Accounting Standards: formula sheet

Key formulas

SMC test: all five conditions

SMC = not listed (or in process of listing) AND not a bank, financial institution or insurance company AND turnover (excluding other income) ≤ ₹250 crore in the preceding year AND borrowings (including public deposits) ≤ ₹50 crore at any time in the preceding year AND not a holding or subsidiary of a non-SMC

Fail any one condition and the company is a Non-SMC. The conditions are tested as at the end of the relevant accounting period.

Standards not applicable to SMCs in entirety

AS 17 Segment Reporting

SMCs are exempt from AS 17. Other standards carry only partial relaxations.

AS 20 relief for SMCs

Diluted EPS disclosure is exempt for SMCs

Basic EPS is still required.

AS 28 relief for SMCs

Value in use may be a reasonable estimate instead of the present value technique

If so, the discount rate provisions do not apply to that SMC.

AS 15 relief for SMCs (defined benefit plans)

Full recognition and measurement rules for defined benefit plans are relaxed, but the liability must still be actuarially determined using the Projected Unit Credit Method

The discount rate is the market yield on government bonds at the balance sheet date.

Interim reporting (AS 25)

AS 25 applies only if an entity is required or elects to present an interim financial report

Listed Non-SMCs preparing quarterly results under SEBI rules apply its recognition and measurement requirements.

Ind AS Conceptual Framework dates

Standard-setting: from April 1, 2020. Preparers: accounting periods beginning on or after April 1, 2021

Known dates for the framework under Ind AS.

Fundamental assumptions

Going concern + Consistency + Accrual

Assumed to be followed. Disclosure is needed only if one is not followed.

Disclosure of policies

Significant accounting policies = disclosed in one place, usually a note

Disclose the policies actually adopted, not generic statements.

Change in policy

Change with material effect → disclose the change, the amount of its effect and the reason

If the amount cannot be worked out, say so. A change with no current effect but likely later effect must also be disclosed.

Selection criteria

Prudence, Substance over form, Materiality

Use these to choose and apply policies.

Accrual idea

Revenue and expenses recognised when earned or incurred, not when cash moves

Cash flow timing does not decide the period.

Measurement rule

Closing inventory value = Lower of (Cost, Net realisable value)

Apply to each item or to groups of similar items, not to the grand total of all stock.

Cost of inventory

Cost = Purchase cost + Conversion cost + Other costs to bring to present location and condition

Purchase cost is net of trade discounts and rebates and excludes recoverable taxes such as GST input credit.

Net realisable value

NRV = Estimated selling price − Estimated cost of completion − Estimated selling costs

Use the estimate at the balance sheet date. Cost of completion is zero for finished goods.

Weighted average cost

Average cost per unit = (Cost of opening stock + Cost of purchases) ÷ (Units in opening stock + Units purchased)

Can be computed periodically or after each purchase (moving average). Say which one you use.

FIFO

Closing stock units are valued at the prices of the most recent purchases

Issues are assumed to come from the earliest stock first.

Excluded costs

Exclude: abnormal wastage, storage (unless necessary in production), administrative overheads not related to production, selling costs

These are charged to profit and loss in the period incurred.

Net change in cash

Net increase or decrease in cash = Operating + Investing + Financing cash flows

Must equal closing cash and cash equivalents minus opening cash and cash equivalents. Use this as your final check.

Operating profit before working capital changes

Net profit before tax and extraordinary items + Depreciation + Interest expense + Loss on sale of assets − Interest and dividend income − Profit on sale of assets

Add back non-cash and financing items. Remove investing items. Interest and dividend income are shown under investing.

Cash generated from operations

Operating profit before working capital changes − Increase in current assets + Decrease in current assets + Increase in current liabilities − Decrease in current liabilities

Use only operating current assets and liabilities. Exclude cash, cash equivalents and items that are investing or financing in nature.

Net cash from operating activities

Cash generated from operations − Income tax paid

Taxes paid are normally shown here unless they can be specifically identified with investing or financing activities.

Tax paid

Tax paid = Opening tax payable + Tax charged to profit − Closing tax payable

Use this when the tax charged and the balance sheet balances are given.

