles liabilities attributable to a discontinuing operation or enters into binding agreements for the sale of such assets or the settlement of such liabilities, it should include, in its financial statements, the following information when the event occurs. Gain or loss recognized on such disposal. Net selling prices (or range of prices) of those assets for which the enterprise has entered into binding contract, the expected timing of receipt of cash flow and the carrying amount of those assets. If an enterprise abandons or withdraws from a plan that was previously reported as a discontinuing operation, that fact, reason therefor and its effect should be disclosed. Comparative information for prior periods in respect of discontinuing operations should also be deemed as discontinuing operations.

AS-26:- Intangible Assets

This Statement requires an enterprise to recognise an intangible asset if, and only if, certain criteria are met. The Statement also specifies how to measure the carrying amount of intangible assets and requires certain disclosures about intangible assets. It does not apply to goodwill arising on an amalgamation and goodwill arising on consolidation.

The recognition of an item as an intangible asset requires an enterprise to demonstrate that the item meets the: (a) definition of an intangible asset (see paragraphs 618); and (b) recognition criteria set out in this Statement An intangible asset should be recognised if, and only if:

(a) it is probable that the future economic benefits that are attributable to the asset will flow to the enterprise; (b) the cost of the asset can be measured reliably

In case of exchange of assets, the cost of the asset acquired is determined in accordance with the principles laid down in this regard in AS 10 Internally generated goodwill should not be recognised as an asset.

Expenditure on an intangible item should be recognised as an expense when it is incurred unless: (a) it forms part of the cost of an intangible asset that meets the recognition criteria ;or (b) the item is acquired in an amalgamation in the nature of purchase and cannot be recognised as an intangible asset

Amortisation
The depreciable amount of an intangible asset should be allocated on a systematic basis over the best estimate of its useful life. The amortisation method used should reflect the pattern in which the asset's economic benefits are consumed by the enterprise. If that pattern cannot be determined reliably, the straight-line method should be used. The amortisation charge for each period should be recognised as an expense unless another Accounting Standard permits or requires it to be included in the carrying amount of another asset.

The residual value of an intangible asset should be assumed to be zero unless: (a) there is a commitment by a third party to purchase the asset at the end of its useful life; or (b) there is an active market for the asset If there has been a significant change in the expected pattern of economic benefits from the asset, the amortisation method should be changed to reflect the changed pattern. Such changes should be accounted for in accordance with AS 5, Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies.

Accounting Standard 28 Impairment of Assets

Impairment of Assets means weakening in the value of asset. An enterprise should assess at each balance sheet date whether there is any indication that an asset may be impaired. Then, recoverable value of the asset should be estimated.

Indication of Impairment of an asset

External Sources of Information
Market value has declined significantly more than that would be expected

as a result of depreciation. Adverse effect on the enterprise due to change in technology, market conditions, etc. Change in interest rates. The carrying amount of the net assets of the reporting enterprise is more than its market capitalization.
Internal Sources of Information
Physical damage of asset
Significant change in style or extent of use of asset. Internal Reporting indicates that the economic performance of an asset is,

or will be, worse than expected.

RECOVERABLE AMOUNT : (of asset or cash generating unit) HIGHER OF NET SELLING PRICE OF ASSET VALUE IN USE Estimating the value in use of an asset involves the following steps :Estimation of future cash inflows & Outflows. Application of appropriate discount rate. Projection of cash flow should be based on Most recent financial budgets/forecasts. Reasonable and supportable assumptions on the economic conditions. Giving more weights to external evidence. Steady or declining growth rate for the period beyond the period covered by most recent budgets/forecasts.

