FINAL
GROUP - IV
PAPER - 16
ADVANCED
FINANCIAL
ACCOUNTING
& REPORTING
The Institute of Cost and Works Accountants of India
12, SUDDER STREET, KOLKATA - 700 016
,First Edition : January 2008
Revised Edition : March 2009
Second Revised Edition : June 2010
Published by:
Directorate of Studies
The Institute of Cost and Works Accountants of India
12, SUDDER STREET, KOLKATA - 700 016
Printed at : India Limited,
50/2, TTC MIDC Industrial Area, Mahape, Navi Mumbai - 400 710, India
Copyright of these Study Notes is reserved by the Institute of Cost and Works Accountants
of India and prior permission from the Institute is necessary for reproduction of the whole
or any part thereof.
, CONTENTS
Page No.
Study Note - 1
Introduction to IAS, USGAAP, Indian Accounting Standard ............................................................ 1
1.1 Framework of Accounting ............................................................................................................... 2
1.1.1 Introduction ............................................................................................................................ 2
1.1.2 Meaning of Accounting ......................................................................................................... 2
1.1.3 Objectives and Functions of Accounting ............................................................................ 3
1.1.4 Fundamental Accounting Assumptions ............................................................................. 3
1.1.5 Limitations of Accounting .................................................................................................... 4
1.1.6 Financial Statements .............................................................................................................. 4
1.1.7 Qualitative Characteristics of Financial Statements .......................................................... 5
1.2 Accounting Standards - Applicability, Interpretation, Scope and Compliance ............... 7
1.3 US GAAPS .......................................................................................................................................... 10
1.3.1 Established Accounting Principles in the US ..................................................................... 10
1.3.2 Other Accounting Literature ................................................................................................ 11
1.3.3 AICPA ...................................................................................................................................... 11
1.3.4 FASB ......................................................................................................................................... 11
1.3.5 Components of US GAAP..................................................................................................... 11
1.4 International Accounting Standards .............................................................................................. 13
1.4.1 Introduction ............................................................................................................................ 13
1.4.2 Extract of the International Accounting Standards ........................................................... 13
1.5 International Financial Reporting Standards ................................................................................ 29
1.6 A Comparison IGAAP - US GAAP - IFRS ..................................................................................... 39
Study Note - 2
Preparation of Company Accounts under Various Circumstances .................................................... 49
2.1 Merger and Acquisitions .................................................................................................................. 50
2.1.1 Introduction ............................................................................................................................ 50
2.1.2 What is Merger? ..................................................................................................................... 50
2.1.3 Varieties of Mergers ............................................................................................................... 51
2.1.4 Acquisitions............................................................................................................................. 51
2.1.5 Types of Acquisitions ............................................................................................................ 52
2.1.6 Distinction Between Mergers and Acquisitions ................................................................ 52
2.2 Accounting for Mergers and Acquisitions..................................................................................... 54
2.2.1 Methods of Accounting ......................................................................................................... 55
Pooling of Interest Method .................................................................................................. 55
Purchase Method.................................................................................................................... 56
2.2.2 How to Value an Acquisition ............................................................................................... 60
, Page No.
2.2.3 Sources of Gains from Acquisitions .................................................................................... 60
2.2.4 Valuation Procedures ............................................................................................................ 61
2.3 External Reconstruction.................................................................................................................... 62
Illustrations........................................................................................................................................ 66
I Computation and Discharge of Purchase Consideration ................................................. 66
II Basics of Amalgamation and Absorption ........................................................................... 73
III Purchasing Company holding shares in Selling Company ............................................. 118
IV Selling Company holding shares in Purchasing Company ............................................. 142
V Cross Holding ......................................................................................................................... 146
VI Chain Holding ........................................................................................................................ 155
VII Internal Reconstruction ......................................................................................................... 158
VIII Reverse Merger ....................................................................................................................... 171
IX External Reconstruction ........................................................................................................ 176
X Surrender of Shares ................................................................................................................ 179
XI Demerger ................................................................................................................................. 182
XII Sales of Division ..................................................................................................................... 205
XIII Impact of Reconstruction over Wealth of Investor and Company ................................. 208
XIV Buy back of Shares ................................................................................................................. 211
XV Conversion .............................................................................................................................. 217
Study Note - 3
Group Financial Statements ...................................................................................................................... 225
3.1 Holding Company............................................................................................................................. 226
3.2 Methods of Combination ................................................................................................................ 226
3.3 Accounting Treatment ...................................................................................................................... 227
3.4 Preparation of Group Cash Flow Statement ................................................................................. 299
3.5 Statement of Cash Flows .................................................................................................................. 300
3.6 Illustrations on Cash Flow Statement............................................................................................. 304
Study Note - 4
Segmental Reporting ................................................................................................................................... 359
4.1 Introduction........................................................................................................................................ 360
4.2 Need for Segmental Reporting ........................................................................................................ 360
4.3 Arguments against Segmental Reporting ...................................................................................... 361
4.4 International Scenario ....................................................................................................................... 362
GROUP - IV
PAPER - 16
ADVANCED
FINANCIAL
ACCOUNTING
& REPORTING
The Institute of Cost and Works Accountants of India
12, SUDDER STREET, KOLKATA - 700 016
,First Edition : January 2008
Revised Edition : March 2009
Second Revised Edition : June 2010
Published by:
Directorate of Studies
The Institute of Cost and Works Accountants of India
12, SUDDER STREET, KOLKATA - 700 016
Printed at : India Limited,
50/2, TTC MIDC Industrial Area, Mahape, Navi Mumbai - 400 710, India
Copyright of these Study Notes is reserved by the Institute of Cost and Works Accountants
of India and prior permission from the Institute is necessary for reproduction of the whole
or any part thereof.
