Undergrad

A.Y 20XX-XX

Name of the Course: Financial Accounting

BCOM
Semester

A Study of Significant Accounting Policies and Compliance wrt

Accounting Standard 1, 2 and 9
Introduction

Accounting as a concept

Accounting as a concept, is the recording of financial transactions along with identifying and
understanding the results of these transactions. It is how a business records and organizes its
financial data and information.

When it comes to accounting, one often gets it confused with book keeping. Both these
concepts overlap in many ways, but when it comes to differentiating them, it can be said that,
book keeping is how one records and categorizes financial transactions whereas accounting
involves putting the derived financial information to good use through strategy and analysis.

The overall accounting system is maintained and adhered to by the Accounting Standards
established by the Accounting Standards Board of ICAI. There are a total of 32 Accounting
Standards, for the preparation of financial statements in accordance with Indian GAAP
(Generally Accepted Accounting Practices).

Accounting Standards simply refers to guidelines to be followed in the accounting system. It

means rules & regulation that are to be followed while recording accounting & financial
transactions. It governs the manner in which financial statements are prepared & presented.

The main aims of accounting standards are to bring uniformity & reliability in the whole
accounting system. Accounting standards standardize the whole accounting procedure of the
economy. All companies after adopting these accounting standards follow the same manner
of recording transactions.

This way the whole accounting system becomes easy & easily understood by all. It prevents
happening of any fraud by establishing certain norms & principles. Accounting standards are
issued by the accounting body of the respective country.

In India, Institute of Chartered Accountants of India formulate & issue Accounting standards.
These standards are followed by accountants & companies in preparing & presenting
financial statements.

The primary benefits and importance of Accounting standards are-

 Brings Uniformity in Accounting System

 Easy Comparability of Financial Statements
 Assists Auditors
 Makes Accounting Informative Easy & Simple
 Avoids Frauds & Manipulations
 Provides Reliability to Financial Statements.
 Measures Management Performance

AS 1 of the accounting standards deals with the ‘Disclosure of Accounting Policies’

AS 1 deals with the disclosure of the policies of accounting, followed in preparation of the
financial statements. To ensure a proper understanding of the policies, it is a pre-requisite that
all significant accounting policies be disclosed in the statements of accounts. Disclosure of
accounting policies or of changes therein cannot remedy wrong or inappropriate treatment of
the item in the books of accounts.

The fundamental Accounting Assumptions include

 Going concern
 Consistency, and
 Accrual

The disclosure of the accounting policies is not necessary, but are supposed to be disclosed
only if they are not followed.

The policy says that, if the policy is not ascertainable, wholly or in part, indicate the fact of
the policy. Also, if the change has material effect in the present year, it needs to be disclosed.

AS 2 deals with the ‘Valuation of Inventories’

This AS deals with the value at which the inventories are calculated and considered in the
financial statements. The general rule of recording the inventories being, the amount
considered is to be the cost or the NRV (Net Realizable Value), whichever is less.

This AS excludes costs of W.I.P arising under construction contracts and under ordinary
course of business and shares or other financial instruments. It also excludes spare parts,
servicing equipment and the standby equipment, which meet the definition of PPE.

Cost of inventories comprise all costs of purchase, costs of conversion and other costs
incurred in bringing the inventories to their present condition and location.

Costs of purchase comprises of exclusion of trade discounts, rebates, etc., duties and taxes
other than refundable duties and taxes, freight inwards and other expenditure directly
attributable to the acquisition. Costs of conversion include allocation of fixed production
overheads based on normal capacity and Variable production overheads assigned to each unit
of production on the basis of the actual use of production facilities.

The exclusions are abnormal wastage, storage costs (unless necessary in the production
process prior to a further production stage), selling and distribution costs, administrative
overheads (only that do not contribute to bringing the inventories to their present location and
condition) and finally the unallocated overheads.

AS 9 is under the heading of ‘Revenue Recognition’

This AS deals with the bases for recognising revenue in the P&L statement. The inclusion as
for the revenue aspect are from the Sale of goods, Rendering of the services and via Interest,
Dividends and Royalties.

The sale of goods aspect includes the property in goods or significant risks, where no
effective control is retained in the goods transferred by the seller to a degree and where no
significant uncertainty exists regarding the amount of the consideration.

Rendering of services includes services completed or under proportionate competition

method. An important note being, at the time of performance, it should not be unreasonable
to expect ultimate collection.