Future cash flows are estimated in the currency in which they will be generated and then discounted using a discount rate appropriate for the currency. As a starting point the enterprise may take into account the following rates : Weighted average cost of capital. Market borrowing rate. Enterprises incremental Borrowing rates. Impairment loss = Carrying amount (-) Recoverable amount An impairment loss or a revalued asset is recognized as an expense in the statement of Profit or Loss. However, an impairment loss on a revalued asset is recognized directly against any revaluation surplus for the asset to the extent that the impairment loss does not exceed the amount held in the revaluation

Accounting Standard 29 PROVISIONS, CONTIGENT LIABILITIES AND CONTINGENT ASSETS

A provision is a liability which can be measured only by using a substantial degree of estimation. It ensures that appropriate recognition criteria and measurement bases are applied to provisions and contingent liabilities and that sufficient information is disclosed in the notes to the financial statements to enable users to understand their nature, timing and amount.

There is a present obligation that probably requires an outflow of resources and a reliable estimate can be made of the amount of obligation.

There is a possible obligation or a present obligation That may, but Probably will not, require an out flow of resources.

There is a possible obligation or a present obligation where the likelihood of an out flow of resources is remote.

A provision is recognised No provision is Disclosures are required recognised for the provision Disclosures are required for the contingent liability

No provision is Recognised. No disclosure is Required

Recognition
Provisions A provision should be recognised when: (a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision should be recognised Reliable Estimate of the Obligation Provisions involve a greater degree of estimation than most other items. Except in extremely rare cases, an enterprise will be able to determine a range of possible outcomes and can therefore make an estimate of the obligation that is reliable to use in recognising a provision.

Contingent liability
An enterprise should not recognise a contingent liability A contingent liability is disclosed, unless the possibility of an outflow of resources embodying economic benefits is remote. The part of the obligation that is expected to be met by other parties is treated as a contingent liability. If it becomes probable that an outflow of future economic benefits will be required for an item previously dealt with as a contingent liability, a provision is recognised

Contingent Assets
An enterprise should not recognise a contingent asset since this may result in the recognition of income that may never be realised. A contingent asset is not disclosed in the financial statements. It is usually disclosed in the report of the approving authority where an inflow of economic benefits is probable.

Measurement
The amount recognised as a provision should be the best estimate of the expenditure required to settle the present obligation at the balance sheet date. The amount of a provision should not be discounted to its present value. The estimates of outcome and financial effect are determined by the judgment of the management of the enterprise, supplemented by experience of similar transactions The provision is measured before tax

Risks and Uncertainties

The risks and uncertainties that inevitably surround many events and circumstances should be taken into account in reaching the best estimate of a provision. Caution is needed in making judgments under conditions of uncertainty, so that income or assets are not overstated and expenses or liabilities are not understated. However, uncertainty does not justify the creation of excessive provisions or a deliberate overstatement of liabilities.

Future events
Future events that may affect the amount required to settle an obligation should be reflected in the amount of a provision where there is sufficient objective evidence that they will occur. Gains from the expected disposal of assets should not be taken into account in measuring a provision. Where some or all of the expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement should be recognised when, and only when, it is virtually certain that reimbursement will be received if the enterprise settles the obligation.

Reimbursement
The reimbursement should be treated as a separate asset. The amount recognised for the reimbursement should not exceed the amount of the provision In the statement of profit and loss, the expense relating to a provision may be presented net of the amount recognised for a reimbursement. Provisions should be reviewed at each balance sheet date and adjusted to reflect the current best estimate.

Application of the Recognition and Measurement Rules

Provisions

should not be recognised for future operating losses Restructuring: A provision for restructuring costs is recognised only when the recognition criteria for provisions are met

As 30:-Financial Instruments: Recognition and Measurement

The objective of this Standard is to establish principles for recognising and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items. Once we find that a transaction creates a financial asset or financial liability, or dispose of or extinguishes a financial asset or financial liability, there are question pertaining to recognition and de-recognition of the asset or liability.
Recognition of a financial asset or liability The date of recognition should be the date on which the entity becomes entitled to, or obligated to, of cash flows and Derecognition thefinancial asset not the actual date of the inflow.

