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PAN African eNetwork Project

Course Name-DBM
Subject Name- AFM
Semester - I

Faculty Name-Dr. Anubha Srivastava

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Points to discuss Issue of share & debenture and their

Form and content of financial statement
as companies Act 1956

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Basics of share and loan

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The Definition of a Stock

stock is a share in the ownership of a
Stock represents a claim on the
company's assets and earnings. As you
acquire more stock, your ownership stake
in the company becomes greater. Whether
you say shares, equity, or stock, it all
means the same thing.

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Stock Vs. Share

The stock or capital stock of a business entity represents the
original capital paid into or invested in the business by its founders.
It serves as a security for the creditors of a business since it cannot
be withdrawn to the detriment of the creditors. Stock is distinct from
the property and the assets of a business which may fluctuate in
quantity and value.
The stock of a business is divided into shares, the total of which
must be stated at the time of business formation. Given the total
amount of money invested in the business, a share has a certain
declared face value, commonly known as the par value of a share.

Used in the plural, stocks is often used as a

synonym for shares.

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A Share in the company is the unit in to which
total share capital is divided
Type of share
Equity share
Preference share
Share capital
Called up
Paid up
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Why :
1. You do not need a lot of money to start making money, unlike
buying property and paying a monthly mortgage.
2. It requires very minimal time to trade - unlike building a conventional
3.. Its fast cash and allows for quick liquidation (You can convert it to
cash easily, unlike selling a property or a business).
4. Its easy to learn how to profit from the stock market.

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Types of stock
Common Stock
Preferred stock
Common shares represent ownership in a company and a claim
(dividends) on a portion of profits. Investors get one vote per share
to elect the board members, who oversee the major decisions made
by management.
Preferred stock represents some degree of ownership in a company
but usually doesn't come with the same voting rights. (This may vary
depending on the company.) With preferred shares, investors are
usually guaranteed a fixed dividend forever.

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How Stocks Trade

Most stocks are traded on exchanges, which are places where
buyers and sellers meet and decide on a price. Some exchanges
are physical locations where transactions are carried out on a
trading floor.
The purpose of a stock market is to facilitate the exchange of
securities between buyers and sellers, reducing the risks of
investing. Just imagine how difficult it would be to sell shares if you
had to call around the neighborhood trying to find a buyer. Really, a
stock market is nothing more than a super-sophisticated farmers'
market linking buyers and sellers.

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Corporate Securities
Ownership Securities

Preference Shares

Cumulative and Non cumulative

Redeemable and Irredeemable
Participating and Non-participating
Convertible and Non convertible

Equity Shares

Blue chip shares

Growth shares
Income shares, etc

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Primary market or New Issue Market: all financial instruments are firstly
issued in this market. There are two type of primary market issues of
common stock .
Firstly: Initial Public offers (IPO) are stocks issued by a formerly privately
owned company selling stock to public for the first time
Secondly: New issue offered by companies that already have floated equity

We also distinguish between two type of primary market issues:

Public offerings : which is an issue of stocks or bonds sold to general
investing public that can be traded on stock market
Private Placements: which is an issue that is sold to a few wealthy or
institutional investors . Moreover private placement do not trade in
secondary market such as stock exchange

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Securities Market
Primary Market or New Issue Market
1. Issue through Prospectus
2. Issue through Offer of Sale
3. Private Placement
4. Right Issue
5. Bonus Issue

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Secondary Market
Stock Exchange
Listing of Securities
Kinds of Speculators
- Bull
- Bear
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Accounting Entries for share

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Accounting Entries
Issue of shares for consideration rather than
cashTo the vendor
On purchase
Asset a/c
To liability a/c
To vendors a/c
On issue of shares
Vendors a/c


To share capital a/c

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Issue of share to promoters-They are

those who provide technical
information ,engineering services and they
are some time paid through issue of
Issue of sweat share it is paid for
providing know how , patents copyright
etc.and In this case share are issued to
them at discount
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Issue of shares for cash

On application
Bank a/c


To share application a./c

Share application a/c Dr.

