Accounting changes are defined as a change in (a) an accounting principle, (b) an accounting estimate, or (c) the reporting enterprise (which is a special type of change in accounting principle. The correction of an error in previously issued financial statements is not deemed to be an accounting change.

A presumption in preparing financial statements is that an accounting principle once adopted should not be changed in accounting for events and transactions of a similar type. That presumption may be overcome only if the enterprise justifies the use of an alternative acceptable accounting principle on the basis that it is preferable.

A change in accounting policy is treated retrospectively by restating all prior periods presented and adjusting opening retained earnings (benchmark).

Changes in accounting policy are made only if required by statute, or by an accounting standard setting body, or if the change will result in a more appropriate presentation of events or transactions in the financial statements of the enterprise.

Changes in accounting policies are applied retrospectively unless the amount of any resulting adjustment that relates to prior periods is not reasonably determinable. Resulting adjustments are reported as an adjustment to the opening balance of retained earnings. Comparative information is restated unless it is impracticable to do so.

A change in accounting estimate is accounted for in the period of change if the change affects that period only or in the period of change and future periods if the change affects both. Restating amounts reported in financial statements of prior periods or reporting pro forma amounts for prior periods is not permitted.

The nature of and justification for a change in accounting principle and its effect on income is disclosed in the financial statements of the period in which the change is made. The justification for the change should explain clearly why the newly adopted accounting principle is preferable.

Changes in accounting principle generally require the following disclosures:

AS 5 requires the disclosure of any change in an accounting policy that has a material effect. The impact of, and the adjustments resulting from, such change, if material, should be shown in the financial statements of the period in which such change is made, to reflect the effect of such change.

Where the effect of such change is not ascertainable, wholly or in part, that fact should be indicated. A change made to an accounting policy that has no material effect on the financial statements for the current period but is reasonably expected to have a material effect in later periods, should be appropriately disclosed in the period in which the change is adopted.

Allowed alternative treatment

Changes in accounting policy are applied retrospectively unless the amount of any resulting adjustment that relates to prior periods is not reasonably determinable. Any resulting adjustments are included in the determination of the net profit or loss for the current period. Comparative information is presented as reported in the financial statements of the prior period. Additional pro forma comparative information is presented unless it is impracticable to do so.

Disclosure is required of the reasons for and effect and accounting treatment of the change.

A change in accounting estimate is reflected prospectively. The nature and effect of the change should be disclosed, even if the effect will only be significant in a future period. If the effect cannot be quantified, that fact should be disclosed.

Effects of a change in an accounting estimate are included in the determination of net profit or loss in:

Accounting policies are the specific accounting principles and the methods of applying those principles that are judged by the management of the enterprise to be the most appropriate in the circumstance to present fairly financial position, and results of operations in accordance with GAAP and that accordingly are adopted for preparing financial statements. (APB 22, ¶6)

When financial statements are issued purporting to present fairly financial position, changes in financial position, and results of operations in accordance with generally accepted accounting principles, a description of all significant accounting policies of the reporting entity should be included as an integral part of the financial statements. (APB 22, ¶8)

Disclosure of accounting policies should identify and describe the accounting principles followed by the reporting entity and the methods of applying those principles. In particular, it should encompass those accounting principles and methods that involve any of the following:

IAS 1 defines overall considerations for financial statements including:

The primary considerations governing the selection and application of accounting policies are:

Adjustments are required to be made to previously issued financial statements if there is a correction of an error in the financial statements of a prior period, a change in certain accounting principles, or an adjustment related to prior interim statements of the current fiscal period or if an enterprise realizes the income tax benefits of a pre-acquisition loss carry-forward of a purchased subsidiary. All other revenues, expenses, gains, and losses recognized during a period shall be included in the net income of that period.

All items of profit and loss recognized during a period, including accruals of estimated losses from loss contingencies, are included in the determination of net income for that period. (FAS 16, ¶10)

An item of profit and loss related to the correction of an error in the financial statements of a prior period is accounted for and reported as a prior period adjustment and excluded from the determination of net income for the current period. (FAS 109, ¶288(n))

Errors in financial statements result from mathematical mistakes, mistakes in the application of accounting principles, or oversight or misuse of facts that existed at the time the financial statements were prepared. (APB 20, ¶13)

An enterprise preparing a classified balance sheet should segregate current assets and current liabilities separately. The current classification applies to those assets that are realized in cash, sold or consumed within one year (or operating cycle, if longer), and those liabilities that are discharged by use of current assets or the creation of other current liabilities within one year (or operating cycle, if longer). The current liability classification is also intended to include obligations that, by their terms, are due on demand or will be due on demand within one year (or operating cycle, if longer) from the balance sheet date, even though liquidation may not be expected within that period. This also includes long-term obligations that are or become callable by the creditor either because the debtor's violation of a provision of the debt agreement at the balance sheet date makes the obligation callable or because the violation, if not cured within a specified grace period, will make the obligation callable. Such callable obligations are classified as current liabilities unless one of the following conditions is met:

The balance sheet classification of assets and liabilities is determined by the form and manner specified in SchVI, Part I. SchVI, Part I determines the presentation of assets and liabilities but does not discuss the factors that would determine classification of an element of financial statements as current or non-current.

IAS 1 offers the alternative, based on the nature of the operations, whether or not to present current and non-current assets and current and non-current liabilities as separate classifications on the face of the balance sheet or to present assets or liabilities broadly in order of their liquidity.

An asset is classified as a current asset when it:

Short-term obligations expected to be refinanced on a long-term basis, including those callable obligations discussed above, shall be excluded from current liabilities only if the enterprise intends to refinance the obligation on a long-term basis and has the demonstrated ability to consummate the refinancing.

Notes:

Current assets are those assets that are reasonably expected to be realized in cash or sold or consumed during the normal operating cycle of the business. (ARB 43, ch3A, ¶4)

Current liabilities are those obligations whose liquidation is reasonably expected to require the use of existing resources properly classifiable as current assets or the creation of other current liabilities. (ARB 43, ch3A, ¶7)

Operating cycle is the average time intervening between the acquisition of materials or services and the final cash realization [from the sale of products or services. (ARB 43, ch3A, ¶5)

Long-term interest bearing liabilities are classified as non-current even if they are due to be settled within twelve months of the balance sheet date if:

The general principle of accounting is that offsetting of assets and liabilities in the balance sheet is improper except when a right of setoff exists. (APB 10, ¶7(1))

Generally, a right of setoff is a debtor's legal right, by contract or otherwise, to discharge all or a portion of the debt owed to another party by applying against the debt an amount that the other party owes to the debtor. A right of setoff exists when all of the following conditions are met:

A business combination occurs when a corporation and one or more incorporated or unincorporated businesses are brought together into one accounting entity. The single entity carries on the activities of the previously separate, independent enterprises. The purchase method and the pooling-of-interests method are both acceptable in accounting for business combinations, although not as alternatives in accounting for the same business combination.

A business combination is accounted for as a pooling of interests if it meets certain specified criteria. Business combinations that do not meet all of the specified criteria are accounted for as purchases.

AS 14 contemplates two types of amalgamations namely, amalgamations where there is a genuine pooling of interests including assets, liabilities, shareholders’ interests and businesses of the amalgamating companies and amalgamations as a result of which one company acquires another company. The former is known as amalgamations in the nature of a merger and is accounted for by the pooling-of-interests method. The latter are known as amalgamations in the nature of purchase and are accounted for by the purchase method.