In order to de-recognise of financial assets from the books of the seller mere legal sale of the asset is not enough, it should be backed by either transfer of risks & rewards, or surrender of control by the seller.
The seller can restrain the buyer from re-selling it, sale would be disregarded and the asset would not get de- recognized.

Drivers of a Firms Profitability & Growth

Framework for Financial Ratio Analysis

Company Evaluation for the year ended 31st March, 2011

GUJARAT STATE FERTILIZERS LTD

RATIOS Return On Net Worth(%) Return On Operating Assets(%) Return on Assets Excluding Revaluations Return on Assets Including Revaluations VALUES (March11) 26 26.2 355 355

Fixed Assets Turnover Ratio Asset Turnover Ratio

Dividend Payout Ratio Net Profit Return on Equity(%)

1.3 1.3
8.7 29.69 20.39

Cost of Equity(%) WACC (NO DEBT IN THE CAPITAL STRUCTURE)

20.39

Leasehold land, other than the perpetual lease is amortized over the life of the lease Intangible assets are amortized over their existing economic life but not more than ten years on a straight line basis

Analysis

Inventories Valued at FIFO basis Finished stock valued at lower of weighted average cost or net realizable value Investments Long term investments are carried out at cost Current investments are carried out at lower of cost or quoted price Impairments The company makes assessment and accounts for impairments in assets

No change in the accounting policy of the firm has been observed. Thus, no impact different from past years would

Analysis
Operating ROA is almost equal to WACC thus

ruling out Over valuation ROE is not much different from Cost of Equity

National fertilizers Ltd.

RATIOS Return On Net Worth(%) Return On Operating Assets(%) Return on Assets Excluding Revaluations Return on Assets Including Revaluations VALUES 8.3 8.3 34 34

Fixed Assets Turnover Ratio Asset Turnover Ratio

Dividend Payout Ratio Net Profit Return On Equity(%)

2 2
35 8.28

Cost Of Equity WACC (NO DEBT IN THE CAPITAL STRUCTURE)

8 8

Analysis
No change in the accounting policies

Since Operating ROA is not less than WACC,

assets are not over valued, more or less equal. ROE not very different from Cost of Equity

Chambal Fertilizers Ltd

RATIOS Return On Net Worth(%) Return On Operating Assets(%) Return on Assets Excluding Revaluations Return on Assets Including Revaluations VALUES 20.03 18.86 39 39

Fixed Assets Turnover Ratio Asset Turnover Ratio

Dividend Payout Ratio Net Profit Return On Equity(%)

0.94 0.94 28.41

52.01

Cost Of Equity WACC

24.14 17.916

Analysis
Huge difference between Cost of equity and

ROE. ROA and WACC not very different. No changes in accounting policies.

Coromandel
RATIOS Return On Net Worth(%) Return On Operating Assets(%) Return on Assets Excluding Revaluations Return on Assets Including Revaluations VALUES 36.47 20.09 67.56 67.56

Fixed Assets Turnover Ratio Asset Turnover Ratio

Dividend Payout Ratio Net Profit Return On Equity(%)

5.66 5.66 33.08

31.3

Cost Of Equity WACC (NO DEBT IN THE CAPITAL STRUCTURE)

2.41 2.41

Analysis
Huge difference between ROE and cost of equity

can be attributed to international standards Return on operating assets and WACC also very different from each other No change in accounting policies

Rajesh Exports
RATIOS Return On Net Worth(%) Adjusted RONW(%) Return on Assets Excluding Revaluations Return on Assets Including Revaluations Fixed Assets Turnover Ratio VALUES 15.53% 0.53% 54.08% 54.08% 232.18% 232.18% 8.30%

Asset Turnover Ratio

Dividend Payout Ratio Net Profit Return On Equity(%)