To share capital a/c
On allotment
Bank a/c
To share allotment a/c
Share allotment a/c
To share capital a/c
On 1st call
Share 1st call a/c
To share capital a/c
Bank a/c
To share 1st call a/c

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Q- On 1st Jan 2001 a company offers 8000

shares of Rs. 10 each . Applications are
received for full 8000 shares . Money payable
is as follows :
On application Rs. 2 per share
On allotment Rs. 2 per share
On 1st call Rs.3 per share
On 2nd call Rs. 2 per share

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Issue of share capital

Over subscription /under subscription
Calls in Arrear /calls in advance
Issue of share at premium and discount
Forfeiture of the share
Surrender of share
Issue of two classes of share
Right share
buy back of share

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Over subscription and under

In under subscription -A company may not receive application for all the
shares offered by it to the public ,in such case entries for application ,
allotment and calls will be made for subscribed share only.
In over subscription -A company gets application for larger number of shares
than offered by it to public
when application are rejected -journal entry will be
Share application a/c Dr.
To bank a/c ( being Refund of money )

In prorate case and partial allotment

Share application a/c
To share allotment a/c

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Calls in arrear and calls in


Calls in advance@6% If company gets its due call

amount in advance in such case such advance
payments are credited to calls in advance a/c . Journal
entry will be
Bank a/c
To calls in advance a/c ( being amount recd.)
Share . Call a/c
To share capital a/c


Bank a/c
Calls in advance a/c
To share .call a/c

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Calls in arrear
Calls in arrear @ 5%-A share holder may not pay the call
amount when it becomes due. Accounting entry will be
Share call a/c
To share capital a/c
Bank a/c
To share call a/c
Calls in arrear a/c
To share.call a/c
Bank a/c
To share .call a/c / calls in arrears a/c
To interest a/c

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Issue of share at premium

and at discount
Accounting entries At Premium
share allotment a/c
To. Share capital a/c
To. Share premium a/c
Bank a/ c
To share allotment a/c
At discount
Share allotment a/c
discount on issue of share a/c
To Share capital a/c
Writing off
Security prem. a/c / P & L a/c
To discount on issue of shares a/c
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Forfeiture of share
When a share holder fails to pay the due
amount his a share are taken back by the
company .
Accounting entriesShare capital a/c
To unpaid calls a/c
To Forfeited share a/c
When they are issued at par same as above

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When issued at premium

Share capital a/c Dr.
Share prem. a/c Dr.
To unpaid calls a/c
To forfeited shares a/c
When issued at discount
Share capital a/c Dr.
To un paid calls a/c
To forfeited share a/c
To discount on issue of shares a/c
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Surrender of shares
Pro rate allotment and forfeiture of share
Total share applied for
Total share allotted x share allotted to
the default shareholders

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Issue of two type of shares

In case the company issues two classes
of share entry will be same
Right share are issued to the existing
share holders to generate money for any
given investment plan

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Buy back of share

The companies act ( Amendment ) Act
1999 is permitting companies to purchase
its own share out of the following
Free reserves
Security Premium account
Any other specified securities

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Loan capital
loan (secured and unsecured )

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Meaning of debenture
It is a fixed interest rate bearing security
where fixed interest is paid at a specified
rates at given date. it can be purchases from
a stock exchange at a price more or less than
face value

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Issuing Debentures
Issuing of debt
Attracts interest
Must be repaid in a specified time frame
Lender = principal
Interest = Charge (Fixed or Floating)
Maturity date
Issued via prospectus to the general public and also privately
to elite few
Must appoint a trustee
Clear disclosure of all matters relating to the debentures

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Type of debenture
Redeemable and irredeemable
Secured and unsecured
Convertible and non convertible
Registered and bearer

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Contrast Funds from equity and



Ownership entitlement

No Ownership entitlement

Voting rights

No Voting rights

Dilute ownership

Do not share profits

Payment of Dividend is at discretion of


Fixed regular income

Does not have to be repaid

Must be repaid

No restriction on amount of share issue

Specific debt/equity ratio

Dividends = Profit

Interest = Expense

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Mortgage Debenture
Secured by a first mortgage over land and/or
Cannot exceed >60% of the value of asset
Limits rights to resell/transfer asset
Trustee can take possession and sell to repay
debenture holders

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Unsecured Note
Debt which is not secured by any charge over
Higher risk = higher rate of interest

