by In order to ensure transparency consistency, comparability, adequacy and reliability of financial reporting, it is essential to standardize the accounting principles and policies, Accounting Standards provide framework and standard accounting polices so that the financial statements of different enterprises become comparable.
Accounting Standards are selected set of accounting policies or broad guidelines regarding the principles and methods to be chosen out of several alternatives. The Accounting Standards Board (ASB) of the Institute of Chartered Accountants of India (ICAI) formulas Accounting Standards to be established by the Council of the ICAI.
Objective of Accounting Standards: Objective of Accounting Standards is to standarize the diverse accounting policies and practices with a view to eliminate to the extent possible the non-comparability of financial statements and the reliability to the financial statements.
The institute of Chartered Accountants of India, recognizing the need to harmonize the diverse accounting policies and practices, constituted at Accounting Standard Board (ASB) on 21st April, 1977.
IFRS:
IFRS is a set of international accounting standards stating how particular types of transactions and other events should be reported in financial statements.
IFRS are generally principles-based standards and seek to avoid a rule-book mentality. Application of IFRS requires exercise of judgment by the preparer and the auditor in applying principles of accounting on the basis of the economic substance of transactions.
IFRS are issued by the International Accounting Standards Board (IASB).
The term IFRS comprises IFRS issued by IASB; IAS issued by IASC; and Interpretations issued by the Standing Interpretations Committee (SIC) and the International Financial Reporting Interpretations Committee (IFRIC) of the IASB.
“For The Effective Study Of Accounting Standards And IFRS There Is A Strong Need To Study The Linkage Between These Two Terms That Means Convergence.”
The convergence of accounting standards refers to the goal of establishing a single set of accounting standards that will be used internationally, and in particular the effort to reduce the differences between the US generally accepted accounting principles (USGAAP) and the International financial reporting standards (IFRS)
Convergence of Indian accounting standards with International financial reporting standards (IFRS):
Meaning of convergence with IFRS: Convergence means to achieve harmony with IFRSs; in precise terms convergence can be considered “to design and maintain national accounting standards in a way that financial statements prepared in accordance with national accounting standards draw unreserved statement of compliance with IFRSs”, i.e., when the national accounting standards will comply with all the requirements of IFRS.
But convergence doesn’t mean that IFRS should be adopted word by word, e.g., replacing the term ‘true & fair’ for ‘present fairly’, in IAS 1, ‘Presentation of Financial Statements’. Such changes do not lead to non-convergence with IFRS.
The reason behind convergence is:
As, Availability of essential financial information about a company to its shareholders and other stakeholders in accordance with internationally accepted financial norms is considered as an integral and important part of good corporate governance. To ensure this and to implement the G-20 commitment to achieve a single set of high quality global accounting standards, the Government has taken decision to achieve convergence of Indian accounting standards with International financial reporting standards (IFRS) in a phased manner in accordance with the roadmap suggested by the Government.
Convergence in Indian Scenario:
With regard to India, the Ministry of Corporate Affairs (MCA) has committed to converge the Indian Accounting Standards with the IFRS effective 1st April 2011. The convergence process is picking up momentum with the credit going to the Ministry of Corporate Affairs. The Ministry has extended its unstinted support and guidance to the various regulatory and legal bodies that are spearheading a smooth transition process. Laudably, the highest authorities of the Indian Government have concluded that convergence of Indian Accounting Standards with IFRS is very vital for the country to take a lead role in the global foray.
Entities covered under convergence
Keeping in view the complex nature of IFRSs and the extent of differences between the existing ASs and the corresponding IFRSs and the reasons therefore, the ICAI is of the view that IFRSs should be adopted for the public interest entities from the accounting periods beginning on or after 1st April, 2011.
Public interest entities:
With a view to determine which entities should be considered as public interest entities for the purpose of application of IFRSs, the criteria for Level I enterprises as laid down by the Institute of Chartered Accountants of India and the definition of ‘small and mediumsized company’ as per Clause 2(f) of the Companies (Accounting Standards) Rules, 2006, as notified by the Ministry of Company Affairs (now Ministry of Corporate Affairs) in the Official Gazette dated December 7, 2006, were considered. The ICAI is of the view that in view of the complexity of recognition and measurement principles and the extent of disclosures required in various IFRSs, and the fact that about four years have elapsed since the ICAI laid down the criteria for Level I enterprises, as far as the size is concerned, it needs a revision. Accordingly, the ICAI is of the view that a public interest entity should be an entity:
(i) Whose equity or debt securities are listed or are in the process of listing on any stock exchange, whether in India or outside India; or
(ii) Which is a bank (including a cooperative bank), financial institution, a mutual fund, or an insurance entity; or
(iii) Whose turnover (excluding other income) exceeds rupees one hundred crore in the immediately preceding accounting year; or
(iv) Which has public deposits and/or borrowings from banks and financial institutions in excess of rupees twenty five crore at any time during the immediately preceding accounting year; or
(v) which is a holding or a subsidiary of an entity which is covered in (i) to (iv) above.
