Financial Accounting Scope, Importance of GAAP, Concepts &

Conventions

Introduction to Financial Accounting Financial accounting is the field of accountancy concerned with the preparation of financial statements for decision makers such as stockholders, suppliers, banks, employees, government agencies, owners and other stakeholders. Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power. The central need for financial accounting is to reduce the various principal-agent problems, by measuring and monitoring the agents' performance and thereafter reporting the results to interested users. Financial accountancy is used to prepare accountancy data for people outside the organisation or for those, who are not involved in the mundane administration of the company. Management accounting, provides accounting information to help managers make decisions to manage and enhance the business. In short, financial accounting is the process of summarising financial data, which is taken from an organisation's accounting records and publishing it in the form of annual or quarterly reports, for the benefit of people outside the organisation. Financial accountancy is governed not only by local standards but also by international accounting standard. Role of Financial Accounting

Financial accounting generates some key documents, which includes profit and loss account, patterning the method of business traded for a specific period and the balance sheet that provides a statement, showing mode of trade in business for a specific period.

It records financial transactions showing both the inflows and outflows of money from sales, wages etc.

Financial accounting empowers the managers and aids them in managing more efficiently by preparing standard financial information, which includes monthly management report tracing the costs and profits against budgets, sales and investigations of the cost.

Principles of Financial Accounting Financial accounting is based on several principles known as Generally Accepted Accounting Principles (GAAP) (Williamson 2007). These include the business entity principle, the objectivity principle, the cost principle and the going-concern principle.

• Business entity principle: Every business requires to be accounted for separately by the proprietor. Personal and business-related dealings should not be mixed.

• Objectivity principle: The information contained in financial statements should be treated objectively and not shadowed by personal opinion.

• Cost principle: The information contained in financial statements requires it to be based on costs incurred in business transactions.

• Going-concern principle: The business will continue operating and will not close but will realise assets and discharge liabilities in the normal course of operations

Benefits of Financial Accounting

• Maintaining systematic records: It is a primary function of accounting to keep a proper and chronological record of transactions and events, which provides a base for further processing and proof for checking and verification purposes. It embraces writing in the original/subsidiary books of entry, posting to ledger, preparation of trial balance and final accounts.

• Meeting legal requirements: Accounting helps to comply with the various legal requirements. It is mandatory for joint stock companies to prepare and present their accounts in a prescribed form. Various returns such as income tax, sales tax are prepared with the help of the financial accounts.

• Protecting and safeguarding business assets: Records serve a dual purpose as evidence in the event of any dispute regarding ownership title of any property or assets of the business. It also helps prevent unwarranted and unjustified use. This function is of paramount importance, for it makes the best use of available resources.

• Facilitates rational decision-making: Accounting is the key to success for any decision- making process. Managerial decisions based on facts and figures take the organisation to heights of success. An effective price policy, satisfied wage structure, collective bargaining decisions, competing with rivals, advertisement and sales promotion policy etc all owe it to well set accounting structure. Accounting provides the necessary database on which a range of alternatives can be considered to make managerial decision-making process a rational one.

• Communicating and reporting: The individual events and transactions recorded and processed are given a concrete form to convey information to others. This economic information derived from financial statements and various reports is intended to be used by different groups who are directly or indirectly involved or associated with the business enterprise.

Limitations of Financial Accounting One of the major limitations of financial accounting is that it does not take into account the non-monetary facts of the business like the competition in the market, change in the value for money etc. The following limitations of financial accounting have led to the development of cost accounting: 1) No clear idea of operating efficiency: You will agree that, at times, profits may be more or less,

not because of efficiency or inefficiency but because of inflation or trade depression. Financial accounting will not give you a clear picture of operating efficiency when prices are rising or decreasing because of inflation or trade depression.

2) Weakness not spotted out by collective results: Financial accounting discloses only the net

result of the collective activities of a business as a whole. It does not indicate profit or loss of each department, job, process or contract. It does not disclose the exact cause of inefficiency i.e. it does not tell where the weakness is because it discloses the net profit of all the activities of a business as a whole. Say, for instance, it can be compared with a reading on a thermometer. A reading of more than 98.4° or less than 98.4º discloses that something is wrong with the human body but the exact disease is not disclosed. Similarly, loss or less profit disclosed by the profit and loss account is a signal of bad performance of the business in whole, but the exact cause of such performance is not identified.

