Retirement Benefits (Revised 2005)

Retirement Benefits (Revised 2005)

AS – 15

Contents

Ø      Applicability & Nature

Ø      Meaning of Employees Benefits & Types of Benefits

Ø      Accounting Treatments

Applicability & Nature

            Applicable        :           01-04-2006

            Nature              :           Mandatory for Level – 1

Note: In addition to Level 1, if any enterprise is having more than 50 employees then such enterprise will also be covered under the applications of AS – 15.

Meaning of Employees Benefits

            Employees benefit shall include all the expenses which are incurred by the enterprise for the benefits of employees or for relatives of employees. As per AS – 15, two types of benefits should be covered for accounting purpose.

Types of Benefits

Short Term Benefits

            Short term benefits are the payments which are expected to be settled in the same period of service or within twelve months after balance sheet date. The following types of amount can be included under the heading of short term benefits.

(a)                Wages & Salaries

(b)               Profit Sharing / Bonus

(c)                Leave Encashment

(d)               Non – Monetary Benefits (Car, Housing, Medical etc)

Accounting of Short Term Benefits

(a)                Wages & salaries: Amount of wages & salaries should be written off in P&L a/c equal to amount of service used by enterprise during the period. Difference between actual payment & value of service should be considered as prepaid expenses or outstanding expenses.

(b)               Profit sharing / Bonus: If any bonus or profit is payable by the enterprise to its worker as per the agreement then payable amount should be provided in P&L a/c of same year.

If any payment is based on the condition of continuation of service during the particular period then provision for payment should not be required for those workers or employees that are not in continuation in service.

(c)                Leave Encashment: If any employee is allowed leaves with pay then accumulation and non accumulation will be considered.

Accumulation Leaves: It may be possible that employee has not used the entire benefit which is provided by the company during the period. In such case the unused benefit should be carried forward and to be added to the allowed benefit of next year. Value of unused benefit should be provided by creating a provision & amount of used benefit should be written off in P&L a/c.

Non Accumulation Leaves: If any leave encashment is in the nature of non accumulation then value of unused benefit should not be carried forward to the next year & no provision is required for such unused benefit. Amount of used benefit should be considered as an expense of the same accounting period.

(d)               Non – Monetary Benefits: Value of non monetary benefits which are provided by company to its employees or worker should be written off in the same accounting period of the benefit provided.

Long Term Benefits

Multi Employer Plans

            Multi Employer plans are formed by two or more employers for the benefits of their employees. If any contribution is made by any employer during the period under the specified plans then amount of contribution should be written off in the same period.

Insurance Plans

            If any employer has invested in the insurance plans for the retirement of employees then amount of premium paid should be considered as a normal expense and to be written off in the same period.

State Plans

            If any plan is to be created as per Govt guidelines whether State Govt or Local Govt then amount of contribution should be written off in the same accounting period.

orm�)� tl� ��-left:36.0pt;text-indent:-36.0pt;mso-list:l4 level1 lfo5'>(1)               In the calculation of cost, refundable part of taxes & duties should not be included.

(2)               If any scrap value is realized from the sale of simple unit then cost of trial run should be capitalized only after adjustment of scrap value.

(3)               If any Govt grant is to be recognized as per AS – 12 in relation to fixed assets, then amount of grant should be adjusted in the calculation of original cost.

(b)               Consolidated Price: If any enterprise has purchased group of assets by payment in single price then such consolidated price should be divided between the assets as per valuer certificate. If any fee is paid to such valuer for such dividation of price then capitalization of fees should be made as per valuer certificate.

(c)                Joint Ownership: If any fixed asset is purchased by two or more enterprise in joint ownership then cost of fixed assets should be recorded in the books of parties with respect to amount of ownership. Depreciation should be calculated as per the recorded value.

(d)               Self Construction: If any asset is self constructed by the enterprise then all the exp should be included in the cost of fixed asset which are directly related to construction of fixed asset.

(e)                Purchase by exchange of assets: Same provision as AS – 13,

(f)                 Purchase by share: If any payment for purchase of fixed asset is made by issue of shares then recognition of fixed asset should be carried at its fair value. Market price of share issue should be ignored.

Difference between fair value of fixed asset & face value of shares should be considered as discount or premium on issue of shares.

Disposal of Fixed Asset

(i)                  If any depreciable asset is disposed off then profit/loss on disposal should be transfer to P/L account.

(ii)                Profit/Loss on sale of non-depreciable assets should be transfer to capital reserve.

(iii)               If any revaluation reserve is outstanding in the balance sheet & asset is disposed off then at the time of disposal amount of revaluation reserve should be also reversed.

Disclosure

(i)                  Gross block value & net block value should be disclosed separately in balance sheet.