Scope of Accounting Standards:
Efforts will be made to issue Accounting Standards which are in conformity with the provisions of the applicable laws, customs, usages and business environment of our country.
However, if due to subsequent amendments in the’ law, a particular Accounting Standard is found to be not in conformity with such law, the provisions of the said law will prevail and the financial statements should be prepared in conformity with such law.
The Accounting Standards by their very nature cannot and do not override the local regulations which govern the preparation and presentation of financial statements in our country. However, the Institute will determine the extent of disclosure to be made in financial statements and the related Auditor’s reports.
Such disclosure may be by way of appropriate notes explaining the treatment of particular items. Such explanatory notes will be only in the nature of clarification and therefore, need not be treated as adverse comments on the related financial statements.
The Accounting Standards are intended to apply only to items which are material. Any ‘imitations with regard to the applicability of a specific Standard will be made clear by the Institute from time to time.
The date from which a particular Standard will come into effect, as well as the class of enterprises to which it will apply, will also be specified by the Institute. However, no standard will have retroactive application, unless otherwise stated.
The institute will use its best endeavors to persuade the Government appropriate authorities industrial and business community to adopt these standards in order to achieve uniformity in the presentation of financial statements.
In carrying out the task of formulation of Accounting Standards, the intention is to concentrate on basic matters. The endeavor would be to confine Accounting Standards to essent.als and not to make them so complex that they cannot be applied effectively and on a nationwide basis. In the years to come, it is to be expected that Accounting Standards will undergo revision and a greater degree of sophistication may then be appropriate.
Procedure for Issuing Accounting Standards:
Broadly, the following procedure will be adopted for formulating Accounting Standards:
ASB shall determine the broad areas in which Accounting Standards need to be formulated and ‘priority in regard to the selection thereof.
In the preparation of Accounting Standards, ASB will be assisted by Study Groups constituted to consider specific subjects. In the formation of Study Groups, provision will be made for wide participation by the members of the institute and others.
ASB will also hold a dialogue with the representatives of the Government, Public Sector Undertakings. Industry and other Organisations for ascertaining their views.
On the basis of the work of the Study Groups and the dialogue with the organisation, an exposure draft of the proposed standard will be prepared and issued for comments by members of the Institute and the public at large.
The draft of the proposed standard will include the following basic points:
- A Statement of concepts and fundamental accounting principles relating to the Standard.
- Definitions of the terms used in the Standard.
- The manner in which the accounting principles have been applied for.
- The presentation and disclosure requirements in complying with the Standard.
- Class of enterprises to which the Standard will apply.
- Date from which the Standard will be effective.
After taking into consideration the comments received, the draft of the proposed Standard will be finalized by ASB and submitted to the Council of the Institute.
The Council of the Institute will consider the final draft of the proposed Standard, and it found necessary, modify the same in consultation with ASB. The Accounting Standard on the relevant subject will then be issued under the authority of the Council.
Compliance with the Accounting Standards:
While discharging their attest functions, it will be duty of the members of the Institute to ensure that the Accounting Standards are implemented in the presentation of financial statements covered by their audit reports.
In the event of any deviation from the Standards, it will also be their duty to make adequate disclosures in their reports so that the users of such statements may be aware of such deviations.
In the initial years, the Standards will be recommendatory in character and the Institute will give wide publicity among the users and educate members about the utility of Accounting Standards and the need for compliance with the above disclosure requirements. Once an awareness about these requirements Is ensured, steps will be taken, in course of time, to enforce compliance with the accounting standards.
The adoption of Accounting Standards in our country and disclosure of the extent to which they have not been observed will, over the years, have an important effect, with consequential improvement in the quality of presentation of financial statements.
