Non-compliance pointed out in the Annual Reports of various companies related to (AS) Accounting standards used in the preparation and presentation of financial statements.
AS -1 Disclosure of Accounting Policies
1. Company Policy regarding timing of recognition of revenue from sales, royalty or dividend have fail to disclosed which is contrary to AS-1
2.Company has included stock of land as an item of closing stock indicates that Land was a significant item of Inventory. Company has not disclosed the method of valuation of Land in the policy is in violation of AS-1.
3. Company’s Annual Report stated that All the Assets and liabilities related to foreign currency transactions are translated at year-end rates and corresponding effect is given to respective accounts, which contrary to AS-11, which requires only assets and liabilities in the nature of monetary items to be converted at year-end rates.
As per AS-11, Exchange differences arising on currency transactions should be recognized as Income or Expense in the period in which they arise.
4. The company has continuously incurring losses, its net worth becomes negative and despite financial restructuring, relief and other measures, the company may not be able to continue its operations. It is not appropriate to prepare its financial statements on a going concern basisas per AS-1
5. All significant accounting policies adopted in the preparation of financial statements should be disclosed with regard to Borrowing cost, Valuation of inventories, Accounting for investments, Impairment of Assets, Provisions, Contingent liabilities and Contingent Assets.
6. Company’s significant amount of funds are involved in Investments and Large amounts of income as Dividend incomearising from such investments, a separate accounting policy of dividend income to be disclosed under significant accounting policies adopted by the Company.
AS-2 Valuation of Inventories
1. Company required to create a provision for custom duty payableon the goods in warehouse and include the said amount in cost of respective inventories or fixed Assets as per AS-2. Custom Duty is incurred for importing of goods and liability to pay arises when entering territorial waters of India.
2. Inventories should be valued at lower cost and NRV (Net Realisable Value). Net Realisable Value is the estimated Selling price less the cost incurred to make the sale. Not reducing the cost incurred to make the sale from the estimated selling price is contrary to AS-2.
3. The Company merely stated the nature of cost included in inventory, omit to specify the exact cost formula used for valuation of inventories. AS-2 requires a cost formula to determine the cost of inventory should be disclosed in the financial statements.
4. As per AS-2 Cost of Inventories should comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to the present location and condition. Excise duty incurred in bringing the inventories to the present location, requires a provision to be created for excise duty payable on goods manufactured and lying in the warehouse. Non-creation of provision contrary not only to Guidance Note but also a violation of AS-2.
5. Stock transfer from one unit to another unit at transfer price may result in recognition of unrealized profit in the financial statements and it’s against the concept of prudence and generally accepted accounting principle.
6. In case of joint products when produced or there are main product and by-product, the cost of conversion of each product is not separately identifiable, they are allocated between products on a rational and consistent basis. The allocation may be based on sales value of each product at stage of production or on completion of production. Most by-products as well as scrap materials are often measured at NRV and value is deducted from cost of main-product.
7. Excise duty should be considered as manufacturing expense and like other manufacturing expenses should be considered as cost for inventory valuation. Excise duty on finished goods should be included in the cost of finished goods instead of showing it separately.
Also Read: Points to be considered in Annual Report Preparation of Companies – PART II
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