ADVANCED FINANCIAL ACCOUNTING & REPORTING

FINAL GROUP - IV PAPER - 16

ADVANCED FINANCIAL ACCOUNTING & REPORTING

The Institute of Cost and Works Accountants of India 12, SUDDER STREET, KOLKATA - 700 016

First Edition : January 2008 Revised Edition : March 2009 Second Revised Edition : June 2010

Published by: Directorate of Studies The Institute of Cost and Works Accountants of India 12, SUDDER STREET, KOLKATA - 700 016

Printed at :

India Limited,

50/2, TTC MIDC Industrial Area, Mahape, Navi Mumbai - 400 710, India

Copyright of these Study Notes is reserved by the Institute of Cost and Works Accountants of India and prior permission from the Institute is necessary for reproduction of the whole or any part thereof.

CONTENTS

Page No.

Study Note - 1

Introduction to IAS, USGAAP, Indian Accounting Standard ............................................................ 1 1.1 Framework of Accounting ............................................................................................................... 2

1.1.1 Introduction ............................................................................................................................ 2 1.1.2 Meaning of Accounting ......................................................................................................... 2 1.1.3 Objectives and Functions of Accounting ............................................................................ 3 1.1.4 Fundamental Accounting Assumptions ............................................................................. 3 1.1.5 Limitations of Accounting .................................................................................................... 4 1.1.6 Financial Statements .............................................................................................................. 4 1.1.7 Qualitative Characteristics of Financial Statements.......................................................... 5 1.2 Accounting Standards - Applicability, Interpretation, Scope and Compliance ............... 7 1.3 US GAAPS .......................................................................................................................................... 10 1.3.1 Established Accounting Principles in the US ..................................................................... 10 1.3.2 Other Accounting Literature ................................................................................................ 11 1.3.3 AICPA ...................................................................................................................................... 11 1.3.4 FASB ......................................................................................................................................... 11 1.3.5 Components of US GAAP..................................................................................................... 11 1.4 International Accounting Standards .............................................................................................. 13 1.4.1 Introduction ............................................................................................................................ 13 1.4.2 Extract of the International Accounting Standards........................................................... 13 1.5 International Financial Reporting Standards ................................................................................ 29 1.6 A Comparison IGAAP - US GAAP - IFRS ..................................................................................... 39

Study Note - 2

Preparation of Company Accounts under Various Circumstances.................................................... 49 2.1 Merger and Acquisitions .................................................................................................................. 50

2.1.1 Introduction ............................................................................................................................ 50 2.1.2 What is Merger? ..................................................................................................................... 50 2.1.3 Varieties of Mergers ............................................................................................................... 51 2.1.4 Acquisitions............................................................................................................................. 51 2.1.5 Types of Acquisitions ............................................................................................................ 52 2.1.6 Distinction Between Mergers and Acquisitions ................................................................ 52 2.2 Accounting for Mergers and Acquisitions..................................................................................... 54 2.2.1 Methods of Accounting ......................................................................................................... 55

Pooling of Interest Method .................................................................................................. 55 Purchase Method.................................................................................................................... 56 2.2.2 How to Value an Acquisition ............................................................................................... 60

Page No.

2.2.3 Sources of Gains from Acquisitions .................................................................................... 60 2.2.4 Valuation Procedures ............................................................................................................ 61 2.3 External Reconstruction.................................................................................................................... 62 Illustrations........................................................................................................................................ 66 I Computation and Discharge of Purchase Consideration................................................. 66 II Basics of Amalgamation and Absorption ........................................................................... 73 III Purchasing Company holding shares in Selling Company ............................................. 118 IV Selling Company holding shares in Purchasing Company ............................................. 142 V Cross Holding ......................................................................................................................... 146 VI Chain Holding ........................................................................................................................ 155 VII Internal Reconstruction ......................................................................................................... 158 VIII Reverse Merger....................................................................................................................... 171 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 3.1 Holding Company............................................................................................................................. 226 3.2 Methods of Combination ................................................................................................................ 226 3.3 Accounting Treatment ...................................................................................................................... 227 3.4 Preparation of Group Cash Flow Statement ................................................................................. 299 3.5 Statement of Cash Flows .................................................................................................................. 300 3.6 Illustrations on Cash Flow Statement............................................................................................. 304

Study Note - 4

Segmental Reporting................................................................................................................................... 359 4.1 Introduction........................................................................................................................................ 360 4.2 Need for Segmental Reporting ........................................................................................................ 360 4.3 Arguments against Segmental Reporting ...................................................................................... 361 4.4 International Scenario ....................................................................................................................... 362

Page No. 4.5 The Indian Scenario........................................................................................................................... 370

4.5.1 Definitions ............................................................................................................................... 370 4.5.2 Disclosure Requirements ...................................................................................................... 373 4.5.3 Accounting and Auditing Issues ......................................................................................... 373 4.6 Segmental Reporting Problems & Difficulties .............................................................................. 375 4.7 Specific Issues Relating to Management Accountants................................................................. 377 4.8 Segmental Disclosure ? A Practical Example ................................................................................ 381 4.9 Illustrations on Segmental Reporting ............................................................................................. 385

Study Note - 5

Development in External Reporting ........................................................................................................ 389 5.1 Indian Accounting Standards .......................................................................................................... 390

5.1.1 Companies (Accounting Standards) Rules, 2006............................................................... 390 5.1.2 Applicability of Accounting Standard to Non-corporate Entities .................................. 392 5.2 Accounting Standards ...................................................................................................................... 395 5.3 Financial Reporting across the world ............................................................................................. 473 5.4 Post Balance Sheet Events ................................................................................................................ 477 5.5 External Reporting under Capital Market Regulations ............................................................... 479 5.6 Value Added Statement ................................................................................................................... 494 5.7 Economic Value Added Statement ................................................................................................. 507 5.8 Human Resource Accounting.......................................................................................................... 512 5.9 Environmental Accounting.............................................................................................................. 512 5.10 Guidance Notes on Accounting for Tax Matters .......................................................................... 516 5.11 Guidance Notes on Derivatives....................................................................................................... 533 5.12 Guidance Notes for Special Businesses / Reports........................................................................ 556

Study Note - 6

Government Accounting in India............................................................................................................. 571 6.1 Government Accounting in India ................................................................................................... 572 6.2 General Principles of Government Accounting ............................................................................ 572 6.3 Methods of Government Accounting............................................................................................. 573 6.4 Comparison with Commercial Accounting................................................................................... 573 6.5 Comptroller and Auditor General of India ................................................................................... 574 6.6 Audit of Government Companies (Commercial Audit).............................................................. 574 6.7 Audit Board Setup in Commercial Audit ...................................................................................... 574

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