3) Not helpful in price fixation: In financial accounting, costs are not available as an aid in determining prices of the products, services, production order and lines of products.

4) No classification of expenses and accounts: In financial accounting, there is no such system by which accounts are classified so as to give relevant data regarding costs by departments, processes, products in the manufacturing divisions, by units of product lines and sales territories, by departments, services and functions in the administrative division. Further expenses are not attributed as to direct and indirect items. They are not assigned to the products at each stage of production to show the controllable and uncontrollable items of overhead costs.

5) No data for comparison and decision-making: It will not provide you with useful data for comparison with a previous period. It also does not facilitate taking various financial decisions like introduction of new products, replacement of labour by machines, price in normal or special circumstances, producing a part in the factory or sourcing it from the market, production of a product to be continued or given up, priority accorded to different products and whether investment should be made in new products etc.

6) No control on cost: It does not provide for a proper control of materials and supplies, wages, labour and overheads.

7) No standards to assess the performance: In financial accounting, there is no such well- developed system of standards, which would enable you to appraise the efficiency of the organisation in using materials, labour and overhead costs. Again, it does not provide you any such information, which would help you to assess the performance of various persons and departments in order that costs do not exceed a reasonable limit for a given quantum of work of the requisite quality.

8) Provides only historical information: Financial accounting is mainly historical and tells you about the cost already incurred. As financial data is summarised at the end of the accounting period it does not provide day-to-day cost information for making effective plans for the coming year and the period after that.

9) No analysis of losses: It fails to provide complete analysis of losses due to defective material, idle time, idle plant and equipment. In other words, no distinction is made between avoidable and unavoidable wastage.

10) Inadequate information for reports: It does not provide adequate information for reports to outside agencies such as banks, government, insurance companies and trade associations.

11) No answer to certain questions: Financial accounting will not provide you with answers to such questions as: a) Should an attempt be made to sell more products or is the factory operating to its

optimum capacity? b) If an order or contract is accepted, is the price obtainable sufficient to show a profit? c) If the manufacture or sales, of product X were discontinued and efforts made to

increase the sale of Y, what would be the effect on the net profit? d) Why the annual profit is of a disappointing amount despite the fact that output was

increased substantially? e) If a machine is purchased to carry out a job, which at present is done by hand, what effect

will this have on the profit line? f) Wage rates having been increased by 50 paisa per hour, should selling price be increased

and if so, by how much? Accounting Principles Financial accounting is information that must be processed and reported objectively. Third parties, who must rely on such information, have a right to be assured that the data is free from bias and

inconsistency, whether deliberate or not. For this reason, financial accounting relies on certain standards or guides that are called 'Generally Accepted Accounting Principles' (GAAP). Principles derived from tradition, such as the concept of matching. In any report of financial statements (audit, compilation, review, etc.), the preparer/auditor must indicate to the reader whether or not the information contained within the statements complies with GAAP.

• Principle of regularity: Regularity can be defined as conformity to enforced rules and laws.

• Principle of consistency: This principle states that when a business has fixed a specific method for the accounting treatment of an item, it will enter all similar items that follow, in exactly the same way.

• Principle of sincerity: According to this principle, the accounting unit should reflect in good faith the reality of the company's financial status.

• Principle of the permanence of methods: This principle aims at maintaining the coherence and comparison of the financial information published by the company.

• Principle of non-compensation: One should show the full details of the financial information and not seek to compensate a debt with an asset, revenue with an expense etc.

• Principle of prudence: This principle aims at showing the reality 'as is': one should not try to make things look rosier than they are. Typically, revenue should be recorded only when it is certain and a provision should be entered for an expense, which is probable.

• Principle of continuity: When stating financial information, one assumes that business will not be interrupted. This principle mitigates the principle of prudence: assets do not have to be accounted at their disposable value, but it is accepted that they are at their historical value.

• Principle of periodicity: Each accounting entry should be allocated to a given period and split accordingly if it covers several periods. If a client pre-pays a subscription (or lease, etc.), the given revenue should be split to the entire time-span and not accounted for entirely on the date of the transaction.