In the end, via other enterprise resources, revenue should be recognized on

-Time proportionate basis

-Accrual basis (consider terms of agreement)
-When right to receive dividend is established
Profile of organisation

The Bajaj Group is a 75 years old company, formed in the year 1945, is amongst the top 10
business houses in India. Its footprint stretches over a wide range of industries, spanning
automobiles, home appliances, lighting, iron and steel, insurance, travel and finance. The
group's flagship company, Bajaj Auto, is ranked as the world's fourth largest three and two-
wheeler manufacturer and the Bajaj brand is well-known across several countries.

The present Chairman of the group, Rahul Bajaj, took charge of the business in 1965. Under
his leadership, the turnover of the Bajaj Auto the flagship company has gone up from INR.72
million to INR. 120 billion, its product portfolio has expanded and the brand has found a
global market.

In 2005, Rahul Bajaj's son Rajiv Bajaj stepped into the shoes of Managing Director of Bajaj
Auto and steered the organization. His major contribution includes the Pulsar range of bikes,
that revolutionised the two-wheeler market in India.

In 2007, Bajaj Auto acquired a 14% stake in KTM that has since grown to 48%. This
particular research and analysis deals with the financial year 2013-14, which was a
comparatively difficult year for the automotive industry. Unfortunately, 2013-14 continued to
be poor. In the backdrop of the sub-5% real GDP growth for the second year in succession,
which has been the worst economic performance of this country in a long time, the domestic
market for motorcycles grew by a meagre 3.9%, which was remarkably low from the over
20% growth witnessed in the years 2010 and 2011, and even the 11.9% growth in 2012.
Despite such headwinds, in 2014, Bajaj Auto Ltd. achieved its highest ever operating
earnings before interest, tax, depreciation and amortisation (EBITDA), profit before tax
(PBT) and profit after tax (PAT).

In an extremely challenging year for the industry, the net sales and other operating income
was flat at ₹20,348 crore. Volume of exports increased by 2.4% to 1.58 million units. The
value of exports grew by 22.1% to an all-time high of ₹8,199 crore. Operating EBITDA
increased by 7.8% to ₹4,305 crore. The results of the organisation’s working and their overall
achievement over this financial year clearly demonstrates that Bajaj Auto Ltd. ranks among
the world’s most profitable automobile companies.

The financials compare the earnings per share for the years 2013 and 2014. These values how
an overall growth. The earnings per share how grown from 105.2 to 112.1.
Core content

The Auditors’ Report shows the true financial performance and gives a true and fair view of
these statements in accordance with the accounting standards. Financial Instruments:
Recognition and Measurement issued by the Institute of Chartered Accountants of India to
the extent it does not contradict any other accounting standard. This responsibility includes
the design, maintenance and implementation of internal control relevant to the preparation
and presentation of the financial statements that give a true and fair view and are free from
material misstatement, whether due to fraud or error.

An audit involves performing procedures to obtain audit evidence, about the amounts and
disclosures in the financial statements. The procedures selected depend on the auditors’
judgment, including the assessment of the risks of material misstatement of the financial
statements, whether due to fraud or error. In making those risk assessments, the auditors
consider internal control relevant to the Company’s preparation and fair presentation of the
financial statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
entity’s internal control. An audit also includes evaluating the appropriateness of accounting
policies used and the reasonableness of the accounting estimates made by Management, as
well as evaluating the overall presentation of the financial statements.

As required by ‘the Companies (Auditor’s Report) Order, 2003’, as amended by ‘the

Companies (Auditor’s Report) (Amendment) Order, 2004’, issued by the Central
Government of India in terms of sub-section (4A) of section 227 of the Act (hereinafter
referred to as the “Order”), and on the basis of such checks of the books and records of the
Company as was considered appropriate and according to the information and explanations
given.

Legal requirements in accordance with section 227(3) of the Act, the report includes:

(a) All the necessary information required for the apt presentation and representation of the
financials is given in the report;

(b) Proper books of account as required by law have been kept by the Company so far as
appears from examination of those books;

(c) The Balance Sheet, Statement of Profit and Loss, and Cash Flow Statement dealt with by
this Report are in agreement with the books of account;
(d) The Balance Sheet, Statement of Profit and Loss, and Cash Flow Statement dealt with by
this report comply with the Accounting Standards referred to in sub-section (3C) of section
211 of the Act;

(e) On the basis of written representations received from the directors as on 31 March 2014,
and taken on record by the Board of Directors, none of the directors is disqualified as on 31
March 2014, from being appointed as a director in terms of clause (g) of sub-section (1) of
section 274 of the Act.

