Page 17 - DCOM409_CONTEMPORARY_ACCOUNTING

Contemporary Accounting

Notes 16. AS-16 – Borrowing costs: Borrowing costs are interest and other costs incurred by an
enterprise in connection with the borrowing of funds. Examples of borrowing costs include:
interest and commitment charges on borrowings; amortisation of discounts or premiums
relating to borrowings; finance charges under finance lease; exchange differences arising
from foreign currency borrowings to the extent they are regarded as an adjustment to
interest costs.
Borrowing costs incurred in connection with acquisition, construction or production of a
fixed asset should be capitalised till the date the asset is ready for commercial use. All
other borrowing costs are to be expensed in the year in which they are incurred. Borrowing
costs incurred to buy inventories (which are held for a short period of time) are not to be
added to the cost of inventories. But borrowing costs incurred to acquire long-term strategic
investments can be capitalised with the cost of acquisition.
17. AS-17 – Segment reporting: This standard suggests that a business entity should provide
important financial information on each reportable segment separately. A reportable
segment is a business segment or a geographical segment. Para 5 of AS-17 defines a
business segment as “a distinguishable component of an enterprise that is engaged in
providing an individual product or service or a group of related products or services and
that is subject to risks and returns that are different from those of other business segments.”
The same paragraph also defines a geographical segment as “a distinguishable component
of an enterprise that is engaged in providing products or services within a particular
economic environment and that is subject to risks and returns that are different from those
of components operating in other economic environments.”
A business segment or geographical segment should be identified as a reportable segment
if one or more of the following conditions are satisfied (Para 27 of AS-17):

(a) its revenue from sales to external customers and from transactions with other
segments is equal to or more than 10% of total revenue of the firm; or
(b) its segment result (profit or loss) is equal to or more than 10% of combined result of
all segments in profit or combined results of all segments in loss, whichever is
greater in absolute amount; or

(c) its segment assets are 10% or more of the total assets of all segments.
Thus, there are three criteria to select a reportable segment – sales basis, profits/loss basis
and asset basis.

18. AS-18 – Related party disclosures: This accounting standard requires that a company
reports all transactions entered into with the related parties. Paragraph 10 of AS-18 defines
related parties as “parties are considered to be related if at any time during the reporting
period one party has the ability to control the other party or exercise significant influence
over the other party in making financial and/or operating decisions.” Sometimes it may
so happen that related parties enter into certain transactions with such terms and conditions
as are not available to unrelated parties. Such favourable terms to related parties might
affect the profitability of the firm.
Related parties disclosures include the following (Para 23 of AS-18):

(a) the name of the transacting related party;
(b) a description of the relationship between the parties and of the nature of transactions;
(c) volume of the transactions either as an amount or as an appropriate proportion;
(d) the amount or appropriate proportions of outstanding items relating to related
parties at the balance sheet date;

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