• Principle of full disclosure/materiality: All information and values pertaining to the financial position of a business must be disclosed in the records.

Accounting Concepts and Conventions

These are underlying concepts and conventions which an accountant has to have in the back of his mind while doing the accounting work. These concepts and conventions are universally followed and understood .

There are 9 concepts and 3 conventions.

THE CONCEPTS 1. Separate Business Entity Concept : In this concept Business & the Owner have separate legal

status according to accounting point of view. The proprietor is considered as a creditor only to the extent of capital brought in business by him. The amount of capital invested in business by the owner will be shown as a ‘liability’

in the books of accounts of business and can be claimed by him against the business for capital brought in by him. In case of limited company, this distinction can be easily made as the company has a legal entity of its own. Like a natural person it can engage itself in economic activities of buying, selling, producing, lending, borrowing and consuming of goods & services.

However, it is difficult to show this distinction in the case of sole proprietorship and partnership. It may be noted that it is only for the accounting purpose that partnership & sole proprietorship are treated as separate from the owner(s), though law does not make such distinction. Infact, the business entity concept is applied to make it possible for the owners to assess the performance of their business and of managers those who are responsible for the proper use of fund supplied by owners, banks & others.

2. Money Measurement Concept : Accounting records only those transactions which are expressed in monetary terms. This concept imposes two limitations. Firstly, there are several facts which though very important to the business and exert a great influence on the productivity and profitability of the enterprise, cannot be recorded in the books of accounts because they cannot be expressed in terms of money like quality of products, efficiency of the employees, death of the manager, etc. These are significant events, but non-financial transactions. Secondly, use of money implies that we assume stable or constant value of rupee. Taking this assumption means that the changes in the money value in future dates are conveniently ignored. For eg. A piece of land purchased in 1990 for Rs. 2 lakh and another bought for the same amount in 1998 are recorded at same price, although the first purchased in 1990 may be worth 2 times higher than the value recorded in the books because of rise in land values.

3. Dual Aspect Concept : In this concept every transaction has dual (two) effects – debit and credit. Because of such effect, the net profit will increase or decrease. In sale of goods for cash there are two aspects, one is delivery of goods and other is immediate receipt of cash. The ‘double entry’ book keeping has come into vogue because for every transaction there is two effect and the total amount debited is always equal to total the amount credited. It follows from ‘dual aspect concept’ that any point in time owners’ equity and liabilitiesfor an accounting entity will be equal to assets owned by that entity. This could be expressed as the following equalities:

Assets = Liabilities + Owners Equity …………(1)

Owners Equity = Assets – Liabilities ………...(2)

The above relation is known as the ‘Accounting Equation’. The term ‘Owners Equity’ denotes the

resources supplied by the owners of the entity and the term ‘liabilities’denotes the claim of outside

parties such as creditors, debenture-holders, bank against the assets of the business

4. Going Concern Concept : According to this concept, it is assumed that the business will continue to operate for a long time in the future i.e. it has a perpetual existence and the accountant, while valuing the assets do not take into account forced sale value of them. The enterprise is viewed as a going concern, i.e., as continuing in operations atleast in foreseeable future . In other words, there is neither the intention nor the necessity to liquidate the particular business venture in the predictable future. Because of this assumption, the accountant while valuing the assets do not take into account forced sale value of them. Infact , the assumption that the business is not expected to be liquidated in the foreseeable future establishes the basis for many of the valuations and allocations in accounts. For example, the accountant charges depreciation of fixed assets value. It is this assumption which underlies the decision of investors to commit capital to enterprise. If the accountant has good reasons to believe that the business, or some part of it is going to be liquidated or that it will cease to operate then the resources could be reported at their current values.

5. Accounting Period Concept : In this concept of accounting, generally, a period of 12 months is selected to find out profit or loss of the business and the financial position of the company. Sometimes, we publish the report on quarterly basis. Therefore, this concept means, period for which financial statement is prepared. This period is also known as ‘determining period’.