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Convertible Note
Allows debenture holder to convert debt to paid up
share capital or cash upon maturity

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Accounting entries for the

issue and redemption of
General Journal
Trust Account- Dr

Application Debentures

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Accounting entries for the

issue of debentures
General Journal
Application - Dr


Trust Acc Debentures


Allot debentures and refund

excess application monies
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Accounting entries for the

issue of debentures

General Journal

Trust Acc Cr
Transfer of trust monies

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Making annual interest

payments on debentures
General Journal
Payment of interest

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Making annual interest

payments on debentures
General Journal
Interest on


Interest incurred but not due for

payment on annual balance date

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Making annual interest

payments on debentures
General Journal
Interest on
Reversal entry

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Accounting entries for the

redemption of debentures
General Journal
Interest Dr
Final interest payment

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Accounting entries for the

redemption of debentures
General Journal


Payment of debenture holders on


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Accounting entries for the

redemption prior to maturity
at a discount
General Journal
Discount on debenture




Payment of debenture holders on

redemption at discount
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Alternate accounts for debt

Debenture Mortgage Unsecured
Debenture Note

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Feature of Common Stock

Voting Rights
Proxy voting
Classes of stock
Other Rights
Share proportionally in declared dividends
Share proportionally in remaining assets
during liquidation
Preemptive right first shot at new stock
issue to maintain proportional ownership if

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Practice questions

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Q 1-A company has s forfeited 300 shares

of Rs. 10 each of X for non payment of
second call of Rs. 3 per share and 200
shares of Y for non payment of final call of
Rs. 5 per share. It has reissued 400
shares (inclusive of all forfeited shares of
X ) at Rs. 8 per shares . Record the above
in the books of company

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Q 2-Give journal entries for the following

A-The company allots 1000 12%
debentures of Rs. 100 each at an issue
price of Rs. 96 per debentures
redeemable at a premium of Rs. 8 per
debenture ( the liability of the premium
also to be recorded in the books at the
time of issue of debentures )

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B- 3000 fully convertible debentures of Rs.

100 each are converted into 20000 equity
shares of Rs. 10 each at a premium of Rs
5 per shares

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Q 3-A company offered for public

subscription 10000 shares of Rs.10 each
at Rs. 11 per share . Money was payable
as follows
On application Rs 3 per share
On allotment
Rs 4 per share
On first and final call Rs 4 per share
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Applications were received for Rs. 12000

shares and director made pro rata
allotment, A an applicant for 80 shares,
could not pay the allotment and call
money B an holder of 300 shares failed to
pay the call money . All these shares were
later forfeited. Out of these forfeited
shares, 150 shares (including whole of As
shares ) were reissued at Rs. 9 per
share .Pass journal entries
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Form and content of financial statement

as per companies Act 1956
Form of statement
Vertical and horizontal statement
Liquidity and permanency order
Content of statement
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Presentation topics

Conceptual framework
Balance Sheet
Income Statement


Conceptual Framework
1. Conceptual frameworks define the fundamental accounting
principle and theories for formulation of accounting standards. They
also decide : Elements of Financial statements,qualitative
characteristics, fundamental assumptions , other concepts etc.
2. Framework statements have been issued in IGAAP and IFRS . In US
GAAP, Statement of Financial Accounting Concepts (SFAC) act as
framework statement which are detailed and rule oriented .
3. Framework assist in- Standard Setting process, interpretation and
application of Accounting standards, harmonisation with other
standards, enabling Auditors in forming an opinion wherever there are
no standard or standards are silent etc.


Conceptual Framework ..Indian GAAP

ICAI framework statement was issued in July 2000. This is NOT an

Accounting standard in itself and does not override any AS.

Users identified as - Investors, Lenders, suppliers, Customers,

Employees, Government and Public.

Underlying Assumptions- Accrual basis, Going Concern,


Qualitative characteristics- Understandability, Relevance, Reliability,

Comparability , true and fair view.

Elements of FS- Assets, Liabilities, equity, performance, income,

expenses, Capital maintenance adjustments. Also defines the
guidelines for recognition of elements of Financial statements.