The use of the pooling-of-interests method is applied to amalgamations in the nature of a merger. The conditions to be satisfied for an amalgamation to be classified as a merger are set out below.

The combined enterprise recognizes those assets and liabilities recorded in conformity with generally accepted accounting principles by the separate enterprises at the date the combination is consummated. The combined enterprise records the historical cost-based amounts of the assets and liabilities of the separate enterprises because the existing basis of accounting continues.

Where the separate enterprises have recorded assets and liabilities under differing methods of accounting, the amounts are adjusted to the same basis of accounting if the change was otherwise appropriate for the separate enterprise. A change in accounting method to conform the individual methods is applied retroactively, and financial statements presented for prior periods are restated.

An enterprise that applies the pooling-of-interests method of accounting to a combination reports results of operations for the period in which the combination occurs as though the enterprises were combined as of the beginning of the period. Results of operations for that period thus comprise those of the separate enterprises combined from the beginning of the period to the date the combination is consummated and those of the combined operations from that date to the end of the period.

Liabilities are not recognized at the date of acquisition if they result from the acquirer’s intentions or actions. Liabilities are not recognized for future losses or other costs expected to be incurred as a result of the acquisition, whether they relate to the acquirer or the acquiree.

At the date of acquisition, the acquirer recognizes a provision that was not a liability of the acquiree at that date if the acquirer has:

Balance sheets and other financial information of the separate enterprises as of the beginning of the period are presented as though the enterprises had been combined at that date. Financial statements and financial information of the separate enterprises presented for prior years are restated on a combined basis to furnish comparative information. All restated financial statements and financial summaries should indicate clearly that financial data of the previously separate enterprises are combined.

All expenses related to effecting a business combination accounted for by the pooling-of-interests method and losses or estimated losses on disposal of specifically identified duplicate or excess facilities are deducted in determining the net income of the resulting combined enterprise for the period in which the expenses are incurred.

A business combination accounted for by the pooling-of-interests method is recorded as of the date the combination is consummated.

Identifiable assets and liabilities may include assets and liabilities not earlier included in the financial statements of the transferor company. The determination of fair values may be dependent on the intentions of the transferee company.

Reserves of the transferor company, other than statutory reserves are not included in the reserves of the transferee company. Statutory reserves are recorded in the financial statement of the transferee company with a corresponding entry made to an account designated as an "Amalgamation Adjustment Account", where the requirements of the relevant statute for recording statutory reserves in the books are complied with. Where such statutory reserves are no longer required, both the reserve and the Amalgamation Adjustment Account should be reversed.

The excess of the amount of consideration over the value of the net assets of the transferor company should be recognized as goodwill and amortized to income on a systematic basis over its useful life, usually not to exceed five years.

The purchase method accounts for a business combination as the acquisition of one enterprise by another. The acquiring corporation records at its cost the acquired assets less liabilities assumed. The difference between the cost of an acquired enterprise and the sum of the fair values of tangible and identifiable intangible assets less liabilities assumed is recorded as goodwill. The reported income of an acquiring corporation includes the operations of the acquired enterprise after acquisition, based on the cost to the acquiring corporation.

The general principles to apply the historical cost basis of accounting to an acquisition of an asset depend on the nature of the transaction:

Schemes of amalgamation may provide for the payment of additional amounts contingent upon the occurrence of one or more future events. Such contingent consideration should be included in the consideration if the payment is probable and a reasonable estimate of the amount can be made.

The treatment prescribed by a scheme of amalgamation sanctioned under a statute, of reserves of the transferor company, should be followed.

The disclosures to be made in the first financial statements following the amalgamation are set out below.

If the fair value of an intangible asset cannot be measured by reference to an active market (as defined in IAS 38), the amount recognized for that intangible asset at the date of the acquisition is limited to an amount that does not create or increase negative goodwill that arises on the acquisition.

Any excess of the cost of the acquisition over the acquirer’s interest in the fair value of the identifiable assets and liabilities acquired as at the date of the exchange transaction is described as goodwill and recognized as an asset. Goodwill is carried at cost less any accumulated amortization and any accumulated impairment losses.

Goodwill is amortized on a systematic basis over its useful life. The amortization period reflects the best estimate of the period during which future economic benefits are expected to flow to the enterprise. There is a rebuttable presumption that the useful life of goodwill will not exceed twenty years from initial recognition. The amortization method used reflects the pattern in which the future economic benefits arising from goodwill is expected to be consumed. The straight-line method is adopted unless there is persuasive evidence that another method is more appropriate in the circumstances. The amortization for each period is recognized as an expense.

The enterprise that distributes cash or other assets or incurs liabilities to obtain the assets or stock of another enterprise is clearly the acquirer. The identities of the acquirer and the acquired enterprise are usually evident in a business combination effected by the issue of stock. The acquiring enterprise normally issues the stock and commonly is the larger enterprise. If a new enterprise is formed to issue stock to effect a business combination to be accounted for by the purchase method, one of the existing combining enterprises is considered the acquirer on the basis of the evidence available.

The same accounting principles apply to determining the cost of assets acquired individually, those acquired in a group, and those acquired in a business combination. A cash payment by an enterprise measures the cost of acquired assets less liabilities assumed. Similarly, the fair values of other assets distributed, such as marketable securities or properties, and the fair value of liabilities incurred by an acquiring enterprise measure the cost of an acquired enterprise.

If there has been a significant change in the expected pattern of economic benefits from goodwill, the method is changed to reflect the changed pattern and accounted for as a change in accounting estimates by adjusting the amortization charge for the current and future periods.

Any excess, as at the date of the exchange transaction, of the acquirer’s interest in the fair values of the identifiable assets and liabilities acquired over the cost of the acquisition, is recognized as negative goodwill.

When the acquisition agreement provides for an adjustment to the purchase consideration contingent on one or more future events, the amount of the adjustment is included in the cost of the acquisition as at the date of acquisition if the adjustment is probable and the amount can be measured reliably.

The cost of the acquisition is adjusted when a contingency affecting the amount of the purchase consideration is resolved subsequent to the date of the acquisition, so that payment of the amount is probable and a reliable estimate of the amount can be made.

A business combination agreement may provide for the issuance of additional shares of a security or the transfer of cash or other consideration contingent on specified events or transactions in the future. Contingent consideration may be based on earnings or security prices or a combination of both.

Some agreements provide that a portion of the consideration be placed in escrow to be distributed or to be returned to the transferor when specified events occur. Either debt or equity securities may be placed in escrow, and amounts equal to interest or dividends on the securities during the contingency period may be paid to the escrow agent or to the potential security holder.

Cash and other assets distributed, securities issued unconditionally and amounts of contingent consideration that are determinable at the date of acquisition are included in determining the cost of an acquired enterprise and recorded at that date. Consideration that is issued or issuable at the expiration of the contingency period or that is held in escrow pending the outcome of the contingency is disclosed but not recorded as a liability or shown as outstanding securities unless the outcome of the contingency is determinable beyond reasonable doubt.

In applying the pooling of interests method, the financial statement items of the combining enterprises for the period in which the combination occurs and for any comparative periods disclosed are included in the financial statements of the combined enterprises as if they had been combined from the beginning of the earliest period presented.

The financial statements of an enterprise do not incorporate a uniting of interests to which the enterprise is a party if the date of the uniting of interests is after the date of the most recent balance sheet included in the financial statements.