6. Cost Concept : In this concept, transactions are entered in the books of accounts at the amounts actually involved. Fixed Assets are recorded at ‘Historical Cost’. Historical cost is the price paid to acquire that particular asset. For eg. If a business buys a plant for Rs.5 lakh the asset would be recorded in the books at Rs.5 lakh, even if its market value at that time happens to be Rs.6 lakh. Thus, assets are recorded at their original purchase price. This concept doesn’t mean that all assets remain on the accounting records at their original cost for all times to come. The assets may systematically be reduced in its value by charging ‘depreciation’. The prime purpose of depreciation is to allocate the cost of an asset over its useful life and to adjust its cost. However, a balance sheet based on this concept can be very misleading as it shows assets at cost even when there are wide difference between their costs and market values. Despite this limitation you will find that the cost concept meets all the three basic norms of relevance, objectivity and feasibility.

7. The Matching Concept : This concept is based on the Accounting Period Concept. In this concept, cost & revenue must be related to the events arising in the same financial year. Revenue earned during the period is compared with the expenditure incurred for earning that revenue. Revenue is the total amount realized from the sale of goods or provision of services together with earnings interest, dividend and other items of income

8. Accrual Concept : This concept makes a distinction between the receipt of cash and the right to receive it, and the payment of cash and the legal obligation to pay it. This concept provides a guideline to the accountant as to how he should treat the cash receipts and the right related thereto

9. Realisation Concept : This concept is technically understood as the process of converting non cash resources and rights into money whereas according to the accounting principle, it is used to identify precisely the amount of revenue to be recognized & the amount of expense to be matched to such revenue for the purpose of income measurement. According to this concept revenue is recognized when sale is made i.e. at the point when the property in goods passes to the buyer & he becomes legally liable pay. However, in case of construction contracts revenue is often recognized on the basis of a proportionate or partial completion method. Similarly in case of long run installment sales contracts, revenue is regarded as realized only in proportion to the actual cash collection.

ACCOUNTING CONVENTIONS The conventions are some of the methods followed over a period of time and has been

accepted universally as customs.

1. Convention of Materiality : This convention states that items of small significance need to be given strict theoretically correct treatment. The cost of recording and showing in financial statement events in business which are insignificant in nature may not be well justified by the utility derived from that information. For eg. An ordinary calculator costing Rs.100 may last for ten years. However, the effort involved in its cost over the ten year period is not worth the benefit that can be derived from this operation. When a statement of outstanding debtors is prepared for sending to top management, figures may be rounded to the nearest ten or hundred. This convention will unnecessarily over burden an accountant

with mare details in case he is unable to find an objective distinction between material and immaterial evens. It should be noted that an item material to one party may be immaterial for another. Another example – After auditing, printing and circulating of the accounts to the share holders it is observed that a bill of printing and stationery amounting to Rs.100/- remained to be accounted in that relevant year, in such case if Rs.100/- is not material as compared to the profit or sales of the company than based on the convention of materiality the expense can be booked in next year and the account of last year need not be re-audited, printed and circulated, since it wont materially affect the accounts. Though this is against the concept of matching, periodicity and accrual, but this convention prevails over the concepts.

2. Convention of Conservatism : This convention requires that the accountants must follow the policy of “Playing safe” while recording business transactions and events. That is why, the accountants follow the rule anticipate no profit but provide for all possible losses, while recording the business events. This rule means that an accountant should record lowest possible value for assets and revenues, and the highest possible value for liabilities & expenses. According to this concept revenues or gains should be recognized only when they are realized in form of cash or assets. Eg. Closing Stock is valued at cost or market price whichever is less. Or we make provisions for Doubtful debts in our books, these are examples of convention of conservatism..Though these are at times against the concept – of Realisation or Cost. Hence conventions at times supersedes the concepts.

3. Convention of Consistency : This convention requires that once a firm decided on certain accounting policies & methods & has used these for some time it should continue to follow the same methods or procedures for all subsequent similar events & transactions unless it has a sound reason to do otherwise. Accounting practices should remain unchanged from one period to another. For eg: If depreciation is charged on fixed assets according to SLM this method should be followed year after year.

