ADVANCED FINANCIAL ACCOUNTING & REPORTING

1 FINAL. GROUP - IV. PAPER - 16. ADVANCED . FINANCIAL . ACCOUNTING . & REPORTING . The Institute of Cost and Works Accountants of India 12, SUDDER STREET, KOLKATA - 700 016. First Edition : January 2008. Revised Edition : March 2009. Second Revised Edition : June 2010. Published by: Directorate of Studies The Institute of Cost and Works Accountants of India 12, SUDDER STREET, KOLKATA - 700 016. Printed at : India Limited, 50/2, TTC MIDC Industrial Area, Mahape, Navi Mumbai - 400 710, India Copyright of these Study Notes is reserved by the Institute of Cost and Works Accountants of India and prior permission from the Institute is necessary for reproduction of the whole or any part thereof. CONTENTS. Page No. Study Note - 1. Introduction to IAS, USGAAP, Indian ACCOUNTING Standard.

2 1. Framework of ACCOUNTING .. 2. Introduction .. 2. Meaning of ACCOUNTING .. 2. Objectives and Functions of ACCOUNTING .. 3. Fundamental ACCOUNTING Assumptions .. 3. Limitations of ACCOUNTING .. 4. FINANCIAL Statements .. 4. Qualitative Characteristics of FINANCIAL Statements .. 5. ACCOUNTING Standards - Applicability, Interpretation, Scope and Compliance .. 7. US GAAPS .. 10. Established ACCOUNTING Principles in the US .. 10. Other ACCOUNTING Literature .. 11. AICPA .. 11. FASB .. 11. Components of US 11. International ACCOUNTING Standards .. 13. Introduction .. 13. Extract of the International ACCOUNTING Standards .. 13. International FINANCIAL REPORTING Standards .. 29. A Comparison IGAAP - US GAAP - IFRS .. 39. Study Note - 2. Preparation of Company Accounts under Various Circumstances.

3 49. Merger and Acquisitions .. 50. Introduction .. 50. What is Merger? .. 50. Varieties of Mergers .. 51. 51. Types of Acquisitions .. 52. Distinction Between Mergers and Acquisitions .. 52. ACCOUNTING for Mergers and 54. Methods of ACCOUNTING .. 55. Pooling of Interest Method .. 55. Purchase 56. How to Value an Acquisition .. 60. Page No. Sources of Gains from Acquisitions .. 60. Valuation Procedures .. 61. External 62. 66. I Computation and Discharge of Purchase Consideration .. 66. II Basics of Amalgamation and Absorption .. 73. III Purchasing Company holding shares in Selling Company .. 118. IV Selling Company holding shares in Purchasing Company .. 142. V Cross Holding .. 146. VI Chain Holding .. 155. VII Internal Reconstruction .. 158. VIII Reverse Merger .. 171.

4 IX External Reconstruction .. 176. X Surrender of Shares .. 179. XI Demerger .. 182. XII Sales of Division .. 205. XIII Impact of Reconstruction over Wealth of Investor and Company .. 208. XIV Buy back of Shares .. 211. XV Conversion .. 217. Study Note - 3. Group FINANCIAL Statements .. 225. Holding 226. Methods of Combination .. 226. ACCOUNTING Treatment .. 227. Preparation of Group Cash Flow Statement .. 299. Statement of Cash Flows .. 300. Illustrations on Cash Flow 304. Study Note - 4. Segmental REPORTING .. 359. 360. Need for Segmental REPORTING .. 360. Arguments against Segmental REPORTING .. 361. International Scenario .. 362. Page No. The Indian 370. Definitions .. 370. Disclosure Requirements .. 373. ACCOUNTING and Auditing Issues .. 373. Segmental REPORTING Problems & Difficulties.