Any difference between the amount recorded as share capital issued plus any additional consideration in the form of cash or other assets and the amount recorded for the share capital acquired is adjusted against equity.

An acquiring enterprise allocates the cost of an acquired enterprise to the assets acquired and liabilities assumed. Allocation follows the principles described below.

A business combination is accounted for as an acquisition, unless an acquirer cannot be identified. In virtually all business combinations an acquirer can be identified, i.e., the shareholders of one of the combining enterprises obtain control over the combined enterprise.

The classification of a business combination is based on an overall evaluation of all relevant facts and circumstances of the particular transaction. The guidance given in IAS 22 provides examples of important factors to be considered, not a comprehensive set of conditions to be met. Single characteristics of a combined enterprise such as voting power or relative fair values of the combining enterprises is not evaluated in isolation in order to determine how a business combination is be accounted for.

IAS 22, ¶16(a)-(c) describe the essential characteristics of a uniting of interests. An enterprise classifies a business combination as an acquisition, unless all of these three characteristics are present. Even if all of the three characteristics are present, an enterprise classifies a business combination as a uniting of interests only if the enterprise can demonstrate that an acquirer cannot be identified.

The date of acquisition of an enterprise is the date assets are received and other assets are given or securities are issued. Parties may, for convenience, designate as the effective date the end of an accounting period between the dates a business combination is initiated and consummated.

The values assigned to assets acquired and liabilities assumed are determined as of the date of acquisition. The statement of income of an acquiring enterprise for the period in which a business combination occurs include income of the acquired enterprise after the date of acquisition by including the revenue and expenses of the acquired operations based on the cost to the acquiring enterprise.

The following disclosures are required:

Although Indian GAAP does not have any accounting pronouncements as regards "Share capital" and "Reserves and surplus", CA 56 sets out the disclosure requirements in this area.

SchVI, Part I requires the following disclosures in respect of share capital:

IAS 1 sets out the presentation requirements in respect of share capital as discussed below.

SchVI, Part I specifies the following disclosures in respect of reserves and surplus:

Treasury shares are presented in the balance sheet as a deduction from equity. The acquisition of treasury shares is presented in the financial statements as a change in equity. No gain or loss is recognized in the income statement on the sale, issuance, or cancellation of treasury shares. Consideration received towards treasury shares is presented in the financial statements as a change in equity. (SIC 16, ¶4)

Stock dividends do not give rise to any change in either the enterprise's assets or its respective shareholders' proportionate interests therein. However, many recipients of stock dividends look upon them as distributions of corporate earnings and usually in an amount equivalent to the fair value of the additional shares received. Furthermore, when issuances of stock dividends are small in comparison with the shares previously outstanding, they do not have any apparent effect upon the share market value. Therefore, stock dividends are accounted for by transferring from retained earnings to the category of permanent capitalization (represented by the capital stock and additional paid-in capital accounts) an amount equal to the fair value of the additional shares issued. (ARB 43, ch7B, ¶10)

Where an enterprise acquires shares of its own capital stock, the cost of the acquired shares is generally shown as a deduction from capital. Gains and losses on sales of treasury stock are accounted for as adjustments to capital and not as part of income. (ARB 43, ch1B and APB 6, ¶12, 13)

FAS 95 establishes standards for cash flow reporting and requires a statement of cash flows as part of a full set of financial statements for all business enterprises in place of a statement of changes in financial position. A statement of cash flows classifies cash receipts and payments according to whether they stem from operating, investing, or financing activities.

Investing activities include making and collecting loans and acquiring and disposing of debt or equity instruments and property, plant, and equipment and other productive assets, that is, assets held for or used in the production of goods or services by the enterprise [other than materials that are part of the enterprise's inventory]. (FAS 95, ¶15)

Financing activities include obtaining resources from owners and providing them with a return on, and a return of, their investment; borrowing money and repaying amounts borrowed, or otherwise settling the obligation; and obtaining and paying for other resources obtained from creditors on long-term credit. (FAS 95, ¶18)

Operating activities are those activities that are not defined as investing or financing activities. (FAS 95, ¶21)

Enterprises are required to prepare a cash flow statement and present it for each period for which financial statements are presented. (AS 3, ¶1)

Cash flow statements should report cash flows during the period classified by operating, investing and financing activities. (AS 3, ¶8)

Operating activities are principal revenue-producing activities of the enterprise and other activities that are not investing or financing activities. (AS 3, ¶5)

Investing activities are acquisition and disposal of long-term assets and other investments not included in cash equivalents. (AS 3, ¶5)

Financing activities are activities that result in changes in the size and composition of the owners' capital (including preference share capital in the case of a company) and borrowings of the enterprise. (AS 3, ¶5)

Enterprises report cash flows from operating activities using either:

The cash flow statement is a required basic financial statement that explains changes in cash and cash equivalents during a period. It should classify changes in cash and cash equivalents into operating, investing, and financial activities.

Enterprises that choose not to show operating cash receipts and payments report the same amount of net cash flow from operating activities indirectly by adjusting net income to reconcile it to net cash flow from operating activities by removing the effects of (a) all deferrals of past operating cash receipts and payments and all accruals of expected future operating cash receipts and payments and (b) all items that are included in net income that do not affect operating cash receipts and payments. If the direct method is used, a reconciliation of net income and net cash flow from operating activities should be provided in a separate schedule. (FAS 95, ¶28)

The statement of cash flows reports the reporting currency equivalent of foreign currency cash flows, using the current exchange rate at the time of the cash flows. The effect of exchange rate changes on cash held in foreign currencies is disclosed as a separate item in the reconciliation of beginning and ending balances of cash and cash equivalents. (FAS 95, ¶25)

Cash flows arising from the following operating, investing or financing activities may be reported on a net basis:

Investing and financing activities that do not give rise to cash flows (a non-monetary transaction such as acquisition of property by issuing debt) are excluded from the cash flow statement but disclosed separately.

Cash flows arising from transactions in a foreign currency are translated into the reporting currency at the exchange rate at the date of the cash flow. Cash flows of a foreign subsidiary are translated at the exchange rates at the dates of the cash flows.

Cash flows associated with extraordinary items are classified as operating, investing or financing activities as appropriate.

Cash flows from interest and dividends received and paid are appropriately classified consistently from period to period as either operating, investing or financing activities.

Cash flows associated with extraordinary items are classified as arising from operating, investing or financing activities as appropriate and separately disclosed. (AS 3, ¶28)

Cash flows from interest and dividends received and paid are disclosed separately depending on their source and the nature of operations of the enterprise. (AS 3, ¶30)

Cash flows arising from taxes on income are separately disclosed and classified as cash flows from operating activities unless they are specifically identified with financing and investing activities. (AS 3, ¶34)

The aggregate cash flows arising from acquisitions and from disposals of subsidiaries or other business units should be presented separately and classified as investing activities. (AS 3, ¶37)

Investing and financing transactions that do not require the use of cash or cash equivalents should be excluded from a cash flow statement. Such transactions should be disclosed elsewhere in the financial statements in a way that provides all the relevant information about these investing and financing activities. (AS 3, ¶40)

Enterprises should disclose the components of cash and cash equivalents and present a reconciliation of the amounts in the cash flow statement with the equivalent items reported in the balance sheet. (AS 3, ¶42)

FAS 47 requires an enterprise to disclose its commitments under unconditional purchase obligations that are associated with suppliers' financing arrangements. Such obligations often are in the form of take-or-pay contracts and throughput contracts. (FAS 47, ¶7)

For long-term unconditional purchase obligations that are associated with suppliers' financing and are recognized on purchasers' balance sheets, payments for each of the next five years shall be disclosed. (FAS 47, ¶7)

Enterprises should also disclose future payments on long-term borrowings and redeemable stock. For long-term unconditional purchase obligations that are associated with suppliers' financing and are not recognized on purchasers' balance sheets, the disclosures include the nature of the obligation, the amount of the fixed and determinable obligation in the aggregate and for each of the next five years, a description of any portion of the obligation that is variable, and the purchases in each year for which an income statement is presented. (FAS 47, ¶6)

FAS 123 establishes the standard for stock-based employee compensation plans including all arrangements by which employees receive shares of stock or other equity instruments of the employer or the employer incurs liabilities to employees in amounts based on the price of the employer's stock.

