Summary: Illustrative accounting policies for non-company entities adhering to ICAI standards outline key accounting principles to ensure accurate financial reporting. These policies specify that financial statements are prepared under historical cost and accrual bases unless stated otherwise. Management must use estimates impacting assets, liabilities, and revenue. Revenue recognition follows specific criteria: sales are recorded when ownership risks transfer, service income is recognized upon service completion, and interest income on a time proportion basis. Assets, both tangible and intangible, are recorded at cost with depreciation and amortization based on their useful lives. Investments are categorized as long-term or current, with valuation adjustments for impairments. Inventories are valued at the lower of cost and net realizable value, while employee benefits include short-term and post-employment benefits. Borrowing costs related to qualifying assets are capitalized, and provisions are made for probable obligations. Tax provisions account for current and deferred tax based on applicable rates. Foreign currency transactions are recorded at transaction dates’ exchange rates, and impairment of assets is assessed annually. Earnings per share are calculated for equity shareholders, and cash flow statements are prepared using the indirect method. These policies aim to guide the preparation of statutory and tax audit reports for the fiscal year ending March 31, 2024.
Illustrative Accounting Policies for a non-company entity complying with Accounting Standards (AS) issued by ICAI
Notes to Accounts: Accounting Policies
1. Basis of Preparation of Financial Statements
The financial statements have been prepared in accordance with the Accounting Standards specified by the Institute of Chartered Accountants of India (ICAI) applicable to non-corporate entities. These financial statements have been prepared under the historical cost convention on an accrual basis, unless otherwise stated.
2. Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires the management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities on the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
3. Revenue Recognition
Revenue is recognized when it is earned and no significant uncertainty exists as to its realization or collection.
- Sale of Goods: Revenue from sales is recognized when the significant risks and rewards of ownership of the goods have been transferred to the buyer, typically on dispatch of goods.
- Rendering of Services: Revenue from services is recognized as and when the services are rendered and it is probable that the economic benefits associated with the transaction will flow to the entity.
- Interest: Interest income is recognized on a time proportion basis considering the amount outstanding and the rate applicable.
4. Property, Plant and Equipment
- Tangible Property, Plant and Equipment: Tangible Property, Plant and Equipment are stated at cost of acquisition less accumulated depreciation and impairment losses, if any. Cost includes all expenses directly attributable to bringing the asset to its working condition for its intended use.
- Intangible Assets: Intangible assets are recorded at the consideration paid for acquisition and are stated at cost less accumulated amortization and impairment losses, if any.
5. Depreciation and Amortization
- Depreciation on Tangible Property, Plant and Equipment: Depreciation on tangible Property, Plant and Equipment is provided on the Written Down Value (WDV) method over their useful life from the date they are available for use.
- Amortization of Intangible Assets: Intangible assets are amortized over their estimated useful life on a systematic basis from the date they are available for use.
6. Investments
Investments are classified as long-term and current. Long-term investments are carried at cost. However, provision for diminution in value is made to recognize a decline, other than temporary, in the value of investments. Current investments are valued at lower of cost and fair value, determined on an individual investment basis.
7. Inventories
Inventories are valued at the lower of cost and net realizable value. Cost is determined on a First-In-First-Out (FIFO) basis and includes expenditure incurred in acquiring the inventories and bringing them to their present location and condition.
8. Employee Benefits
- Short-term Employee Benefits: These are recognized as an expense at the undiscounted amount in the Profit and Loss Account for the year in which the related service is rendered.
- Post-Employment Benefits: Contributions to defined contribution plans such as Provident Fund are charged to the Profit and Loss Account as incurred. For defined benefit plans like Gratuity, the entity determines the liability using the projected unit credit method with actuarial valuations being carried out at each balance sheet date.
9. Borrowing Costs
Borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset are capitalized as part of the cost of that asset. Other borrowing costs are recognized as an expense in the period in which they are incurred.
10. Provisions, Contingent Liabilities, and Contingent Assets
A provision is recognized when the entity has a present obligation because of a past event, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Contingent liabilities are disclosed in the Notes to Accounts, unless the possibility of an outflow of resources embodying economic benefits is remote. Contingent assets are neither recognized nor disclosed in the financial statements.
11. Taxation
- Current Tax: Provision for current tax is made based on the taxable income for the year, using the tax rates and laws that are enacted or substantively enacted at the reporting date.
- Deferred Tax: Deferred tax is recognized on timing differences, being the differences between taxable income and accounting income that originate in one period and are capable of reversal in one or more subsequent periods. Deferred tax assets are recognized only to the extent there is a reasonable certainty that sufficient future taxable income will be available against which such deferred tax assets can be realized.
12. Foreign Currency Transactions
Foreign currency transactions are recorded at the exchange rates prevailing on the date of the transaction. Monetary items denominated in foreign currencies at the year-end are restated at year-end rates. Non-monetary items carried at historical cost are recorded at the exchange rate at the date of the transaction. Exchange differences arising on settlement or restatement of monetary items are recognized in the Profit and Loss Account.
13. Impairment of Assets
At each balance sheet date, the carrying amounts of tangible and intangible assets are reviewed to determine whether there is any indication of impairment. If any such indication exists, the recoverable amount of the asset is estimated. If the carrying amount of the asset exceeds its recoverable amount, an impairment loss is recognized in the Profit and Loss Account.
14. Earnings Per Share (if applicable)
Earnings per share (EPS) is calculated by dividing the net profit or loss for the period attributable to equity shareholders by the weighted average number of equity shares outstanding during the period. For calculating diluted earnings per share, the net profit or loss for the period attributable to equity shareholders and the weighted average number of shares outstanding during the period are adjusted for the effects of all dilutive potential equity shares.
15. Cash Flow Statement
The Cash Flow Statement is prepared by the indirect method set out in Accounting Standard (AS) 3 on “Cash Flow Statements” and presents the cash flows by operating, investing, and financing activities of the entity.
I hope the above draft policies will prove to be an aid to all of you in finalising of the Statutory Audit Reports/ Tax Audit Reports of Non Corporate Entities for the financial year ending on 31 st March, 2024.
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