Accounting Standards in India and International Accounting Standards Accounting standards are being established both at national and international levels. However, the diversity of accounting standards among the nations of the world has been a problem for the globalisation of the business environment. In India, the Accounting Standards Board (ASB) was constituted by the Institute of Chartered Accountants of India (ICAI) on 21st April 1977, which performs the function of formulating accounting standards. The Statements on accounting standards are issued by the Institute of Chartered Accountants of India (ICAI) to establish standards that have to be complied with, to ensure that financial statements are prepared in accordance with a commonly accepted accounting standard in India (India GAAP). Accurate and reliable financial information is the lifeline of commerce and investing. Presently, there are two sets of accounting standards that are accepted for international use namely, the U.S., Generally Accepted Accounting Principles (GAAP) and the International Financial Reporting Standards (IFRS) issued by the London-based International Accounting Standards Board (IASB). Generally, accepted accounting principles (GAAP) are diverse in nature but based on a few basic principles as advocated by all GAAP rules. These principles include consistency, relevance, reliability and comparability. Generally Accepted Accounting Principles (GAAP) ensures that all companies are on a level playing field and that the information they present is consistent, relevant, reliable and

comparable. Although U.S. GAAP is only applicable in the U.S., other countries have their own adaptations that are similar in purpose, although not always in design.

Accounting Standards (ASs)

AS 1 Disclosure of Accounting Policies

AS 2 Valuation of Inventories

AS 3 Cash Flow Statements

AS 4 Contingencies and Events Occuring after the Balance Sheet Date

AS 5 Net Profit or Loss for the period,Prior Period Items and Changes in Accounting Policies

AS 6 Depreciation Accounting

AS 7 Construction Contracts (revised 2002)

AS 8 Accounting for Research and Development

AS 9 Revenue Recognition

AS 10 Accounting for Fixed Assets

AS 11 The Effects of Changes in Foreign Exchange Rates (revised 2003),

AS 12 Accounting for Government Grants

AS 13 Accounting for Investments

AS 14 Accounting for Amalgamations

AS 15 (revised 2005) Employee Benefits

Limited Revision to Accounting Standard (AS) 15, Employee Benefits (revised 2005)

AS 15 (issued 1995)Accounting for Retirement Benefits in the Financial Statement of Employers

AS 16 Borrowing Costs

AS 17 Segment Reporting

AS 18, Related Party Disclosures

AS 19 Leases

AS 20 Earnings Per Share

AS 21 Consolidated Financial Statements

AS 22 Accounting for Taxes on Income.

AS 23 Accounting for Investments in Associates in Consolidated Financial Statements

AS 24 Discontinuing Operations

AS 25 Interim Financial Reporting

AS 26 Intangible Assets

AS 27 Financial Reporting of Interests in Joint Ventures

AS 28 Impairment of Assets

AS 29 Provisions, Contingent` Liabilities and Contingent Assets

AS 30 Financial Instruments: Recognition and Measurement and Limited Revisions to AS 2, AS 11 (revised 2003), AS 21, AS 23, AS 26, AS 27, AS 28 and AS 29

AS 31, Financial Instruments: Presentation

Accounting Standard (AS) 32, Financial Instruments: Disclosures, and limited revision to Accounting Standard (AS) 19, Leases