FAS 123 also applies to transactions in which an entity issues its equity instruments to acquire goods or services from non-employees. Such transactions are accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.

The SEBI guidelines set out the accounting for stock based compensation by listed companies.

The accounting value of options granted during an accounting period is treated as a form of employee compensation. This value is equal to the aggregate, over all employee stock options granted during the accounting period, of the fair value of the option.

Fair value means the option discount or, if the company so chooses, the value of the option using the Black Scholes formula or other similar valuation method.

Option discount means the excess of the market price of the share at the date of grant of the option under ESOS over the exercise price of the option (including up-front payment, if any)

The accounting value of the option should be amortized on a straight-line basis over the vesting period.

Although IAS does not specify any recognition and measurement criteria for equity based compensation, companies are required to adhere to certain disclosure requirements. These include:

Under the fair value based method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period.

When a vested option lapses on expiry of the exercise period, after the fair value of the option has already been accounted for as employee compensation, this accounting treatment shall be reversed by a credit to employee compensation expense.

Employee stock purchase plans that allow employees to purchase stock at a discount from market price are not compensatory if they satisfy three conditions:

When there is more than one equity compensation plan, disclosures may be made in total, separately for each plan or in groupings that are considered most useful for assessing the enterprise’s obligations. Where disclosure is given in total for a grouping of plans, they are provided in the form of weighted averages or of relatively narrow ranges.

Pro forma disclosures required by an employer that continues to apply the accounting provisions of APB 25 should reflect the difference between compensation cost, if any, included in net income and the related cost measured by the fair value based method defined in FAS 123, including tax effects, if any. The required pro forma amounts will not reflect any other adjustments to net income or earnings per share.

A summary of APB 25 and related interpretations is presented below.

Entities should recognize compensation costs for stock issued through non-variable employee stock option, purchase, and award plans as the difference between the quoted market price of the stock at the measurement date (ordinarily the date of grant or award) less the amount, if any, the employee is required to pay. This cost is charged to expense over the periods in which the employee performs the related services.

The measurement date for grants under stock option, purchase, and award plans involving junior stock is the first date on which are known both the number of shares of the employer's regular common stock that an employee is entitled to receive in exchange for the junior stock and the option or purchase price, if any. Generally, total compensation cost is the amount by which the market price at the measurement date of the employer's regular common stock that an employee is entitled to receive exceeds the amount that the employee paid or will pay for the junior stock. If performance goals to which the junior stock award relates will probably be achieved, compensation cost shall be charged to expense over the periods the employee performs the related services.

Estimated amounts to be paid under a deferred compensation contract that is not equivalent to a pension plan or a postretirement health or welfare benefit plan are accrued over the period of an employee's active employment from the time the contract is signed to the employee's full eligibility date.

IAS requires compensation to employees including deferred compensation agreements to be measured and recognized on the accrual basis.

The expected cost of short term employee benefits in the form of compensated absences is recognized as follows:

Comprehensive income is defined as "the change in equity [net assets] of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners". (CON 6, ¶70)

A full set of financial statements for a period should show financial position at the end of the period, earnings (net income) for the period, comprehensive income (total non-owner changes in equity) for the period, cash flows during the period, and investments by and distributions to owners during the period. (CON 5, ¶13)

IAS 1 requires entities to prepare and present a statement of changes in equity.

This statement shows:

The total of other comprehensive income for a period is required to be transferred to a component of equity that is displayed separately from retained earnings and additional paid-in capital in a statement of financial position at the end of an accounting period. A descriptive title such as accumulated other comprehensive income should be used for that component of equity. (FAS 130, ¶26)

An enterprise should also disclose accumulated balances for each classification in that separate component of equity on the face of a statement of financial position, in a statement of changes in equity, or in notes to the financial statements. The classifications should correspond to classifications used elsewhere in the same set of financial statements for components of other comprehensive income. (FAS 130, ¶26)

US GAAP specifies the accounting for the costs of computer software to be sold, leased, or otherwise marketed as a separate product or as part of a product or process. It applies to computer software developed internally and to purchased software.

Costs incurred internally in creating a computer software product are charged to expense when incurred as research and development until technological feasibility has been established for the product. Technological feasibility is established upon completion of a detail program design or, in its absence, completion of a working model. This occurs when the enterprise has completed all planning, designing, coding, and testing activities that are necessary to establish that the product can be produced to meet its design specifications including functions, features, and technical performance requirements.

Thereafter, all software production costs are capitalized and subsequently reported at the lower of unamortized cost or net realizable value. Capitalized costs are amortized based on current and future revenue for each product with an annual minimum equal to the straight-line amortization over the remaining estimated economic life of the product.

The cost of purchased computer software to be sold, leased, or otherwise marketed that has no alternative future use is accounted for the same as the costs incurred to develop such software internally. If that purchased software has an alternative future use, the cost is capitalized when the software is acquired and accounted for in accordance with its alternative future use.

Capitalized software costs are amortized on a product-by-product basis. The annual amortization is the greater of the amount computed using (a) the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product or (b) the straight-line method over the remaining estimated economic life of the product including the period being reported on. Amortization starts when the product is available for general release to customers.

At each balance sheet date, the unamortized capitalized costs of a computer software product is compared to the net realizable value of that product. The amount by which the unamortized capitalized costs of a computer software product exceed the net realizable value of that asset is written off. The amount of the write-down shall not be subsequently restored.

The purpose of consolidated statements is to present the results of operations and the financial position of a parent company and its subsidiaries essentially as if the group were a single enterprise with one or more branches or divisions. Consolidated statements are more meaningful than separate statements and are usually necessary for a fair presentation when one of the enterprises in the group directly or indirectly has a controlling financial interest in the other enterprises. (ARB 51, ¶1)

If an enterprise has one or more subsidiaries, consolidated statements rather than parent-company financial statements are the appropriate general-purpose financial statements. (FAS 94, ¶61)

The Report of the Kumar Mangalam Committee on Corporate Governance took note of the discussions of the SEBI Committee on Accounting Standards. The report recommends that companies should be required to give consolidated financial statements in respect of all subsidiaries in which they hold 51 % or more of the share capital.