Outlines the measurement criteria for elements of Financial

statements including Historical Cost, Current cost , Realisable Value

Lays down concept of Financial and operating Capital and their



Conceptual framework.Indian GAAP..

ICAI is working on project to harmonise IGAAP with IFRS . New

Accounting standards are on the anvil for Financial instruments,
Share based payments, Retirement benefit Plans, Agriculture,
Insurance etc.

Adoption of Accounting standards issued by ASB is made

compulsory for Indian Companies as per Companies Act,

GAAP announced by ASB of ICAI. Till date 29 AS announced, and

effective 28 GAAP, after withdrawal of AS 8 on R&D. Several guidance
notes also issued which members are required to follow. GAAP also
pronounced by SEBI, Listing agreement and statutes like Companies
Act, RBI Act, Banking Act, IRDA Act , Electricity Act etc.

Enterprises have been classified in 3 categories for application of

Accounting standards: Level 1, Level 2 and Level 3


Conceptual Framework ..IFRS

IFRS framework was issued in April, 1989. This Framework deals
with Objective of Financial statement, Qualititative characteristics,
elements of financial statement, Concept of Capital and capital
Qualitative characteristics- Understandability, Relevance, materiality,
Reliability, faithful representation, substance over form, neutrality,
prudence, completeness, Comparability and true and fair view

Measurement criteria includes PV in addition to Historical Cost,

Current cost and Realisable Value

Concept of Financial and Physical Capital as well their maintenance

enunciated in framework which have also been incorporated in
IFRS is required or permitted for use in over 90 Countries for
Financial reporting, EU has recently mandated application of IFRS for
all listed Companies affecting over 7000 companies .


Conceptual Framework ..US GAAP

Under US GAAP, detailed framework for pronouncing accounting
standards are contained in SFAC- Statement of Financial Accounting
Concepts .Total seven SFAC have been issued, out of which SFAC-3 is
SFAC forms the basis of pronouncement of FAS. SFAC is not
authoritative GAAP, but can be used if no GAAP exists. There are 6 SFAC
in force on Objective , Quality Characteristics, Recognition and
measurement, Elements and Cash flow.
GAAP /SFAC pronouncement are made by FASB which is not an
accounting Body like ICAI. AICPA does not pronounce GAAP.
Over 150 FAS announced till date, many of which are amendment /
Separate Accounting Board for Government Companies called GASB.


US GAAP Hierarchy


Opinion, ARB Bulletin
FASB Tech Bulletin, AICPA
guides, SOP (AICPA)
AICPA AcSEC Practice Bulletins( FASB Cleared)
, FASB EIFT Consensus Positions

AICPA Accounting interpretation, FASB Q&A,

other Industry literature and Practices


Conceptual Framework ..Comparison

Historical Costing IGAAP and IFRS permits revaluation in contrast
to Historical Cost convention, while US GAAP does not permit
revaluation. Only securities and derivatives can be valued at Fair
Value under IFRS and US GAAP.
True & Fair View: Under IFRS and IGAAP framework , there is an
assumption that adoption of IFRS /IGAAP leads to a true and fair
presentation, there is no such assumption under US GAAP.
Prudence Vs Rules: There is a common allegation against US GAAP,
that they are rule oriented and based on specific cases. However this
is not true, as FAS are also more detailed and lay down detailed
principles for application. No such allegation is leveled against IGAAP
and IFRS.
Comparative Position : under IGAAP and IFRS, comparative financial
figures are to be provided for one previous years, whereas under
USGAAP (SEC requirement for listed companies ) comparatives are to
be provided for two previous years except for Balance Sheet.

Conceptual Framework ..comparison

Over-riding of Standards IFRS permits that a company may
withhold application of IFRS in extremely rare situation, where it is
felt that application of IFRS would defeat the very objective of
Financial reporting. Disclosure must be made for reason for override.
No such override is generally permitted under IGAAP and US GAAP.

Reporting Elements : IFRS prescribes the minimum structure and

content of financial statement including Statement of Changes in
equity (in addition to Balance sheet, Income statement, Cash flow
statement , notes comprising significant accounting Policy and other
explanatory notes). Under US GAAP in addition to statement of
changes in Equity, Statement of Comprehensive Income is required.
Both of these statements are NOT required under IGAAP.


