Financial Reporting Major Issues - Series -1

Case 1: It was observed that the accounting policies were disclosed as:

-"Intangible assets are recognized and accounted at cost in accordance with Accounting Standard 26 Intangible Assets"

- "Deferred Tax Asset/Lability has been provided for in the books of accounts as per AS-22"

Ans: 

Merely quoting Accounting Standard does not constitute Full disclosure of relevant policies. 

Accounting policies should be more explicit to help the readers to understand the Financial statements. 

Paragraph 11 of AS 1 describes the meaning of accounting policy as follows:

The accounting policies refer to 

the specific accounting principles and

the methods of applying those principles adopted by the enterprise 

in the preparation and presentation of financial statements

Case 2: The abstract of the accounting policy adopted to determine the cost of inventories read as follows: 

"Work in Process at raw material cost." 

Question: Whether the above accounting policy is tenable in Law?

Ans: 

Work in progress has been valued only at raw material cost, 
which indicates that the conversion cost and other direct costs incurred 
in bringing the inventories to present location and condition 
had not been considered 
which is not in the compliance with the Paragraph 6 of AS 2.

Case 3: It was noted from note on inventories that inventory balance has been determined after adjusting advances paid against them. Further, the amount involved was significant as compared to the size of the company.

Ans: 

Advances paid against any inventory does not give rise to inventory, 

hence, given accounting treatment is not correct. 

Since the amount was significant, 

a proper note should have been given to support such adjustment.

Case 4: From the note given in the financial statements, it was observed that the land (earlier recognized as fixed assets) has now been classified as inventories. However, during the year the purpose for which it is intended to be used has been stayed by Hon'ble Supreme Court. The management is exploring possibility to use the land as per the applicable regulations.

Ans: 

Having regard to the definition of inventories as per paragraph 3.1 of AS 2, 

the land in question cannot be considered as held for sale in the ordinary course of business nor can it be considered to be used in the process of production. 

Accordingly, classification of Land as an item of inventories does not appear to be correct.

Case 5: The abstract of accounting policy relating to employee benefits, reads as follows:

"Leave Encashment and other Benefits are charged to revenue on accrual basis."

Question: Whether the above accounting policy is tenable in Law?

Ans: 

Although it has been stated to have followed accrual basis of accounting, 

whether such liabilities have been determined on actuarial basis or not was not disclosed. 

As per Paragraph 64 of AS 15

In order to measure the present value of the post-employment benefit obligations and the related current service cost, it is necessary to:

(a) apply an actuarial valuation method (refer paragraphs 65-67 of AS 15);

(b) attribute benefit to periods of service (refer paragraphs 68-72 of AS 15); and

(c) make actuarial assumptions (refer paragraphs 73-91 of AS 15).