A parent company presents consolidated financial statements unless it:

A difference in fiscal periods of a parent and subsidiary does not justify the latter’s exclusion from consolidation. It is ordinarily feasible for the subsidiary to prepare statements for a period that corresponds with or closely approaches the fiscal period of the parent. Where the difference is not more than three months, it is acceptable to use the subsidiary's statements for its fiscal period. Recognition is given to the effect of intervening events that materially affect the financial position or results of operations by disclosure. (ARB 51, ¶4)

Consolidated statements should disclose the consolidation policy being followed. (ARB 51, ¶5)

In the preparation of consolidated statements, intercompany balances and transactions are eliminated. Further, any intercompany profit or loss on assets remaining within the group shall be eliminated. The concept usually applied for this purpose is gross profit or loss (ARB 51, ¶6)

Income taxes paid on intercompany profits on assets remaining within the group are deferred or the intercompany profits to be eliminated in consolidation are appropriately reduced. (ARB 51, ¶17)

Consolidated financial statements are prepared using uniform accounting policies for like transactions and other events in similar circumstances.

When an investment ceases to be a subsidiary, it is accounted for as if it were an investment under IAS 25 or an associate under IAS 28, as applicable.

In a parent’s separate financial statements, investments in subsidiaries that are included in the consolidated financial statements are either:

Where two or more purchases are made over a period of time, the retained earnings of the subsidiary at acquisition are generally determined on a step-by-step basis. Where small purchases are made over a period of time and then a purchase is made which results in control, the date of the latest purchase may be considered as the date of acquisition. (ARB 51, ¶10)

When a subsidiary is acquired during the year, there are two methods of dealing with the results of its operations in the consolidated income statement. One method is to include the subsidiary in the consolidation as though it had been acquired at the beginning of the year, and to deduct at the bottom of the consolidated income statement the pre-acquisition earnings applicable to each block of stock. This presents results that are more indicative of the current status of the group, and facilitates future comparison with subsequent years. Another method of prorating income is to include in the consolidated statement only the subsidiary's revenue and expenses subsequent to the date of acquisition. (ARB 51, ¶11)

When the investment in a subsidiary is disposed of during the year, it is preferable to omit the details of operations of the subsidiary from the consolidated income statement, and to show the equity of the parent in the earnings of the subsidiary prior to disposal as a separate item in the statement. (ARB 51, ¶12)

The following circumstances, for example, may indicate a relationship in which an enterprise controls an SPE and consequently consolidate the SPE:

The excess of losses applicable to the minority interest in a subsidiary over the equity capital of the subsidiary are charged against the majority interest, as there is no obligation of the minority interest to make good such losses. The majority interest is credited to the extent of such losses previously absorbed when future earnings materialize. (ARB 51, ¶15)

A contingency is an existing condition, situation, or set of circumstances involving uncertainty as to possible gain (gain contingency) or loss (loss contingency) to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur. (FAS 5, ¶1)

Contingencies are conditions or situations, the ultimate outcome of which are known or determined only on the occurrence, or non-occurrence, of one or more uncertain future events. (AS 4, ¶3)

Contingent losses are provided for by a charge in the statement of profit and loss if:

IAS 37 requires that provisions are recognized in the balance sheet when an enterprise has a present obligation (legal or constructive) as a result of a past event, it is probable (i.e. more likely than not) that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.

Provisions should be measured in the balance sheet at the best estimate of the expenditure required to settle the present obligation at the balance sheet date, in other words, the amount that an enterprise would rationally pay to settle the obligation, or to transfer it to a third party, at that date.

An enterprise should take risks and uncertainties into account. However, uncertainty does not justify the creation of excessive provisions or a deliberate overstatement of liabilities. An enterprise should discount a provision where the effect of the time value of money is material and should take future events, such as changes in the law and technological changes, into account where there is sufficient objective evidence that they will occur.

If condition a. is met with respect to a particular loss contingency and the reasonable estimate of the loss is a range, condition b. is met and an amount is accrued for the loss. If some amount within the range appears at the time to be a better estimate than any other amount within the range, that amount shall be accrued. If no amount within the range is a better estimate than any other amount, however, the minimum amount in the range shall be accrued. (FIN 14, ¶3)

A disclosure of the nature of an accrual made pursuant to the above provisions and, in some circumstances the amount accrued, may be necessary for the financial statements not to be misleading. The terminology used should be descriptive of the nature of the accrual. (FAS 5, ¶9)

Where an accrual is not made for a loss contingency because one or both of the conditions above are not met, or if an exposure to loss exists in excess of the amount accrued, disclosure of the contingency is made when there is a reasonable possibility that a loss or an additional loss may have been incurred. The disclosure should indicate the nature of the contingency and also give an estimate of the possible loss or range of loss or state that such an estimate cannot be made. (FAS 5, ¶10)

The amount at which a contingency is stated in the financial statements is based on information available at the date on which the financial statements are approved. Events occurring after the balance sheet date that indicate that an asset was impaired, or that a liability existed, at the balance sheet date are taken into account in identifying contingencies and in determining the amounts at which such contingencies are included in financial statements. (AS 4, ¶7.1)

Provisions for contingencies are not made in respect of general or unspecified business risks as they do not relate to conditions or situations existing at the balance sheet date. (AS 4, ¶5.6)

Contingent gains are not recognized in the financial statements. (AS4, ¶12)

Events occurring after the balance sheet date are those significant events, both favorable and unfavorable, that occur between the balance sheet date and the date on which the financial statements are approved by the Board of Directors in the case of a company, and, by the corresponding approving authority in the case of any other entity.

AS 4 discusses two types of events:

When it is virtually certain that reimbursement will be received if the enterprise settles the obligation, the reimbursement should be recognized as a separate asset.

A provision is used only for expenditures for which the provision was originally recognized and should be reversed if an outflow of resources is no longer probable.

IAS 37 sets out three specific applications of these general requirements:

Post balance sheet date events may indicate the need for adjustments to assets and liabilities as of the balance sheet date or may require disclosure. (AS 4, ¶8.1)

Adjustments to assets and liabilities are required for post balance sheet date events that provide additional information affecting the determination of the amounts relating to conditions existing at the balance sheet date. (AS 4, ¶8.2)

Assets and liabilities are adjusted for post balance sheet date events that indicate that the going concern assumption is not appropriate. (AS 4, ¶15)

Adjustments to assets and liabilities are not appropriate for events occurring after the balance sheet date, if such events do not relate to conditions existing at the balance sheet date. (AS 4, ¶8.3)

Disclosures are made in the report of the approving authority of events occurring after the balance sheet date that represent material changes and commitments affecting the financial position of the enterprise. (AS 4, ¶15)

IAS 37 prohibits the recognition of contingent liabilities and contingent assets. An enterprise should disclose a contingent liability, unless the possibility of an outflow of resources embodying economic benefits is remote, and disclose a contingent asset if an inflow of economic benefits is probable

An enterprise should adjust its financial statements for events after the balance sheet date that provide further evidence of conditions that existed at the balance sheet. An enterprise should not adjust its financial statements for events after the balance sheet date that are indicative of conditions that arose after the balance sheet date.

If dividends to holders of equity instruments are proposed or declared after the balance sheet date, an enterprise should not recognize those dividends as a liability. An enterprise may give the disclosure of proposed dividends either on the face of the balance sheet as an appropriation within equity or in the notes to the financial statements.

An enterprise should not prepare its financial statements on a going concern basis if management determines after the balance sheet date either that it intends to liquidate the enterprise or to cease trading, or that it has no realistic alternative but to do so. There is no requirement to adjust the financial statements where an event after the balance sheet date indicates that the going concern assumption is not appropriate for part of an enterprise.