(ii)                If any profit/loss has been arisen during the period on the disposal of fixed asset then amount should be disclosed separately.

-font-f!�yS� ��-bidi-font-family:Sailor'>5.            If any profit has been generated by the discontinuing operation during the period then such profit should also be disclosed.

6.            Cash Flow statement of discontinuing operation should be prepared additionally to normal cash flow statement of the remaining business.

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Purchase by Shares

                                                            Cost of Intangible Assets

                                                Fair value               or               Fair Value of

                                                I.A. taken                                 share issued

                                                            Whichever is clearly evident

Notes:

(1)               If shares of the company are listed on stock exchange then market price can be used directly for the shares issued.

(2)               If shares of the company are not listed then fair value of intangible asset acquired can be used.

(3)               If fair value of intangible taken & share issued both are available then fair value of taken assets should be preferred.

Exchange by Assets

            If any intangible asset is exchanged by asset then fair value of given asset should be recognized as cost of intangible. In the absence of such fair value, book value should be recorded of given asset.

Note: Provisions of AS – 26 are not similar under specified heading as in AS – 13 & AS – 10. As per AS – 26, fair value of given asset or book value of given asset can be used for recognition and no settlement in cash will be considered.

            As per AS – 10 & 13, settlement in cash can take place at the time of exchange of asset because fair value of asset taken as well as fair value of asset given are considerable.

Taken in Amalgamation

            If any intangible is taken over under the scheme of amalgamation then the following points may be applied.

(i)                                                         First Recognition

 

    Fair Value available                                                              Fair value not available

Should be recognized separately                                               Should not be recognized separately

By fair value (subject to conditions                                            and should be included in Goodwill

specified below)

(ii)                Fair value of intangible asset can be recognized by active market or latest transaction price.

(iii)               If active market is available then full amount of intangible asset should be recognized.

(iv)              If latest transaction price is used for recognition then cost can be recognized to the extent by which capital reserve is not created. (The above provision can be applicable only for amalgamation in the nature of purchase)

Purchased by Govt Grant

            If any intangible asset is purchased by Govt grant then cost of intangible asset can be recorded by net approach or gross approach specified in AS – 12.

Balance Sheet (Disclosure) [Net Approach]

                                                                                                Intangible Asset            xxxx

                                                                                                Less: Grant                  xxxx     xxxx    

Balance Sheet (Disclosure) [Gross Approach]

Deferred Grant                         xxxx                                         Intangible Asset            xxxx

                                                                                                (Full amount)

Internally Generated Intangible Asset

            If any intangible asset is generated internally by the enterprise, then it is generated under two different phases.

1)      Research Phase: Research phase is the planed investigation carried by enterprise to create new application of business activities. Research activities may include invention of new products, production techniques, technical system or any other finding for cost saving or future benefits to enterprise. (All the expenses during research phase should be written off in P&L a/c immediately because it is not certain during research phase that any result will be obtained or not from research.)

2)      Development Phase: Development phase is the verified application of research activities and all the expenses during the development phase should be capitalized in the cost of intangible asset. Before capitalizing the expenditure during development phase the following conditions should be satisfied.

• Technical should be available with the enterprise.
• The Enterprise is having intention to complete the intangible assets for use or sell.
• After completion of intangible the enterprise should be able to use or sell intangible.
• Future economic benefit should be measured by suitable assumption.
• Financial Resources should be proper to complete the asset.
• There will be proper system to record the cost during development phase.

lB's� ��nore'>(3)               Journal Entries

(i)         Cash/Bank/Grant Receivable                Dr

                                    To Govt Grant

(ii)        Grant A/c                                             Dr

                                    To Deferred Grant A/c (It is transferred to reserve &surplus)

(iii)       Deferred Grant A/c                               Dr

                                    To P&L A/c

Refund of Grant:

                        Deferred Grant A/c (O/s Bal)                Dr

                        P&L A/c (which is already used)           Dr

                                                To Cash/Bank/Grant Receivable

Note: At the time of refund of grant total benefit should be reversed in the current period in total irrespective the effect of these transaction on current year profits.

Disclosure:

(i)      Accounting policy should be disclosed separately in relation to classification of nature of grant.

(ii)    If any refund has been made during the period then amount of refund should be also disclosed.

Difference between AS/IAS/US GAAP:

            If any grant is related to promoter’s contributions then accounting of such grant should be made as capital profits as per as-12. The same grant should be recognized as revenue profits as per other statements. Revenue profits should be recognized on deferred basis as per management intention.

Valuation of Inventory

Valuation of Inventory

AS – 2

Contents

Ø      Applicability & Nature

Ø      Meaning of Inventory

Ø      Valuation of Inventory

Ø      Steps in Valuation Procedure.