, CONTENTS
Page No.
Study Note - 1
Introduction to IAS, USGAAP, Indian Accounting Standard ............................................................ 1
1.1 Framework of Accounting ............................................................................................................... 2
1.1.1 Introduction ............................................................................................................................ 2
1.1.2 Meaning of Accounting ......................................................................................................... 2
1.1.3 Objectives and Functions of Accounting ............................................................................ 3
1.1.4 Fundamental Accounting Assumptions ............................................................................. 3
1.1.5 Limitations of Accounting .................................................................................................... 4
1.1.6 Financial Statements .............................................................................................................. 4
1.1.7 Qualitative Characteristics of Financial Statements .......................................................... 5
1.2 Accounting Standards - Applicability, Interpretation, Scope and Compliance ............... 7
1.3 US GAAPS .......................................................................................................................................... 10
1.3.1 Established Accounting Principles in the US ..................................................................... 10
1.3.2 Other Accounting Literature ................................................................................................ 11
1.3.3 AICPA ...................................................................................................................................... 11
1.3.4 FASB ......................................................................................................................................... 11
1.3.5 Components of US GAAP..................................................................................................... 11
1.4 International Accounting Standards .............................................................................................. 13
1.4.1 Introduction ............................................................................................................................ 13
1.4.2 Extract of the International Accounting Standards ........................................................... 13
1.5 International Financial Reporting Standards ................................................................................ 29
1.6 A Comparison IGAAP - US GAAP - IFRS ..................................................................................... 39
Study Note - 2
Preparation of Company Accounts under Various Circumstances .................................................... 49
2.1 Merger and Acquisitions .................................................................................................................. 50
2.1.1 Introduction ............................................................................................................................ 50
2.1.2 What is Merger? ..................................................................................................................... 50
2.1.3 Varieties of Mergers ............................................................................................................... 51
2.1.4 Acquisitions............................................................................................................................. 51
2.1.5 Types of Acquisitions ............................................................................................................ 52
2.1.6 Distinction Between Mergers and Acquisitions ................................................................ 52
2.2 Accounting for Mergers and Acquisitions..................................................................................... 54
2.2.1 Methods of Accounting ......................................................................................................... 55
Pooling of Interest Method .................................................................................................. 55
Purchase Method.................................................................................................................... 56
2.2.2 How to Value an Acquisition ............................................................................................... 60
, Page No.
2.2.3 Sources of Gains from Acquisitions .................................................................................... 60
2.2.4 Valuation Procedures ............................................................................................................ 61
2.3 External Reconstruction.................................................................................................................... 62
Illustrations........................................................................................................................................ 66
I Computation and Discharge of Purchase Consideration ................................................. 66
II Basics of Amalgamation and Absorption ........................................................................... 73
III Purchasing Company holding shares in Selling Company ............................................. 118
IV Selling Company holding shares in Purchasing Company ............................................. 142
V Cross Holding ......................................................................................................................... 146
VI Chain Holding ........................................................................................................................ 155
VII Internal Reconstruction ......................................................................................................... 158
VIII Reverse Merger ....................................................................................................................... 171
IX External Reconstruction ........................................................................................................ 176
X Surrender of Shares ................................................................................................................ 179
XI Demerger ................................................................................................................................. 182
XII Sales of Division ..................................................................................................................... 205
XIII Impact of Reconstruction over Wealth of Investor and Company ................................. 208
XIV Buy back of Shares ................................................................................................................. 211
XV Conversion .............................................................................................................................. 217
Study Note - 3
Group Financial Statements ...................................................................................................................... 225
3.1 Holding Company............................................................................................................................. 226
3.2 Methods of Combination ................................................................................................................ 226
3.3 Accounting Treatment ...................................................................................................................... 227
3.4 Preparation of Group Cash Flow Statement ................................................................................. 299
3.5 Statement of Cash Flows .................................................................................................................. 300
3.6 Illustrations on Cash Flow Statement............................................................................................. 304
Study Note - 4
Segmental Reporting ................................................................................................................................... 359
4.1 Introduction........................................................................................................................................ 360
4.2 Need for Segmental Reporting ........................................................................................................ 360
4.3 Arguments against Segmental Reporting ...................................................................................... 361
4.4 International Scenario ....................................................................................................................... 362