Certain loss contingencies are disclosed in financial statements even though the possibility of loss may be remote. The common characteristic of those contingencies is a guarantee, normally with a right to proceed against an outside party in the event that the guarantor is called upon to satisfy the guarantee. Examples include (a) guarantees of indebtedness of others, (b) obligations of commercial banks under standby letters of credit, and (c) guarantees to repurchase receivables that have been sold or otherwise assigned. Disclosure of those loss contingencies, and others that in substance have the same characteristics, should be continued and should include the nature and amount of the guarantee. Consideration should be given to disclosing, if estimable, the value of any recovery that could be expected to result, such as from the guarantor's right to proceed against an outside party. (FAS 5, ¶12)

Contingencies that might result in gains are usually not reflected in the financial statements since this might be to recognize revenue prior to its realization. Adequate disclosure is made of contingencies that might result in gains, but care is exercised to avoid misleading implications as to the likelihood of realization. (FAS 5, ¶17)

Where the enterprise's owners or others have the power to amend the financial statements after issuance, the enterprise should disclose that fact.

SOP 98-1 provides guidance on accounting for the costs of computer software developed or obtained for internal use.

Computer software meeting the characteristics specified in this SOP is internal-use software.

Computer software costs that are incurred in the preliminary project stage are expensed as incurred. Once the capitalization criteria of SOP 98-1 are met, external direct costs of materials and services consumed in developing or obtaining internal-use computer software, payroll and payroll-related costs for employees who are directly associated with and who devote time to the internal-use computer software project (to the extent of the time spent directly on the project), and interest costs incurred when developing computer software for internal use are capitalized.

Training costs and data conversion costs are expensed as incurred.

Internal and external costs incurred during the preliminary project stage are expensed as incurred.

The process of data conversion from old to new systems includes purging or cleansing of existing data, reconciliation or balancing of the old data and the data in the new system, creation of new/additional data, and conversion of old data to the new system. Data conversion often occurs during the application development stage. Data conversion costs are expensed as incurred.

Post-Implementation/Operation Stage. Internal and external training costs and maintenance costs are expensed as incurred.

Internal costs incurred for maintenance are expensed as incurred. Entities that cannot separate internal costs on a reasonably cost-effective basis between maintenance and relatively minor upgrades and enhancements should expense such costs as incurred.

External costs incurred under agreements related to specified upgrades and enhancements are expensed or capitalized depending on their nature. External costs related to maintenance, unspecified upgrades and enhancements, and costs under agreements that combine the costs of maintenance and unspecified upgrades and enhancements are recognized in expense over the contract period on a straight-line basis unless another systematic and rational basis is more representative of the services received.

The capitalized costs of computer software developed or obtained for internal use should be amortized on a straight-line basis unless another systematic and rational basis is more representative of the software's use.

If, after the development of internal-use software is completed, an entity decides to market the software, proceeds received from the license of the computer software, net of direct incremental costs of marketing, should be applied against the carrying amount of that software.

Convertible debt securities are debt securities that are convertible into common stock of the issuer or an affiliated enterprise at a specified price at the option of the holder and that are sold at a price or have a value at issuance not significantly in excess of the face amount. The terms of such securities generally include:

SchVI, Part I sets out the disclosure requirements in respect of debt. Debt disclosures are made on the basis of the underlying security.

The following disclosures are required for secured debt:

All entities that have issued securities, including options, warrants, debt, and stock, must comply with the disclosure requirements of FAS 129 dealing with disclosures on capital structures.

Product financing arrangements for products that were produced by or were originally purchased by the sponsor or purchased by another enterprise on behalf of the sponsor and have the following characteristics:

The financing arrangement requires the sponsor to purchase the product, a substantially identical product, or processed goods of which the product is a component at specified prices. The specified prices are not subject to change except for fluctuations due to finance and holding costs. This characteristic of predetermined prices also is present if any of the following circumstances exists:

The following disclosures are required for unsecured debt:

The amounts to be paid by the sponsor are adjusted, as necessary, to cover substantially all fluctuations in costs incurred by the other enterprise in purchasing and holding the product (including interest). (FAS 49, ¶5)

Product and obligations under product financing arrangements that have both characteristics described above are accounted for as follows:

A restructuring of debt constitutes a TDR if the creditor, for reasons related to the debtor's financial difficulties, grants a concession to the debtor that it would not otherwise consider. This does not apply to routine changes in debt terms.

The accounting for a TDR is based on the type of the restructuring, which may be one of two primary types: (a) a transfer of assets (or equity interest) from a debtor to a creditor in full settlement of a debt and (b) a modification of terms.

If a debtor satisfies a debt in full by transferring assets, or by granting an equity interest, to a creditor and the FMV of the assets transferred or equity interest granted is less than the carrying value of the debt (or, in the case of the creditor, is less than the recorded investment in the debt) the difference generally is an extraordinary gain to the debtor and ordinary loss to the creditor. Also, the debtor must recognize a gain or loss for any difference between the carrying value of the assets transferred and their fair value. Subsequent accounting for assets received in a TDR is the same as if the assets were acquired for cash.

The cost of an asset is one of the costs of the services it renders during its useful economic life. GAAP requires that this cost be spread over the expected useful life of the asset in such a way as to allocate it as equitably as possible to the periods during which services are obtained from the use of the asset.

Depreciation accounting is a system of accounting that aims to distribute the cost or other basic value of tangible capital assets, less salvage (if any), over the estimated useful life of the unit (which may be a group of assets) in a systematic and rational manner. It is a process of allocation, not of valuation. (ARB 43, ch9C, ¶5)

AS 6 does not apply to:

The depreciable amount of a depreciable asset is allocated on a systematic basis to each accounting period during the useful life of the asset.

The useful lives of assets are estimated after considering expected physical wear and tear, obsolescence and legal or other limits on the use of the asset.

The useful lives of major depreciable assets or classes of depreciable assets are reviewed periodically and depreciation rates adjusted for current and future periods if expectations are significantly different from previous estimates.

The depreciation method selected is applied consistently unless altered circumstances justify a change.

Disclosures include:

Property, plant, and equipment is not written up by an enterprise to reflect appraisal, market, or current values which are above cost to the enterprise. This may not apply to foreign operations under unusual conditions such as serious inflation or currency devaluation. However, when the accounts of an enterprise with foreign operations are translated into U.S. currency for consolidation, such write-ups normally are eliminated. Whenever appreciation is recorded on the books, income is charged with depreciation computed on the written-up amounts. (APB 6, ¶17)

Where the expected productivity or revenue-earning power of the asset is relatively greater during the earlier years of its life, or where maintenance charges tend to increase during later years, the declining-balance method may provide the most satisfactory allocation of cost. That conclusion also applies to other methods, including the sum-of-the-years'-digits method, which produce substantially similar results. (FAS 109, ¶288a)

The following disclosures are made in the financial statements or in notes thereto:

The depreciation method selected is applied consistently from period to period. A change from one method of providing depreciation to another should be made in accordance with AS 1 and 5. When such a change in the method of depreciation is made, depreciation is recalculated in accordance with the new method retroactively. The deficiency or surplus arising from retrospective recalculation of depreciation is adjusted in the financial statements in the year in which the method of depreciation is changed. Such a change is treated as a change in accounting policy and its effect is quantified and disclosed. (AS 6, ¶17)