Accounting Standards Importance
Improves Reliability of Financial Statements
There are many stakeholders of a company and they rely on the financial statements for their information. Many of these stakeholders base their decisions on the data provided by these financial statements. Then there are also potential investors who make their investment decisions based on such financial statements.
So, it is essential these statements present a true and fair picture of the financial situation of the company. The Accounting Standards (AS) ensure this. They make sure the statements are reliable and trustworthy.
Attains Uniformity in Accounting
Accounting Standards provides rules for standard treatment and recording of transactions. They even have a standard format for financial statements. These are steps in achieving uniformity in accounting methods.
Prevents Frauds and Accounting Manipulations
Accounting Standards (AS) lay down the accounting principles and methodologies that all entities must follow. One outcome of this is that the management of an entity cannot manipulate with financial data. Following these standards is not optional, it is compulsory.
So, these standards make it difficult for the management to misrepresent any financial information. It even makes it harder for them to commit any frauds.
Comparability
This is another major objective of accounting standard. Since all entities of the country follow the same set of standards their financial accounts become comparable to some extent. The users of the financial statements can analyze and compare the financial performances of various companies before taking any decisions.
Also, two statements of the same company from different years can be compared. This will show the growth curve of the company to the users.
Assists Auditors
Now the accounting standards lay down all the accounting policies, rules, regulations, etc in a written format. These policies have to be followed. So if an auditor checks that the policies have been correctly followed he can be assured that the financial statements are true and fair.
Determining Managerial Accountability
The accounting standards help measure the performance of the management of an entity. It can help measure the management’s ability to increase profitability, maintain the solvency of the firm, and other such important financial duties of the management.
Management also must wisely choose their accounting policies. Constant changes in the accounting policies lead to confusion for the user of these financial statements. Also, the principle of consistency and comparability are lost.
Significance of accounting standards
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.
As a business owner, you understand that accounting has to be accurate, but you may not know why accounting standards the rules with acronyms such as GAAP and IFRS are such a big deal. If you were the only one who ever needed to see your accounting, they wouldn’t be, but investors and regulators may go over your ledgers, too. When you follow accounting standards, outsiders can understand what they’re reading.
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.
Determining Managerial Accountability
The accounting standards help measure the performance of the management of an entity. It can help measure the management’s ability to increase profitability, maintain the solvency of the firm, and other such important financial duties of the management.
Management also must wisely choose their accounting policies. Constant changes in the accounting policies lead to confusion for the user of these financial statements. Also, the principle of consistency and comparability are lost.
Assists Auditors
Now the accounting standards lay down all the accounting policies, rules, regulations, etc in a written format. These policies have to be followed. So, if an auditor checks that the policies have been correctly followed, he can be assured that the financial statements are true and fair.
Improves Reliability of Financial Statements
There are many stakeholders of a company and they rely on the financial statements for their information. Many of these stakeholders base their decisions on the data provided by these financial statements. Then there are also potential investors who make their investment decisions based on such financial statements.
So, it is essential these statements present a true and fair picture of the financial situation of the company. The Accounting Standards (AS) ensure this. They make sure the statements are reliable and trustworthy.
Attains Uniformity in Accounting
Accounting Standards provides rules for standard treatment and recording of transactions. They even have a standard format for financial statements. These are steps in achieving uniformity in accounting methods.
Prevents Frauds and Accounting Manipulations
Accounting Standards (AS) lay down the accounting principles and methodologies that all entities must follow. One outcome of this is that the management of an entity cannot manipulate with financial data. Following these standards is not optional, it is compulsory.
So, these standards make it difficult for the management to misrepresent any financial information. It even makes it harder for them to commit any frauds.
Comparability
This is another major objective of accounting standards. Since all entities of the country follow the same set of standards their financial accounts become comparable to some extent. The users of the financial statements can analyze and compare the financial performances of various companies before taking any decisions.
Also, two statements of the same company from different years can be compared. This will show the growth curve of the company to the users.
List of Accounting Standards issued by ASB
List of Mandatory Accounting Standards of ICAI (as on 1 July 2017 and onwards), is as under:
AS 1 Disclosure of Accounting Policies: This Standard deals with the disclosure of significant accounting policies which are followed in preparing and presenting financial statements.
AS 2 Valuation of Inventories: This Standard deals with the determination of value at which inventories are carried in the financial statements, including the ascertainment of cost of inventories and any write-down thereof to net realisable value.