IFRS are International Financial Reporting Standards, which are issued by the International Accounting Standards Board (IASB), a committee compromising of 14 members, from nine different countries, which work together to develop global accounting standards. The aim of this committee is to build universal standards that are translucent, enforceable, logical, and of high quality. Nearly 100 countries make use of IFRS. These countries include the European Union, Australia and South Africa. While some countries require all companies to stick to IFRS, others merely try to synchronize their own country’s standards to be similar. India's commitment to convergence with International Financial Reporting Standards ("IFRS") moved a step closer with the publication of 35 Indian IFRS standards ("Ind-AS") by the Ministry for Corporate Affairs (MCA) in late February 2011. However, Ind-AS are different from IFRS in several important areas. The Institute of Chartered Accountants of India (ICAI) has announced that IFRS will be mandatory in India for financial statements for the periods beginning on or after 1 April 2012. This will be done by revising existing accounting standards to make them compatible with IFRS. Reserve Bank of India has stated that financial statements of banks need to be IFRS-compliant for periods beginning on or after 1 April 2011. The ICAI has also stated that IFRS will be applied to companies above INR 1000 crore (INR 10 billion) from April 2011. Phase wise applicability details for different companies in India: Phase 1: Opening balance sheet as at 1 April 2011* 1) Companies which are part of NSE Index – Nifty 50 2) Companies which are part of BSE Sensex – BSE 30 3) Companies whose shares or other securities are listed on a stock exchange outside India 4) Companies, whether listed or not, having net worth of more than INR 1000 crore (INR 10 billion) Phase 2: Opening balance sheet as at 1 April 2012* Companies not covered in phase 1 and having net worth exceeding INR 500 crore (INR 5 billion) Phase 3: Opening balance sheet as at 1 April 2014* Listed companies not covered in the earlier phases * If the financial year of a company commences at a date other than 1 April, then it shall prepare its opening balance sheet at the commencement of immediately following financial year. On January 22, 2010, the Ministry of Corporate Affairs issued the road map for transition to IFRS. It is clear that India has deferred transition to IFRS by a year. In the first phase, companies included in Nifty 50 or BSE Sensex, and companies whose securities are listed on stock exchanges outside India and all other companies having net worth of INR 1000 crore will prepare and present financial statements using Indian Accounting Standards converged with IFRS. According to the press note issued by the government, those companies will convert their first balance sheet as at April 1, 2011, applying accounting standards convergent with IFRS if the accounting year ends on March 31. This implies that the transition date will be April 1, 2011. According to the earlier plan, the transition date was fixed at April 1, 2010. The press note does not clarify whether the full set of financial statements for the year 2011–12 will be prepared by applying accounting standards convergent with IFRS. The deferment of the transition may make companies happy, but it will undermine India's position. Presumably, lack of preparedness of Indian companies has led to the decision to defer the adoption of IFRS for a year. This is unfortunate that India, which boasts for its IT and accounting skills, could not prepare itself for the transition to IFRS over last four years. But that might be the ground reality. Transition in

phases Companies, whether listed or not, having net worth of more than INR 500 crore will convert their opening balance sheet as at April 1, 2013. Listed companies having net worth of INR 500 crore or less will convert their opening balance sheet as at April 1, 2014. Un-listed companies having net worth of Rs 500 crore or less will continue to apply existing accounting standards, which might be modified from time to time. Transition to IFRS in phases is a smart move. The transition cost for smaller companies will be much lower because large companies will bear the initial cost of learning and smaller companies will not be required to reinvent the wheel. However, this will happen only if a significant number of large companies engage Indian accounting firms to provide them support in their transition to IFRS. If, most large companies, which will comply with Indian accounting standards convergent with IFRS in the first phase, choose one of the international firms, Indian accounting firms and smaller companies will not benefit from the learning in the first phase of the transition to IFRS. It is likely that international firms will protect their learning to retain their competitive advantage. Therefore, it is for the benefit of the country that each company makes judicious choice of the accounting firm as its partner without limiting its choice to international accounting firms. Public sector companies should take the lead and the Institute of Chartered Accountants of India (ICAI) should develop a clear strategy to diffuse the learning. Size of companies The government has decided to measure the size of companies in terms of net worth. This is not the ideal unit to measure the size of a company. Net worth in the balance sheet is determined by accounting principles and methods. Therefore, it does not include the value of intangible assets. Moreover, as most assets and liabilities are measured at historical cost, the net worth does not reflect the current value of those assets and liabilities. Market capitalisation is a better measure of the size of a company. But it is difficult to estimate market capitalisation or fundamental value of unlisted companies. This might be the reason that the government has decided to use 'net worth' to measure size of companies. Some companies, which are large in terms of fundamental value or which intend to attract foreign capital, might prefer to use Indian accounting standards convergent with IFRS earlier than required under the road map presented by the government. The government should provide that choice.

The following IFRS statements are currently issued:

IFRS 1 First time Adoption of International Financial Reporting Standards IFRS 2 Share-based Payment IFRS 3 Business Combinations IFRS 4 Insurance Contracts IFRS 5 Non-current Assets Held for Sale and Discontinued Operations IFRS 6 Exploration for and Evaluation of Mineral Resources IFRS 7 Financial Instruments: Disclosures IFRS 8 Operating Segments IFRS 9 Financial Instruments IAS 1: Presentation of Financial Statements. IAS 2: Inventories IAS 7: Cash Flow Statements IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors IAS 10: Events After the Balance Sheet Date IAS 11: Construction Contracts IAS 12: Income Taxes IAS 14: Segment Reporting (superseded by IFRS 8 on 1 January 2008) IAS 16: Property, Plant and Equipment IAS 17: Leases IAS 18: Revenue IAS 19: Employee Benefits IAS 20: Accounting for Government Grants and Disclosure of Government Assistance