Ø      Valuation Method

Ø      Important Points

Ø      Disclosures

Applicability & Nature

            Applicable        :           01-04-1999 (Revised)

            Nature              :           Mandatory for all

Meaning of Inventory

 

Held for Sale                Held in production process                   Held for consumption

Finished Goods                  Work in Process                            Raw Material & Supplies

Meaning of Supplies

            As per AS – 2, stock of loosed tools or spare parts should also be covered under the accounting principle of AS. The main condition for the application of AS – 2 of these stocks is only the common use in the production departments. As per ASI – 2 if any spare part is related to a particular fixed assets rather than common use, amount of such spare parts should not be covered under the accounting principle of AS – 2 but principle of AS – 10 should be applied.

Valuation of Inventory

            Cash or NRV whichever is lower.

Note: As per AS if any stock is to be valued at NRV then loss on valuation should be written off in P&L A/c of the same year.

Steps in Valuation Procedure

Step1: Cost Calculation

Step2: NRV Calculation

Step3: Comparison

Cost Calculation

Finished Goods: Purchase Price of Raw Material + Direct Wages + Factory Overheads = Total Cost

WIP: Purchase Price of Raw Material + Direct Wages + Factory Overheads = Total Cost

Raw Material: Purchase Price of Raw Material = Total Cost

Meaning / Calculation of Purchase Price of Raw Material

            In the calculation of purchase price of material all the expenses should be included which are directly incurred for the purchase of material. For Example: Purchase price, Taxes & duty, Freight inward, Material handlings charges or any other expense related to purchase. In the calculation of purchase price amount of trade discount & refundable taxes or duties should not be included.

Meaning of Direct Wages

            Amount of direct wages can be used directly from payroll sheets which are prepared in factory premises at the time of payment of wages.

Meaning of Factory Overheads

Variable Overhead

            Variable overhead are always per unit fixed & amount of these overhead will be changed by change in production units. Amount of variable expenses should be calculated on the basis of actual production because these expenses are always incurred according to the size of production.

Fixed Overhead

            Situation 1:  Actual Production is lower than Normal Production

                                    If any enterprise has produced lower no of units than normal capacity, per unit fixed overhead should be calculated on the basis of normal capacity & such rate should be applied on actual production. If any amount remain unallocated then such amount should be transferred to P&L a/c. but can’t be included as a part of production cost.

Example:          Fixed Overhead                        Rs. 2,00,000

                        Normal Production                   10,000 units

                        Actual Production                     8,000 units

                        Calculate production cost

Sol:      2,00,000 / 10,000 = Rs 20 per unit

            Production cost = 8,000 x Rs 20/- = Rs 1,60,000

            Situation 2:  Actual Production is higher than Normal Production

                                    If actual production is higher than normal production, the total amount of actual expenses should be included as a part of production cost and rate per unit should not be calculated by normal production.

Important note: In the calculation of cost of inventories only factory cost is considered and amount of administration overhead or selling overhead should not be considered in the calculation of cost.

NRV Calculation

            Net Realizable Value = Market Price – Estimated cost to complete sale

[Comment: In the calculation of NRV the entire cost which is expected to complete the sale should be deducted because market value is not comparable directly to factory cost. Amount of administrative expense & selling overhead which are expected to be incurred should be deducted out of market value to convert such price equal to factory cost.]

Comparison

(1)        Finished Goods

Example           Material                                    2,00,000

                        Wages                                      1,00,000

                        Factory Overhead (Variable)    1,00,000

                                                                        4,00,000

                        Factory Overhead (Fixed)        4,00,000

                        Normal Capacity                      1,00,000 units

                        Actual Capacity                        80,000 units

            Out of 80,000 units, the enterprise has sold the 70,000 units. Calculate value of 10,000 units which are held in the stocks assuming market price Rs 50 per unit & estimated cost to complete the sale of Rs 25,000.

Sol:      Calculation of Fixed cost

            Material                                   2,00,000

            Wages                                      1,00,000

            Factory Overhead (V)              1,00,000

            Factory Overhead (F)               3,20,000 (400000 / 100000 x 80000)

                                                            7,20,000

            Cost of 10000 units = 720000 / 80000 x 10000 = Rs 90,000

            NRV    =          500000 – 25000 = Rs 4,75,000

Valuation          = Cost or NRV whichever is lower

                        = Rs 90,000

(2)        Raw Material

Example:          Finished goods are valued at cost.

                        Raw Material (10000)              Rs 10/- Cost

                        Raw Material                            Rs 8/- S.P.

Valuation of RM           ?