Fixed asset sale proceeds

Sale proceeds = Book value of asset sold ± Profit or loss on sale

Book value is found from the asset account or by reconstructing it with accumulated depreciation.

Cash and cash equivalents

Closing cash and cash equivalents = Opening balance + Net increase (or − net decrease)

Reconcile this with the balance sheet figures.

Cost of a fixed asset

Cost = Purchase price (net of trade discount) + duties and non-refundable taxes + freight + installation + testing + professional fees

Exclude general overheads, running costs after the asset is ready and recoverable taxes such as input tax credit.

Depreciable amount

Depreciable amount = Cost (or revalued amount) − Estimated residual value

Residual value is the expected disposal value at the end of useful life.

Straight line method

Annual depreciation = (Cost − Residual value) ÷ Useful life in years

The charge is the same each year. For part years, charge pro rata to the months of use.

Written down value method

Depreciation for the year = Opening book value × Rate %

Residual value is not deducted before applying the rate. Add additions at cost and charge pro rata for the period used.

Profit or loss on disposal

Profit or loss = Sale proceeds − Book value at date of sale

Book value is cost less accumulated depreciation up to the sale date, including depreciation for the part year.

Change in depreciation method

Adjustment = Depreciation under new method since acquisition − Depreciation actually charged

A surplus is written back and a shortfall is charged in the year of change, with disclosure.

Sale of goods: recognition test

Revenue is recognised when risks and rewards of ownership pass to the buyer and collection of the price is not significantly uncertain

Delivery of possession usually marks the transfer, but a sale with the seller retaining significant risks is not yet a sale.

Rendering of services

Revenue = contract price × proportion of service performed

Used under the proportionate completion method. Under the completed service contract method, revenue waits until performance is complete.

Interest

Interest income = Principal × Rate × Time

Accrue on a time basis, even if not yet received. Time is the period in the accounting year.

Royalty and dividend

Royalty: accrual as per agreement. Dividend: when the right to receive is established

Declared dividend on shares held is income when the shareholder's right is established, not when cash arrives.

Grant recognition (AS 12)

Recognise only if conditions will be complied with AND receipt is reasonably assured

Both conditions must hold. Then match the grant to the costs it compensates. This covers non-monetary grants too.

Grant related to depreciable asset

Net asset cost = Cost − Grant, or Deferred income released over asset life

When the grant is released in proportion to depreciation over the same life, as in the worked example, both methods give the same net profit effect. Pick the one the question asks for.

Grant equal to the whole cost of the asset

Asset is shown at a nominal value

The cost-deduction method would reduce the asset to nil, so the asset is carried at a nominal value instead.

Basic EPS

Basic EPS = (Net profit after tax − preference dividend) ÷ Weighted average number of equity shares

Preference dividend includes any cumulative dividend for the year, whether or not declared.

Weighted average shares

Σ (Shares outstanding × Months outstanding ÷ 12)

Weight shares from the date consideration is receivable, usually the date of issue. Bonus shares are treated as outstanding from the start.

Diluted EPS

Diluted EPS = (Earnings for basic EPS + post-tax interest saved on convertibles + preference dividend saved) ÷ (Weighted average shares + potential equity shares)

Include potential shares only if they reduce EPS from continuing ordinary operations.

Capitalisation rate (general borrowings)

Rate = Total borrowing cost on general borrowings ÷ Weighted average general borrowings outstanding × 100

Amount capitalised = Rate × Expenditure on the qualifying asset, weighted for time.

Specific borrowing

Capitalised cost = Actual borrowing cost − Income from temporary investment of unspent funds

Applies only to funds borrowed specifically for the qualifying asset.

Finance lease initial value (lessee)

Lower of fair value and present value of minimum lease payments

Discount at the interest rate implicit in the lease if practicable, else the lessee's incremental borrowing rate.

Provision test

Present obligation from past event + outflow probable + reliable estimate → Provision

All three conditions must hold together. If any one fails, move to the contingent liability test.

Contingent liability

Possible obligation, or present obligation not meeting recognition criteria → Disclose (not recognise)

No disclosure if the chance of outflow is remote.