Balance Sheet..IGAAP.
Balance sheet is required under the GAAPs to give disclosure about
assets and Liabilities and as a primary financial statement .
Format : IGAAP provides two format of Balance Sheet- Horizontal
and Vertical format ( Part I of schedule VI to the Companies Act,
IGAAP does not prescribe any current and non current classification.
It rather lists out line items in increasing order of liquidity as sources
and application of funds.
Vertical format requires details of each item in separate schedule,
read with notes.

Additional disclosures include no of shares held by Holding co as

well as the ultimate holding co, aggregate value of quoted
investments, their market value, amount of guarantee given by the
Company on behalf of directors etc.


Balance Sheet...IFRS (IAS1)

IFRS does not prescribe any format, but stipulates minimum line
items like PPE, Investment property, Intangible assets, Financial
assets, Biological assets, inventory, receivables etc. Additional line
items, subheadings and subtotals shall be presented on the face of
BS if relevant. The order of presentation within the group or otherwise
in not mandatory.

An organisation has an option to adopt Current or Non current

classification of assets and liabilities . Deferred Tax Assets not to be
shown as Current assets, if Current /non current classification
adopted. ( IAS 1.53 )
While many items of disclosure are common, the following items
must be disclosed on the face of balance sheet : Biological assets,
Tax Liability, Minority Interest etc (IAS 1.66 )

IFRS permits an enterprise to disclose any long term interest

bearing liability due for settlement within 12 months,as long term
liability if the same is likely to be refinanced and can be supported
by adequate documentary evidence.


Balance Sheet...US GAAP

US GAAP also does not prescribe any format , but Rule S-X of SEC
stipulates for listed companies minimum line items to be disclosed
either on face of Balance sheet or Notes to Accounts like Current
Assets ( Cash and cash items, marketable securities, allowance for
Bad debts, prepaid expenses, other current assets) and Non Current
Assets on asset side and current and non current liabilities on
liabilities side.

While many items of disclosure are common, the following items

must be disclosed like Unearned Income, Securities of related parties,
Minority Interest in consolidated subsidiaries, non current
indebtedness to related parties.


Balance Sheet..comparison

Format : IGAAP provides two formats of Balance Sheet- Horizontal

and Vertical format and order of presentation as well . IFRS and
USGAAP do not prescribe any format ,
Order of line items: Under US GAAP, items in assets and liabilities
are presented in decreasing order of liquidity, whereas under IFRS (if
Current and non current order followed ) and IGAAP, line items are
presented in increasing order of liquidity.
Consolidation : Under IGAAP and IFRS consolidation of Financial
statements of subsidiaries is not compulsory until it is required
under some other law or regulation, whereas under US GAAP
consolidation of results of Subsidiaries and Variable interest entity
(FIN 46R) is compulsory. A VIE is an entity in which the organisation
does not hold majority interest but is responsible to provide
necessary funding support.


Income statement...IGAAP

Under Indian GAAP no format is prescribed , but minimum line items

have been specified in Part II of schedule VI to Companies Act, 1956
including Aggregate Turnover, Gross Service revenue for
Commission paid to Sole selling agent, Brokerage and discount on
sales, depreciation, consumption of stores and spare parts, power
and fuel, rent, repairs, rates and taxes etc.
Indian GAAP requires disclosure of several additional information by
way of notes like Licensed and installed capacity, actual production
details, details of imports, forex earnings and outgo, Net Profit
computation u/s 349 etc.

Any item of expenditure which exceeds 1% of total revenue or Rs

5000/- whichever is higher should be shown as a distinct items and
should not be clubbed as Misc expenses.

Requires separate disclosure of exceptional and non recurring



Income statement... IFRS

IFRS does not prescribe any standard format for income

statement but prescribes minimum disclosure includes revenue,
finance costs, share of post tax results of JV and associates using
equity method, pre tax gain/loss on asset disposal, discontinued
operation tax charge, and Net profit or loss etc.

Under IFRS , the reporting entity has an option to prepare income

statement either by nature of expenses or by Function (Cost of sales
method ) (IAS 1.84)

Under IFRS , Income is defined as Revenue and gains and expenses

are defined to include losses and are decreases in economic activity
that result in decrease in equity.