5 375. Specific Issues Relating to Management Accountants .. 377. Segmental Disclosure A Practical Example .. 381. Illustrations on Segmental REPORTING .. 385. Study Note - 5. Development in External REPORTING .. 389. Indian ACCOUNTING Standards .. 390. Companies ( ACCOUNTING Standards) Rules, 390. Applicability of ACCOUNTING Standard to Non-corporate Entities .. 392. ACCOUNTING Standards .. 395. FINANCIAL REPORTING across the world .. 473. Post Balance Sheet Events .. 477. External REPORTING under Capital Market Regulations .. 479. Value Added Statement .. 494. Economic Value Added Statement .. 507. Human Resource 512. Environmental ACCOUNTING .. 512. Guidance Notes on ACCOUNTING for Tax Matters .. 516. Guidance Notes on 533. Guidance Notes for Special Businesses / Reports.

6 556. Study Note - 6. Government ACCOUNTING in India .. 571. Government ACCOUNTING in India .. 572. General Principles of Government ACCOUNTING .. 572. Methods of Government ACCOUNTING .. 573. Comparison with Commercial 573. Comptroller and Auditor General of India .. 574. Audit of Government Companies (Commercial Audit) .. 574. Audit Board Setup in Commercial Audit .. 574. Page No. Section - 11 Comptroller and Auditor General to Prepare and Submit Accounts to the President, Governors of State and Administrators of Union Territories having Legislative 576. Public Accounts 576. Role of Public Accounts Committee .. 581. Committee on Public Undertakings .. 582. Specimen Report .. 583. STUDY NOTE - 1. Introduction to IAS, USGAAP, Indian ACCOUNTING Standard This Study Note includes: Framework of ACCOUNTING Indian ACCOUNTING Standard US GAAP.

7 International ACCOUNTING Standards International FINANCIAL REPORTING Standards Comparative Analysis of the Indian ACCOUNTING Standard, IFRS and USGAAP. Framework of ACCOUNTING Framework of ACCOUNTING Introduction Most of the world's work is done through organizations - g roups of people who work together to accomplish one or more objectives. In doing its work, an organization uses resources - l abor, materials, various services, buildings, and equipment. These resources need to be nanced, or paid for. To work effectively, the people in an organization need information about the amounts of these resources, the mean of nancing them and the results achieved through using them. Parties outside the organization need similar information to make judgments about the organization.

8 ACCOUNTING is a system that provides such information. Organizations can be classi ed broadly as either for-pro t or nonpro t. As these names suggest, a dominant purpose of organizations in the former category is to earn a pro t, whereas organizations in the latter category have other objectives, such as governing, providing social services, and providing education. ACCOUNTING is basically similar in both types of organizations. Meaning of ACCOUNTING The Committee on Terminology set up by the American Institute of Certi ed Public Accountants formulated the following de nition of ACCOUNTING in 1961: ACCOUNTING is the art of recording, classifying, and summarizing in a signi cant manner and in terms of money, transactions and events which are, in part at least, of a nancial character, and interpreting the result thereof.

9 As per this de nition, ACCOUNTING is simply an art of record keeping. The process of ACCOUNTING starts by rst identifying the events and transactions which are of nancial character and then be recorded in the books of account. This recording is done in Journal or subsidiary books, also known as primary books. Every good record keeping system includes suitable classi cation of transactions and events as well as their summarization for ready reference. After the transaction and events are recorded, they are transferred to secondary books. Ledger. In ledger transactions and events are classi ed in terms of income, expense, assets and liabilities according to their characteristics and summarized in pro t & loss account and balance sheet. Essentially the transactions and events are to be measured in terms of money.

10 Measurement in terms of money means measuring at the ruling currency of a country, for example, rupee in India, dollar in the and like. The transactions and events must have at least in par, nancial characteristics. The inauguration of a new branch of a bank is an event without having nancial character, while the business disposed of by the branch is an event having nancial character. ACCOUNTING also interprets the recorded, classi ed and summarized transactions and events. Objectives and Functions of ACCOUNTING The main objectives are Systematic recording of transactions, Ascertainment of results of recorded transactions and the nancial position of the business, providing information to the users for rational decision-making and to know the solvency position. The functions of ACCOUNTING are Measurement, Forecasting, Decision-making, Comparison & Evaluation, Control, Government Regulation and Taxation.