Contingent asset

Possible inflow depending on uncertain event → Do not recognise; disclose only if inflow is probable

If the gain is virtually certain, it is no longer a contingent asset and is recognised as an asset.

Restructuring and future losses

Future operating losses → No provision

There is no present obligation from a past event.

Level I applicability

Level I entities → comply in full with all Accounting Standards

Level II to IV non-company entities have relaxations, such as AS 3 not applicable to them.

AS 11 basic rule

Foreign currency transaction recorded at exchange rate on transaction date

Monetary items are reported at the closing rate at the balance sheet date. Non-monetary items at historical cost use the rate on the transaction date.

Quick revision

• Level I entities must comply in full with all the Accounting Standards.
• AS 3 Cash Flow Statements is not applicable to Level II, III and IV non-company entities.
• AS 2: inventories are valued at the lower of cost and net realisable value.
• AS 3 classifies cash flows into operating, investing and financing activities.
• AS 10 deals with the recognition, measurement and cost of Property, Plant and Equipment. Depreciation is dealt with under Schedule II of the Companies Act, 2013 and AS 10 as applicable.
• AS 9: for sale of goods, revenue is recognised when the significant risks and rewards of ownership pass to the buyer and collection is not significantly uncertain. Services, interest, royalties and dividends have separate rules.
• AS 12 covers government grants; recognise them only when there is reasonable assurance of compliance and receipt.
• AS 16 allows capitalisation of borrowing costs only for qualifying assets.
• AS 20 gives basic and diluted earnings per share.
• AS 29 covers provisions, contingent liabilities and contingent assets; disclose contingent liabilities but do not recognise contingent assets.
• Matching of costs with income is not an objective of the Conceptual Framework.
• Write every answer as provision, application, conclusion.

Common mistakes

• Saying turnover must include other income when testing for SMC Fix: Use turnover excluding other income. Compare it with ₹250 crore.
• Treating a company with ₹50 crore borrowings in one month as an SMC because the year-end figure is low Fix: The test is borrowings (including public deposits) not exceeding ₹50 crore at any time during the preceding accounting year. One breach makes it a Non-SMC.
• Saying the three fundamental assumptions must always be disclosed. Fix: Remember they are assumed. Disclose only when an assumption is not followed.
• Treating consistency and comparability as the same thing. Fix: In AS 1, consistency means following the same policies from period to period. Comparability is a separate idea. The Ind AS Conceptual Framework (para 2.26) calls it the goal that consistency helps achieve.
• Comparing total cost with total NRV of all stock. Fix: Compare item by item, or group by similar items, then add the lower values.
• Including selling expenses or interest in cost. Fix: Include only costs to bring goods to present location and condition. Selling costs go into NRV as a deduction, not into cost.
• Starting the operating section with net profit after tax and forgetting to add back tax. Fix: Rebuild profit before tax: add the tax provision for the year, and add back dividends and transfers to reserves if the profit figure is the closing balance of the Profit and Loss account.
• Showing depreciation as a cash outflow or deducting it again. Fix: Depreciation uses no cash. Add it back to profit in the operating section only.
• Deducting residual value while applying a WDV rate Fix: Apply the WDV rate to the opening book value only. Residual value does not reduce the base.
• Including general overheads or running costs in the cost of the asset Fix: Include only costs needed to bring the asset to its location and working condition. Charge routine repairs and general overheads to profit and loss.

Exam tips

• Write the five SMC conditions from memory and test every fact. Marks go for the check, not just the label.
• Use exact figures: ₹250 crore turnover (excluding other income) and ₹50 crore borrowings at any time.
• In role questions give one clear job per body: ICAI formulates, Government notifies, NFRA recommends and monitors.
• For AS vs Ind AS, give three or four points and end with who follows which set under the notified rules.
• Learn the SMC reliefs by standard: AS 17 exempt, diluted EPS exempt, AS 28 value in use estimate, AS 29 certain disclosures.
• Learn the one-line definition of each fundamental assumption. Examiners often ask for these in short notes.
• When asked about a policy change, always give three things: the change, the reason and the amount of effect.
• Use a simple example, such as stock valuation or depreciation method, to make the answer concrete.