Comments: In the given case valuation of raw material should be carried at cost only even if market price of such material is lower than cost. Raw material are purchased only for consumption purpose and after consumption such material will be converted into finished goods which are valued at cost. It means that there is no loss on finished goods due to which loss can’t be recorded on direct material.

Example:          Finished goods are valued at NRV

                        Raw Material (cost)                  Rs 10/-

            (i)         Market Price                            Rs 12/-

            (ii)        Market Price                            Rs 8/-

Comments: Finished goods are valued at NRV due to which valuation of raw material should be made as per valuation principle. In the first case valuation should be carried at Rs 10 per unit because cost is lower. In second case valuation should be made at market price because cost is higher.

(3)        Working in Process

                        Valuation of WIP should always be made at cost because market price estimation may not be accurate for these goods.

Important Points

(1)               If any enterprise is having units of contract sale then independent market price should be ignored for the valuation of contract sale of unit. Valuation of these units should be considered only by contract price.

(2)               As per AS – 2 interest can’t be capitalized in the cost of inventory because such amount is not related to production but interest can be capitalized in the cost of inventory as per the provision of AS – 16.

Valuation Method

FIFO

Weighted Average

Retail Value (For Mall)

Example:          Retail Value

Particulars                    RV                   Cost

Op. Stock                    10000                2000

Purchase                      50000              25000

                                    60000              27000

Retail Value Sold = Rs 50000

Stock value      =          25000 / 50000 x 10000 = Rs 5000

Avg base          =          27000 / 60000 x 10000 = Rs 4500

Disclosures

(1)               Accounting policy should be disclosed. (FIFO / Weighted Avg / Retail Value)

(2)               If any stock has been valued at NRV then description of such stock should also given in the note to accounts.

n styl9us-� ��:4'>                                               Should not be recognized separately

By fair value (subject to conditions                                            and should be included in Goodwill

specified below)

(ii)                Fair value of intangible asset can be recognized by active market or latest transaction price.

(iii)               If active market is available then full amount of intangible asset should be recognized.

(iv)              If latest transaction price is used for recognition then cost can be recognized to the extent by which capital reserve is not created. (The above provision can be applicable only for amalgamation in the nature of purchase)

Purchased by Govt Grant

            If any intangible asset is purchased by Govt grant then cost of intangible asset can be recorded by net approach or gross approach specified in AS – 12.

Balance Sheet (Disclosure) [Net Approach]

                                                                                                Intangible Asset            xxxx

                                                                                                Less: Grant                  xxxx     xxxx    

Balance Sheet (Disclosure) [Gross Approach]

Deferred Grant                         xxxx                                         Intangible Asset            xxxx

                                                                                                (Full amount)

Internally Generated Intangible Asset

            If any intangible asset is generated internally by the enterprise, then it is generated under two different phases.

1)      Research Phase: Research phase is the planed investigation carried by enterprise to create new application of business activities. Research activities may include invention of new products, production techniques, technical system or any other finding for cost saving or future benefits to enterprise. (All the expenses during research phase should be written off in P&L a/c immediately because it is not certain during research phase that any result will be obtained or not from research.)

2)      Development Phase: Development phase is the verified application of research activities and all the expenses during the development phase should be capitalized in the cost of intangible asset. Before capitalizing the expenditure during development phase the following conditions should be satisfied.

• Technical should be available with the enterprise.



• The Enterprise is having intention to complete the intangible assets for use or sell.



• After completion of intangible the enterprise should be able to use or sell intangible.



• Future economic benefit should be measured by suitable assumption.



• Financial Resources should be proper to complete the asset.



• There will be proper system to record the cost during development phase.

lB's� ��nore'>(3)               Journal Entries

(i)         Cash/Bank/Grant Receivable                Dr

                                    To Govt Grant

(ii)        Grant A/c                                             Dr

                                    To Deferred Grant A/c (It is transferred to reserve &surplus)

(iii)       Deferred Grant A/c                               Dr

                                    To P&L A/c

Refund of Grant:

                        Deferred Grant A/c (O/s Bal)                Dr

                        P&L A/c (which is already used)           Dr

                                                To Cash/Bank/Grant Receivable

Note: At the time of refund of grant total benefit should be reversed in the current period in total irrespective the effect of these transaction on current year profits.

Disclosure:

(i)      Accounting policy should be disclosed separately in relation to classification of nature of grant.

(ii)    If any refund has been made during the period then amount of refund should be also disclosed.

Difference between AS/IAS/US GAAP:

            If any grant is related to promoter’s contributions then accounting of such grant should be made as capital profits as per as-12. The same grant should be recognized as revenue profits as per other statements. Revenue profits should be recognized on deferred basis as per management intention.