Additional disclosure under IFRS include amount of dividend and

DPS declared or proposed (IAS 1.95) , Share in profit /loss of
associates under equity method, profit/loss attributable to minority
interest (IAS 1.82) .


Income statement...US GAAP

Under US GAAP as well there is no prescribed format, SEC
guidelines Rule S-X prescribe minimum line items to be shown on the
face of income statement. SEC rules also suggest 2 alternatives a) a
single step format where expenses are classified by function and b) a
Multiple step format where Cost of sales is deducted from Sales .

Income can be classified as from net sale of tangible products,

operating revenue of public utilities, rentals ,services & other revenue.
Revenue from any class which is less than 10% of total revenue can
be clubbed with other class.

Costs and exp include cost of tangible goods sold, operating exp of
public utility, exp relating to rental income, Selling general and admn
exp,Provisions .

Non operating income like dividend, interest on securities, net profit

on securities, misc income as well as non operating exp like loss on
securities, misc income ,deductions can be shown in notes to


Income statement... Comparison

Change in accounting policy : Under IGAAP effect for change in

accounting policy is given with prospective effect , if the same is material.
Only in case of change in method of depreciation, the same has to be
applied with retrospective effect. Other disclosures required like need for
change etc

IFRS requires retroactive application for the earliest period practical

and adjustment of opening retained earning. Exemption given for
prospective application, if resulting adjustment are not reasonably

US GAAP 1) requires prospective application of change in accounting policy

and proforma disclosure of effect on income before extraordinary items on the
face of income statement as separate section.

US GAAP -2) In case of specific situations like change from LIFO method of
valuation of stock,accounting for long term construction contract, change from/
to full cost method in extractive Industry and Change in depreciation Policy,
retrospective application required to restate opening retained earning. Effect of
changes on income before extraordinary items, net income and EPS should be
disclosed for all periods on the face of Income statement in the period of change.

Income statement... Comparison

Prior period items :
IGAAP (AS 5.15,19) requires separate disclosure of prior period in the
current financial statement either as part of current years results or as
an alternative approach after determination of current net profit or
No restatement of retained earnings are required.however complete
disclosure of prior period and its impact on financial statements should
be disclosed.
US GAAP (FAS 16) also mandates retrospective application of error and
requires restatement of comparative opening balance with suitable
footnote disclosure.

IFRS requires that a prior period item/error should be corrected by

retrospective effect by restatement of opening balance of assets,
liabilities or equities for the earliest period practicable. Entity should
also disclose nature of error and the amount of correction for each
financial line item. IFRS also requires that such disclosure should not
be repeated in subsequent period.


Income statement... Comparison

Discounting : IFRS provides that where the inflow of cash is

significantly deferred without interest, discounting is needed. US
GAAP also permits discounting in certain cases, while there is no
concept of discounting under IGAAP.

Persuasive evidence: US GAAP requires availability of a persuasive

evidence for revenue recognition with several elements while there is
no such requirement in IGAAP and IFRS .

Consolidation : US GAAP mandates consolidation of results of

subsidiaries and VIEs, whereas IGAAP and IFRS do not mandate
consolidation as such except as required under law.
Others :There are significant differences in the 3 GAAP on
measurement and disclosure of various heads of Income and
Expenditure including forex losses, extinguishment of debts,
Employee benefits, ESOP, Dividend Tax, Loss on investments etc.
leading to reconciliation issues between IGAAP results vis a vis IFRS



Conceptual framework: While IGAAP and IFRS have conceptual

framework statement, US GAAP has SFAC. Broadly similar principles
except Revaluation , True and fair view override, comparative financial
statements, statement of changes in equity and comprehensive

Balance sheet : Indian GAAP provides 2 formats of Balance sheet

presentation and minimum line items to be shown on the face of
balance sheet. IFRS and US GAAP do not provide any format, but
suggest minimum line items. Liquidity order differs in Indian GAAP
vis a vis USGAAP and IFRS.
Income statement : No format suggested in the 3 GAAP but minimum
line items suggested.difference in definition of Income, expenses,
treatment of change in accounting Policy, prior period items and
miscellaneous items leading to reconciliation issues.


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