The useful lives of major depreciable assets or classes of depreciable assets may be reviewed periodically. Where there is a revision of the estimated useful life of an asset, the unamortized depreciable amount should be charged over the revised remaining useful life. (AS 6, ¶23)

Any addition or extension that becomes an integral part of the existing asset is depreciated over the remaining useful life of that asset. The depreciation on such addition or extension is provided at the rate applied to the existing asset. Where an addition or extension retains a separate identity and is capable of being used after the existing asset is disposed of, depreciation is provided independently on the basis of an estimate of the applicable useful life. (AS 6, ¶24)

Where the historical cost of a depreciable asset undergoes a change due to increase or decrease in long term liability on account of exchange fluctuations, price adjustments, changes in duties or similar factors, the depreciation on the revised unamortized depreciable amount is provided prospectively over the residual useful life of the asset. (AS 6, ¶25)

Where depreciable assets are revalued, the provision for depreciation is based on the revalued amount and on the estimate of the remaining useful lives of such assets. In case the revaluation has a material effect on the amount of depreciation, the same is disclosed separately in the year in which revaluation is carried out. (AS 6, ¶26)

The following information is disclosed in the financial statements:

Section AC D 50 presents the accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction.

The accounting for changes in the fair value of a derivative (that is, gains and losses) depends on the intended use of the derivative and the resulting designation.

IAS 39 is effective for annual financial statements beginning on or after January 1, 2001 and is summarized below.

Under IAS 39, all financial assets and financial liabilities are recognized on the balance sheet, including all derivatives. They are initially measured at cost, which is the fair value of whatever was paid or received to acquire the financial asset or liability.

An enterprise should recognize normal purchases of securities in the market place either at trade date or settlement date, with recognition of certain value changes between trade and settlement dates if settlement date accounting is used.

Transaction costs are included in the initial measurement of all financial instruments.

Subsequent to initial recognition, all financial assets are remeasured to fair value, except for the following, which should be carried at amortized cost:

For a derivative designated as hedging the exposure to variable cash flows of a forecasted transaction (referred to as a cash flow hedge), the effective portion of the derivative's gain or loss is initially reported as a component of other comprehensive income (outside earnings) and subsequently reclassified into earnings when the forecasted transaction affects earnings. The ineffective portion of the gain or loss is reported in earnings immediately.

For a derivative designated as hedging the foreign currency exposure of a net investment in a foreign operation, the gain or loss is reported in other comprehensive income (outside earnings) as part of the cumulative translation adjustment. The accounting for a fair value hedge described above applies to a derivative designated as a hedge of the foreign currency exposure of an unrecognized firm commitment or an available-for-sale security. Similarly, the accounting for a cash flow hedge described above applies to a derivative designated as a hedge of the foreign currency exposure of a foreign-currency-denominated forecasted transaction.

An enterprise measures loans and receivables that it has originated and that are not held for trading at amortized cost, less reductions for impairment or uncollectibility. The enterprise need not demonstrate intent to hold originated loans and receivables to maturity. For other fixed maturity investments, intent to hold to maturity is considered in the aggregate, not by subcategories.

An intended or actual sale of a held-to-maturity security due to a non-recurring and not reasonably anticipated circumstance beyond the enterprise's control should not call into question the enterprise's ability to hold its remaining portfolio to maturity.

If an enterprise is prohibited from classifying financial assets as held-to-maturity because it has sold more than an insignificant amount of assets that it had previously said it intended to hold to maturity, that prohibition should expire at the end of the second financial year following the premature sales.

Under this section, an entity that elects to apply hedge accounting is required to establish at the inception of the hedge the method it will use for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. Those methods must be consistent with the entity's approach to managing risk.

This section applies to all entities. A not-for-profit organization should recognize the change in fair value of all derivatives as a change in net assets in the period of change. In a fair value hedge, the changes in the fair value of the hedged item attributable to the risk being hedged also are recognized. However, because of the format of their statement of financial performance, not-for-profit organizations are not permitted special hedge accounting for derivatives used to hedge forecasted transactions. This section does not address how a not-for-profit organization should determine the components of an operating measure if one is presented.

For those financial assets and liabilities that are remeasured to fair value, an enterprise will have a single, enterprise-wide option either to:

IAS 39 establishes conditions for determining when control over a financial asset or liability has been transferred to another party. For financial assets a transfer normally would be recognized if (a) the transferee has the right to sell or pledge the asset and (b) the transferor does not have the right to reacquire the transferred assets unless either the asset is readily obtainable in the market or the reacquisition price is fair value at the time of reacquisition.

With respect to derecognition of liabilities, the debtor must be legally released from primary responsibility for the liability (or part thereof) either judicially or by the creditor. If part of a financial asset or liability is sold or extinguished, the carrying amount is split based on relative fair values. If fair values are not determinable, a cost recovery approach to profit recognition is taken.

Hedging, for accounting purposes, means designating a derivative or (only for hedges of foreign currency risks) a non-derivative financial instrument as an offset in net profit or loss, in whole or in part, to the change in fair value or cash flows of a hedged item. Hedge accounting is permitted under IAS 39 in certain circumstances, provided that the hedging relationship is clearly defined, measurable, and actually effective.

However, the approximate income statement effect of hedge accounting for an overall net position can be achieved, in some cases, by designating part of one of the underlying items as the hedged position.

For hedges of forecasted transactions, the gain or loss on the hedging instrument will adjust the basis (carrying amount) of the acquired asset or liability.

IAS 39 supplements the disclosure requirements of IAS 32 for financial instruments.

IAS 39 is effective for annual accounting periods beginning on or after 1 January 2001. Earlier application is permitted as of the beginning of a financial year that ends after issuance of IAS 39.

Generally accepted accounting principles that apply to established operating enterprises govern the recognition of revenue by a development stage enterprise and determine whether a cost incurred by a development stage enterprise is to be charged to expense when incurred or is to be capitalized or deferred.

Accounting treatment is governed by the nature of the transaction rather than by the degree of maturity of the enterprise. Thus, the determination of whether a particular cost is charged to expense when incurred or is capitalized or deferred is based on the same accounting standards regardless of whether the enterprise incurring the cost is already operating or is in the development stage.

An enterprise is considered to be in the development stage if it is devoting substantially all of its efforts to establishing a new business and either of the following conditions exists:

The additional information includes the following:

SOP 98-5 provides guidance on the financial reporting of start-up costs and organization costs.

Start-up activities as those one-time activities related to opening a new facility, introducing a new product or service, conducting business in a new territory, conducting business with a new class of customer or beneficiary, initiating a new process in an existing facility, or commencing some new operation. Start-up activities include activities related to organizing a new entity (commonly referred to as organization costs).

Costs relating to the consumption of economic benefits during a period may be recognized either directly or by relating it to revenues recognized during the period. Other costs are recognized as expenses in the period in which they are incurred because the period to which they otherwise relate is indeterminable or not worth the effort to determine.

Certain expenditures for start-up and preoperative activities and development stage enterprises are examples of the kinds of items for which assessments of future economic benefits may be especially uncertain.

Costs of start-up activities, including organization costs, are consequently expensed as incurred.

FAS 128 establishes standards for computing and presenting earnings per share (EPS) and applies to entities with publicly held common stock or potential common stock. It simplifies the standards for computing earnings per share previously found in APB 15 and makes them comparable to international EPS standards. It replaces the presentation of primary EPS with a presentation of basic EPS and also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures. FAS 128 also requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation.

Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Diluted EPS is computed similarly to fully diluted EPS pursuant to APB 15.

IAS 33 is substantially similar to the requirements of FAS 128 and is applicable to public companies only.

IAS 33 requires the disclosure of basic (undiluted) and diluted net income per ordinary share on the face of the income statement with equal prominence.

EPS disclosures are required for each class of common having different dividend rights.

Diluted EPS reflects the potential reduction of EPS from that would arise on the conversion of options, warrants, rights, convertible debt, convertible preferred, and other contingent issuances of ordinary shares.

The numerator for basic EPS is profit after minority interest and preference dividends. The denominator for basic EPS is the weighted average outstanding ordinary shares during an accounting period.

The "What if converted method" is applied to compute potential dilution arising on the conversion of common stock equivalents such as rights, convertible debt, convertible preferred, and other contingent issuances of ordinary shares.

The "Treasury stock method" is used to compute dilution of options and warrants.

Pro forma EPS reflects issuances, exercises, and conversions after balance sheet date.

The disclosures relating to financial instruments are contained in AC F 25.

F 25 presents requirements for all entities to disclose certain information about their financial instruments. However, certain disclosures are optional for nonpublic entities that meet the following criteria are exempt from the disclosure requirements of this section.

AS 11, ¶26 requires the disclosure of the amount of exchange differences in respect of forward exchange contracts to be recognized in the profit or loss for one or more subsequent accounting periods, as required by AS 11, ¶13.

AS 11, ¶27 encourages the disclosure of an enterprise's foreign currency risk management policy.

The purpose of the disclosures required is to provide information that will enhance understanding of the significance of on-balance sheet and off-balance sheet financial instruments to an enterprise’s financial position, performance and cash flows and assist in assessing the amounts, timing and certainty of future cash flows associated with those instruments.

In addition to giving information about particular financial instrument balances and transactions, enterprises are encouraged to provide a discussion of the extent to which financial instruments are used, the associated risks and the business purposes served.

A discussion of management’s policies for controlling the risks associated with financial instruments, including policies on matters such as hedging of risk exposures, avoidance of undue concentrations of risk and requirements for collateral to mitigate credit risks, provides a valuable additional perspective that is independent of the specific instruments outstanding at a particular time.

In addition, all entities except certain nonpublic entities are required to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized in the statement of financial position, for which it is practicable to estimate fair value. If estimating fair value is not practicable, F 25 requires disclosure of descriptive information pertinent to estimating the value of a financial instrument.

F 25 also encourages, but does not require, quantitative information about market risks of derivative instruments, and also of other assets and liabilities, that is consistent with the way the entity manages or adjusts those risks.

A financial instrument is defined as cash, evidence of an ownership interest in an entity, or a contract that both:

The standards do not prescribe either the format of the information required to be disclosed or its location within the financial statements. With regard to recognized financial instruments, to the extent that the required information is presented on the face of the balance sheet, it is not necessary for it to be repeated in the notes. With regard to unrecognized financial instruments, however, information in notes or supplementary schedules is the primary means of disclosure.

Disclosures may include a combination of narrative descriptions and specific quantified data, as appropriate to the nature of the instruments and their relative significance to the enterprise. Determination of the level of detail to be disclosed about particular financial instruments is a matter for judgement.

Disclosures include:

If it is not practicable for an entity to estimate the fair value of a financial instrument or a class of financial instruments, the following is disclosed:

Financial assets are cash, evidence of an ownership interest in an entity, or a contract that conveys to a second entity a contractual right (a) to receive cash or another financial instrument from a first entity or (b) to exchange other financial instruments on potentially favorable terms with the first entity. (FAS 125, ¶243). This definition is similar to the definition of financial instrument under FAS 107, ¶3(b).

Servicing assets are contracts to service financial assets under which the estimated future revenues from contractually specified servicing fees, late charges, and other ancillary revenues are expected to more than adequately compensate the servicer for performing the servicing. A servicing contract is either (a) undertaken in conjunction with selling or securitizing the financial assets being serviced or (b) purchased or assumed separately. (FAS 125, ¶243)

Servicing liabilities are contracts to service financial assets under which the estimated future revenues from contractually specified servicing fees, late charges, and other ancillary revenues are not expected to adequately compensate the servicer for performing the servicing. (FAS 125, ¶243)

Servicing assets purchased or servicing liabilities assumed should be initially measured at fair value.

A servicing asset or liability is amortized in proportion to and over the period of estimated net servicing income (if servicing revenues exceed servicing costs) or net servicing loss (if servicing costs exceed servicing revenues). A servicing asset or liability is assessed for impairment or increased obligation based on its fair value (FAS 125, ¶13)

An entity should disclose the following for all servicing assets and servicing liabilities:

The accounting and reporting standards for transfers of financial assets are contained in AC F 38. Those standards are based on consistent application of a financial-components approach that focuses on control. Under this approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. F 38 provides standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings.

A transfer of financial assets in which the transferor surrenders control over those assets is accounted for as a sale to the extent that consideration other than beneficial interests in the transferred assets is received in exchange. The transferor has surrendered control over transferred assets if and only if all of the following conditions are met:

IAS 39 provides guidance on transfers of financial instruments.

An enterprise derecognizes a financial asset or a portion of a financial asset when, and only when, the enterprise loses control of the contractual rights that comprise the financial asset (or a portion of the financial asset). An enterprise loses such control if it realizes the rights to benefits specified in the contract, the rights expire, or the enterprise surrenders those rights.

Determining whether an enterprise has lost control of a financial asset depends both on the enterprise’s position and that of the transferee. Consequently, if the position of either enterprise indicates that the transferor has retained control, the transferor does not remove the asset from its balance sheet. On derecognition, the difference between:

If a debtor delivers collateral to the creditor and the creditor is permitted to sell or repledge the collateral without constraints, then:

An enterprise removes a financial liability (or a part of a financial liability) from its balance sheet when, and only when, it is extinguished – that is, when the obligation specified in the contract is discharged, cancelled, or expires.

An exchange between an existing borrower and lender of debt instruments with substantially different terms is an extinguishment of the old debt that results in derecognition of that debt and recognition of a new debt instrument.

Similarly, a substantial modification of the terms of an existing debt instrument (whether or not due to the financial difficulty of the debtor) is accounted for as an extinguishment of the old debt.

The presentation of comparative financial statements in annual and other reports enhances the usefulness of such reports and brings out more clearly the nature and trends of current changes affecting the enterprise. Such presentation emphasizes the fact that statements for a series of periods are far more significant than those for a single period and that the accounts for one period are but an installment of what is essentially a continuous history. (ARB 43, ch2A, ¶1)

In any one year it is ordinarily desirable that the balance sheet, the income statement, [the statement of cash flows,] and the statement of [retained earnings] be given for one or more preceding years as well as for the current year. Footnotes and explanations that appeared on the statements for the preceding years should be repeated, or at least referred to, in the comparative statements to the extent that they continue to be of significance. (ARB 43, ch2A, ¶2)

Unless a standard permits or requires otherwise, comparative information is disclosed in respect of the previous period for all numerical information in the financial statements.

Comparative information is included in narrative and descriptive information when it is relevant to an understanding of the current period’s financial statements.

When the presentation or classification of items in the financial statements is amended and comparative amounts are reclassified, the nature, amount of, and reason for any reclassification is disclosed.