IAS 21: The Effects of Changes in Foreign Exchange Rates IAS 23: Borrowing Costs IAS 24: Related Party Disclosures IAS 26: Accounting and Reporting by Retirement Benefit Plans IAS 27: Consolidated Financial Statements IAS 28: Investments in Associates IAS 29: Financial Reporting in Hyperinflationary Economies IAS 31: Interests in Joint Ventures IAS 32: Financial Instruments: Presentation (Financial instruments disclosures are in IFRS 7

Financial Instruments: Disclosures, and no longer in IAS 32) IAS 33: Earnings Per Share IAS 34: Interim Financial Reporting IAS 36: Impairment of Assets IAS 37: Provisions, Contingent Liabilities and Contingent Assets IAS 38: Intangible Assets IAS 39: Financial Instruments: Recognition and Measurement IAS 40: Investment Property IAS 41: Agriculture

An accounting convention is a modus operandi of universally accepted system of recording and presenting accounting information to the concerned parties. They are followed judiciously and rarely ignored. Accounting conventions are evolved through the regular and consistent practice over the years to aid unvarying recording in the books of accounts. Accounting conventions help in comparing accounting data of different business units or of the same unit for different periods. These have been developed over the years. 1) Convention of relevance: The convention of relevance emphasises the fact that only such

information should be made available by accounting that is pertinent and helpful for achieving its objectives. The relevance of the items to be recorded depends on its nature and the amount involved. It includes information, which will influence the decision of its client. This is also known as convention of materiality. For example, business is interested in knowing as to what has been the total labour cost. It is neither interested in knowing the amount employees spend nor what they save.

2) Convention of objectivity: The convention of objectivity highlights that accounting information should be measured and expressed by the standards which are universally acceptable. For example, unsold stock of goods at the end of the year should be valued at cost price or market price, whichever is less and not at a higher price even if it is likely to be sold at a higher price in the future.

3) Convention of feasibility: The convention of feasibility emphasises that the time, labour and cost of analysing accounting information should be comparable to the benefits arising out of it. For example, the cost of 'oiling and greasing' the machinery is so small that its break-up per unit produced will be meaningless and will amount to wastage of labour and time of the accounting staff.

4) Convention of consistency: The convention of consistency means that the same accounting principles should be used for preparing financial statements year on year. An evocative conclusion can be drawn from financial statements of the same enterprise when there is similarity between them over a period of time. However, these are possible only when accounting policies and practices followed by the enterprise are uniform and consistent over a period. If dissimilar accounting procedures and practices are followed for preparing financial statements of different accounting years, then the result will not be analogous. Generally, a businessman follows the above-mentioned general practices or methods year after year. For example, while charging depreciation on fixed assets or valuing unsold stock, if a particular method is used it should be followed year after year, so that the financial statements can be analysed and a comparison made.

5) Convention of full disclosure: Convention of full disclosure states that all material and relevant facts concerning financial statements should be fully disclosed. Full disclosure means that there should be complete, reasonable and sufficient disclosure of accounting information. Full refers to complete and detailed presentation of information. Thus, the convention of full disclosure suggests that every financial statement should disclose all pertinent information. For example, the business provides financial information to all interested parties like investors, lenders, creditors, shareholders etc. The shareholder would like to know the profitability of the firm while the creditors would like to know the solvency of the business. This is only possible if the financial statement discloses all relevant information in a complete, fair and an unprejudiced manner.

6) Convention of conservatism: This concept accentuates that profits should never be overstated or anticipated. However, if the business anticipates any loss in the near future, provision should be made for it in the books of accounts, for the same. For example, creating provision for doubtful debts, discount on debtors, writing off intangible assets like goodwill, patent and so on should be taken in to consideration Traditionally, accounting follows the rule 'anticipate no profit and provide for all possible losses.' For example, the closing

stock is valued at cost price or market price, whichever is lower. The effect of the above is that in case market price has come down then provide for the 'anticipated loss', but if the market price has increased then ignore the 'anticipated profits'. The convention of conservatism is a valuable tool in situation of ambiguity and qualms.