The Company also maintains proper records showing full particulars, including quantitative
details and situation, of fixed assets. The fixed assets are physically verified by the
Management according to a phased programme designed to cover all the items over a period
of three years which is reasonable having regard to the size of the Company and the nature of
its assets. Pursuant to the programme, a portion of the fixed assets has been physically
verified by the Management during the year and no material discrepancies have been noticed
on such verification. Also, the financials depict that a substantial part of fixed assets has not
been disposed off by the Company during the year.

The inventory (excluding stocks with third parties) has been physically verified by the
Management during the year. In respect of inventory lying with third parties, these have
substantially been confirmed by them. In our opinion, the frequency of verification is
reasonable. The procedures of physical verification of inventory followed by the
Management are reasonable and adequate in relation to the size of the Company and the
nature of its business. (c) On the basis of the company’s internal examination of the inventory
records, the Company is maintaining proper records of inventory. The discrepancies noticed
on physical verification of inventory as compared to book records were not material.

The books of account maintained by the Company in respect of products where, pursuant to
the rules made by the Central Government of India, the maintenance of cost records has been
prescribed under clause (d) of sub-section (1) of section 209 of the Act, and are of the opinion
that, prima facie, the prescribed accounts and records have been made and maintained.

The records of the Company depict that the Company is regular in depositing the undisputed
statutory dues, including provident fund, investor education and protection fund, employees’
state insurance, income tax, sales tax, wealth tax, service tax, customs duty, excise duty and
other material statutory dues, as applicable, with the appropriate authorities. Also, there are
no dues of wealth-tax which have not been deposited on account of any dispute
The Directors present their Seventh Annual Report and audited Statement of accounts for the
year ended 31 March 2014. Since this Report pertains to financial year that commenced prior
to 1 April 2014, the contents therein are governed by the relevant provisions/schedules/rules
of the Companies Act, 1956, in compliance with general circular No. 08/2014 dated 4 April
2014 issued by the Ministry of Corporate Affairs.

For the Dividend aspect, directors recommend for consideration of the shareholders at the
ensuing annual general meeting, payment of a dividend of ₹50 per share, (500 per cent) for
the year ended 31 March 2014. The amount of dividend and the tax thereon aggregate to H
1,692.73 crore. Dividend paid for the year ended 31 March 2013 was ₹45 per share (450 per
cent). The amount of dividend and the tax thereon aggregated to ₹1,523.45 crore. The
operations of the Company are elaborated in the annexed Management Discussion and
Analysis Report.

International business of Bajaj Auto continues to outperform competition in terms of two and
three-wheeler exports in spite of the grim world economic scenario. They have maintained
their leadership position in exports and have dominated the Indian two and three-wheeler
export scenario. Bajaj has exported a huge total of 1,583,935 two and three-wheelers.

Foreign exchange earnings and outgo of the Company continued to be a net foreign
exchange earner during the year. Total foreign exchange earned by the Company during the
year under review was ₹7,963.86 crore, compared to ₹6,565.34 crore during the previous
year. Total foreign exchange outflow during the year under review was ₹725.21 crore as
against ₹1,083.16 crore during the previous year. The above outflow excludes an investment
of ₹67.75 crore made in its subsidiary, PT. Bajaj Auto Indonesia (PT BAI) for increasing its
stake from 98.94% to 99.25%.

The Directors’ responsibility statement shows that in the preparation of annual accounts, the
applicable accounting standards have been followed along with proper explanation relating to
material departures. It also shows that the directors have selected such accounting policies
and applied them consistently and made judgments and estimates that are reasonable and
prudent. They have taken proper and sufficient care for the maintenance of adequate
accounting records for safeguarding the assets of the Company and for preventing and
detecting fraud and other irregularities. And that the annual accounts have been prepared on a
going concern basis.
The Notes to Financial Statements show the Accounting Policies that are complied with in
the financials and also depict the accounting standards followed by the company in that
particular accounting year.

The financial statements are prepared in accordance with the generally accepted accounting
principles in India under the historical cost convention on accrual basis. All assets and
liabilities have been classified as current or non-current as per the Company’s normal
operating cycle and other criteria set out.

