ADVANCED FINANCIAL ACCOUNTING & REPORTING

1 ADVANCEDFINANCIAL ACCOUNTING & REPORTINGThe Institute of cost and Works Accountants of India12, SUDDER STREET, KOLKATA - 700 016 FINALGROUP - IVPAPER - 16 First Edition : January 2008 Revised Edition : March 2009 Second Revised Edition : June 2010 Published by:Directorate of StudiesThe Institute of cost and Works Accountants of India12, SUDDER STREET, KOLKATA - 700 016 Printed at : India Limited,50/2, TTC MIDC Industrial Area, Mahape, Navi Mumbai - 400 710, IndiaCopyright 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 Page No. Study Note - 1 Introduction to IAS, USGAAP, Indian ACCOUNTING Standard .. Framework of ACCOUNTING .. 2 Introduction .. 2 Meaning of ACCOUNTING .. 2 Objectives and Functions of ACCOUNTING .

2 3 Fundamental ACCOUNTING Assumptions .. 3 Limitations of ACCOUNTING .. 4 FINANCIAL Statements .. 4 Qualitative Characteristics of FINANCIAL Statements .. 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 GAAP .. International ACCOUNTING Standards .. 13 Introduction .. 13 Extract of the International ACCOUNTING Standards .. International FINANCIAL REPORTING Standards .. A Comparison IGAAP - US GAAP - IFRS .. 39 Study Note - 2 Preparation of Company Accounts under Various Circumstances.

3 Merger and Acquisitions .. 50 Introduction .. 50 What is Merger? .. 50 Varieties of Mergers .. 51 51 Types of Acquisitions .. 52 Distinction Between Mergers and Acquisitions .. ACCOUNTING for Mergers and 54 Methods of ACCOUNTING .. 55 Pooling of Interest Method .. 55 Purchase Method .. 56 How to Value an Acquisition .. 60 Page No. Sources of Gains from Acquisitions .. 60 Valuation Procedures .. 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.

4 142 V Cross Holding .. 146 VI Chain Holding .. 155 VII Internal Reconstruction .. 158 VIII Reverse Merger .. 171 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 Company .. Methods of Combination .. ACCOUNTING Treatment .. Preparation of Group Cash Flow Statement.

5 Statement of Cash Flows .. Illustrations on Cash Flow Statement .. 304 Study Note - 4 Segmental REPORTING .. Introduction .. Need for Segmental REPORTING .. Arguments against Segmental REPORTING .. International Scenario .. 362 Page The Indian Scenario .. 370 Definitions .. 370 Disclosure Requirements .. 373 ACCOUNTING and Auditing Issues .. Segmental REPORTING Problems & Difficulties .. Specific Issues Relating to Management Accountants .. Segmental Disclosure A Practical Example .. Illustrations on Segmental REPORTING .. 385 Study Note - 5 Development in External REPORTING .. Indian ACCOUNTING Standards .. 390 Companies ( ACCOUNTING Standards) Rules, 2006 .. 390 Applicability of ACCOUNTING Standard to Non-corporate Entities.

6 ACCOUNTING Standards .. FINANCIAL REPORTING across the world .. Post Balance Sheet Events .. External REPORTING under Capital Market Regulations .. Value Added Statement .. Economic Value Added Statement .. Human Resource ACCOUNTING .. Environmental ACCOUNTING .. Guidance Notes on ACCOUNTING for Tax Matters .. Guidance Notes on Derivatives .. Guidance Notes for Special Businesses / Reports .. 556 Study Note - 6 Government ACCOUNTING in India .. 571 Government ACCOUNTING in India .. General Principles of Government ACCOUNTING .. Methods of Government ACCOUNTING .. Comparison with Commercial ACCOUNTING .. Comptroller and Auditor General of India .. Audit of Government Companies (Commercial Audit) .. 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 Assemblies.

7 Public Accounts Role of Public Accounts Committee .. Committee on Public Undertakings .. Specimen Report .. 583 Introduction to IAS, USGAAP, Indian ACCOUNTING StandardSTUDY NOTE - 1 This Study Note includes: Framework of ACCOUNTING Indian ACCOUNTING Standard US GAAP International ACCOUNTING Standards International FINANCIAL REPORTING Standards Comparative Analysis of the Indian ACCOUNTING Standard, IFRS and USGAAP2 Framework of Framework of IntroductionMost 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 fi nanced, or paid for. To work effectively, the people in an organization need information about the amounts of these resources, the mean of fi nancing them and the results achieved through using them.

8 Parties outside the organization need similar information to make judgments about the organization. ACCOUNTING is a system that provides such can be classifi ed broadly as either for-profi t or nonprofi t. As these names suggest, a dominant purpose of organizations in the former category is to earn a profi 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 Meaning of AccountingThe Committee on Terminology set up by the American Institute of Certifi ed Public Accountants formulated the following defi nition of ACCOUNTING in 1961: ACCOUNTING is the art of recording, classifying, and summarizing in a signifi cant manner and in terms of money, transactions and events which are, in part at least, of a fi nancial character, and interpreting the result per this defi nition, ACCOUNTING is simply an art of record keeping.

9 The process of ACCOUNTING starts by fi rst identifying the events and transactions which are of fi 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 classifi 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 classifi ed in terms of income, expense, assets and liabilities according to their characteristics and summarized in profi t & loss account and balance sheet. Essentially the transactions and events are to be measured in terms of money. Measurement in terms of money means measuring at the ruling currency of a country, for example, rupee in India, dollar in the and like.

10 The transactions and events must have at least in par, fi nancial characteristics. The inauguration of a new branch of a bank is an event without having fi nancial character, while the business disposed of by the branch is an event having fi nancial character. ACCOUNTING also interprets the recorded, classifi ed and summarized transactions and Objectives and Functions of AccountingThe main objectives are Systematic recording of transactions, Ascertainment of results of recorded transactions and the fi 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 FINANCIAL ACCOUNTING & ReportingAccounting conceptsAccounting concepts defi ne the assumptions on the basis of which fi nancial statements of a business entity are prepared.