Cost Of Equity WACC

Su-raj Diamonds
RATIOS Return On Net Worth(%) Adjusted RONW(%) Return on Assets Excluding Revaluations Return on Assets Including Revaluations Fixed Assets Turnover Ratio Asset Turnover Ratio Dividend Payout Ratio Net Profit Return On Equity(%) Cost Of Equity WACC Values 11.66% 11.65% 143.23% 143.23% 40.38% 40.38% 8.72%

Goenka Diamonds and Jewels

RATIOS Return On Net Worth(%) Adjusted RONW(%) Return on Assets Excluding Revaluations VALUES 16.19% 17.07% 83.69% 83.69% 42.93% 42.93% 8.57%

Return on Assets Including Revaluations

Fixed Assets Turnover Ratio Asset Turnover Ratio Dividend Payout Ratio Net Profit Return On Equity(%) Cost Of Equity WACC

Gitanjali gems
RATIOS Return On Net Worth(%) Adjusted RONW(%) Return on Assets Excluding Revaluations VALUES 9.95% 9.95% 26.59% 26.59% 60.32% 60.32% 13.17%

Return on Assets Including Revaluations

Fixed Assets Turnover Ratio Asset Turnover Ratio Dividend Payout Ratio Net Profit Return On Equity(%) Cost Of Equity WACC

Sagar Cements Ltd.

RATIOS Return on Net Worth VALUES 7.94%

adjusted RONW
ROA excluding revaluations ROA including revaluations Asset turnover ratio Fixed Asset turnover ratio Dividend payout ratio net profit Return on Equity Cost of Equity WACC

4.68%
146.15 146.15 1.04 1.04 22.52 116.06% 1.17% 1.17%

JK Lakshmi Cement Ltd.

RATIOS Return on Net Worth adjusted RONW VALUES 5.73% 3.63%

ROA excluding revaluations

ROA including revaluations Asset turnover ratio Fixed Asset turnover ratio

84.29
85.51 0.57 0.57

Dividend payout ratio net profit

Return on Equity Cost of Equity WACC

30.05
96.63% 1.88% 1.88%

Shiva Cement Ltd.

RATIOS Return on Net Worth adjusted RONW VALUES 3.60% 3.07%

ROA excluding revaluations

ROA including revaluations Asset turnover ratio Fixed Asset turnover ratio Dividend payout ratio net profit Return on Equity Cost of Equity WACC

4.23
4.23 0.40 0.40 ---16.2% -------

Prism Cement Ltd.

RATIOS Return on Net Worth VALUES 21.46%

adjusted RONW
ROA excluding revaluations ROA including revaluations Asset turnover ratio Fixed Asset turnover ratio Dividend payout ratio net profit Return on Equity Cost of Equity WACC

23.17%
23.23 23.23 1.61 1.61 49.12 19.03% 1.96% 1.96%

Packaging Sector
Ratio Balmer Lawrie 20.07% Bilcare Time Uflex Technoplas t 16.62% 17.01% 31.91 31.91 1.34 1.34 12.26 38.48% 36.63% 251.24 251.25 1.27 1.27 9.01

Return on Net Worth (RONW)

14.16% 14.34% 442.38 442.38 0.93 0.93 ---

ROA adjusted RONW 20.23% ROA excluding revaluations ROA including revaluations Asset turnover ratio Fixed asset turnover ratio Dividend payout ratio net profit 392.52 392.52 3.30 3.30 41.21

Packaging Sector
Ratio Jindal Polyfilm s 36.58% Ess Dee Everest Kanto 9.30% 9.26% 70.74 70.74 1.18 0.99 26.58 Polyplex Corp. 65.74% 43.55% 502 502 1.36 1.36 3.52

Return on Net Worth (RONW)

17.12% 16.55% 215.03 217.83 1.47 1.47 6.33

ROA adjusted RONW 36.05% ROA excluding revaluations ROA including revaluations Asset turnover ratio Fixed asset turnover ratio Dividend payout ratio net profit 353.20 353.20 1.37 1.37 2.24

THANK YOU.