The System of accounting

i) The Company follows the mercantile system of accounting and recognises income
and expenditure on an accrual basis except in case of significant uncertainties.
ii) Financial statements are prepared under the historical cost convention. These costs are
not adjusted to reflect the impact of changing value in the purchasing power of
money.
iii) Estimates and assumptions used in the preparation of the financial statements and
disclosures are based upon Management’s evaluation of the relevant facts and
circumstances as of the date of the financial statements, which may differ from the
actual results at a subsequent date.

Revenue recognition:

a) Sales: i) Domestic sales are accounted for on dispatch from the point of sale i.e., when the
risks are transferred to the buyer. ii) Export sales are recognised on the date of the mate's
receipt/shipped on board and initially recorded at the relevant exchange rates prevailing on
the date of the transaction.

b) Export incentives: Export incentives are accounted for on export of goods if the
entitlements can be estimated with reasonable accuracy and conditions precedent to claim are
fulfilled.

c) Other income: The Company recognises income (including rent etc.) on accrual basis.
However, where the ultimate collection of the same lacks reasonable certainty, revenue
recognition is postponed to the extent of uncertainty.

d) Investment income: (1) Interest income is accrued over the period of the loan/investment
and net of amortisation of premium/discount with respect to fixed income securities, thereby
recognising the implicit yield to maturity, with reference to coupon dates, where applicable.
However, income is accrued only where interest is serviced regularly and is not in arrears, as
per the guidelines framed by the Management. (2) Dividend is accrued in the year in which it
is declared whereby a right to receive is established. (3) Profit/loss on sale of investments is
recognised on the contract date.

For Depreciation and Amortization of leasehold land, the premium on the land is amortized
over the period of the lease. For the other fixed assets, depreciation is provided at rates
computed with reference to the economic life of the assets, where the estimated economic life
is shorter, rates such as aircraft which is written off over ten years i.e., depreciation rate of
9.5%. vis a vis Schedule XIV rate of 5.6%.

Cost of Inventories have been computed to include all costs of purchases, cost of conversion
and other costs incurred in bringing the inventories to their present location and condition.

a) Finished stocks of vehicles, auto spare parts and work-in-progress are valued at cost or net
realisable value whichever is lower. Finished stocks of vehicles lying in the factory premises,
branches, depots are valued inclusive of excise duty. b) Stores, packing material and tools are
valued at cost arrived at on weighted average basis. c) Raw materials and components are
valued at cost arrived at on weighted average basis or lower of cost and net realisable value,
as circumstances demand. d) Machinery spares and maintenance materials are charged out as
expense in the year of purchase. e) Goods in transit are stated at actual cost incurred up to the
date of Balance Sheet.

For the Provisions and Contingent Liabilities, the Company creates a provision when there is
present obligation as a result of a past event that probably requires an outflow of resources
and a reliable estimate can be made of the amount of the obligation such as product warranty
costs. A disclosure for a contingent liability is made when there is a possible obligation or a
present obligation that may, but probably will not, require an outflow of resources. When
there is a possible obligation or a present obligation in respect of which the likelihood of
outflow of resources is remote, no provision or disclosure is made.
Conclusion

The financial report of Bajaj Auto Ltd. shows the accurate facts and figures for the
accounting year of 2013-14. The notes to accounts and the auditor’s report show the
accounting policies and standards being followed and implemented by the company in the
formulation of its accounts. The company abides by the accounting standards 1 via the
disclosure of the accounting policy implemented, it shows the implementation of AS 2 via the
valuation of inventories and the AS 9, recognizing the revenue.

The financials show expressly show the policy being implemented, and depicts the policy
used, like the director’s report explained the fact that the accounts are showed as that of a
going concern.

The concern recognizes the revenue via the segment information, them being the primary and
secondary segment. The Primary segment being the Business Segment and the Secondary
segment being the Geographic Segment; later in the report the reverse figures have also been
determined and derived. Even the consolidated statement for the profit and loss shows the
total revenue recognized. Even the value of the revenue generated from the operations have
been used in the consolidated financial statements for the determination of the net sales
figure.

The details of the inventory differentiated into values of raw materials, work in progress and
the finished goods, their values shown in the standalone and consolidated financial
statements.

Bibliography

https://www.bajajauto.com/report/bal_2014_for_web1.pdf

https://www.accountingnotes.net/accounting-standards/accounting-standards-concept-
meaning-nature-and-objectives/3847

http://www.mca.gov.in/MinistryV2/accountingstandards1.html

https://resource.cdn.icai.org/55939asb45327.pdf

https://www.icai.org/post.html?post_id=8658