AS 3 Cash Flow Statements: This Standard deals with the provision of information about the historical changes in cash and cash equivalents of an enterprise by means of a Cash Flow Statement which classifies cash flows during the period from operating, investing and financing activities.
AS 4 Contingencies and Events Occurring After Balance Sheet Date: This Standard deals with the treatment of contingencies and events occurring after the balance sheet date.
AS 5 Net profit or Loss for the period, Prior Period Items and Changes in Accounting Policies: This Standard should be applied by an enterprise in presenting profit or loss from ordinary activities, extraordinary items and prior period items in the Statement of Profit and Loss, in accounting for changes in accounting estimates, and in disclosure of changes in accounting policies.
AS 7 Construction Contracts: This Standard prescribes the accounting for construction contracts in the financial statements of contractors.
AS 9 Revenue Recognition: This Standard deals with the bases for recognition of revenue in the Statement of Profit and Loss of an enterprise. The Standard is concerned with the recognition of revenue arising in the course of the ordinary activities of the enterprise from: a) Sale of goods; b) Rendering of services; and c) Interest, royalties and dividends.
AS 10 Property, Plant and Equipment: The objective of this Standard is to prescribe the accounting treatment for property, plant and equipment (PPE).
AS 11 The Effects of Changes in Foreign Exchange Rates: AS 11 lays down principles of accounting for foreign currency transactions and foreign operations, i.e., which exchange rate to use and how to recognise in the financial statements the financial effect of changes in exchange rates.
AS 12 Government Grants: This Standard deals with accounting for government grants. Government grants are sometimes called by other names such as subsidies, cash incentives, duty drawbacks, etc.
AS 13 Accounting for Investments: This Standard deals with accounting for investments in the financial statements of enterprises and related disclosure requirements.
AS 14 Accounting for Amalgamations: This Standard deals with accounting for amalgamations and the treatment of any resultant goodwill or reserves.
AS 15 Employee Benefits: The objective of this Standard is to prescribe the accounting treatment and disclosure for employee benefits in the books of employer except employee share-based payments. It does not deal with accounting and reporting by employee benefit plans.
AS 16 Borrowing Costs: This Standard should be applied in accounting for borrowing costs. This Standard does not deal with the actual or imputed cost of owners’ equity, including preference share capital not classified as a liability.
AS 17 Segment Reporting: The objective of this Standard is to establish principles for reporting financial information, about the different types of segments/ products and services an enterprise produces and the different geographical areas in which it operates.
AS 18 Related Party Disclosures: This Standard should be applied in reporting related party relationships and transactions between a reporting enterprise and its related parties. The requirements of this Standard apply to the financial statements of each reporting enterprise and also to consolidated financial statements presented by a holding company.
AS 19 Leases: The objective of this Standard is to prescribe, for lessees and lessors, the appropriate accounting policies and disclosures in relation to finance leases and operating leases.
AS 20 Earnings Per Share: AS 20 prescribes principles for the determination and presentation of earnings per share which will improve comparison of performance among different enterprises for the same period and among different accounting periods for the same enterprise.
AS 21 Consolidated Financial Statements: The objective of this Standard is to lay down principles and procedures for preparation and presentation of consolidated financial statements. These statements are intended to present financial information about a parent and its subsidiary (ies) as a single economic entity to show the economic resources controlled by the group, obligations of the group and results the group achieves with its resources.
AS 22 Accounting for Taxes on Income: The objective of this Standard is to prescribe accounting treatment of taxes on income since the taxable income may be significantly different from the accounting income due to many reasons, posing problems in matching of taxes against revenue for a period.
AS 23 Accounting for Investments in Associates: This Standard should be applied in accounting for investments in associates in the preparation and presentation of consolidated Financial Statements (CFS) by an investor.
AS 24 Discontinuing Operations: The objective of AS 24 is to establish principles for reporting information about discontinuing operations, thereby enhancing the ability of users of financial statements to make projections of an enterprise’s cash flows, earnings generating capacity, and financial position by segregating information about discontinuing operations from information about continuing operations. AS 24 applies to all discontinuing operations of an enterprise.
AS 25 Interim Financial Reporting: This Standard applies if an entity is required or elects to publish an interim financial report. The objective of AS 25 is to prescribe the minimum content of an interim financial report and to prescribe the principles for recognition and measurement in complete or condensed financial statements for an interim period.
AS 26 Intangible Assets: AS 26 prescribes the accounting treatment for intangible assets (i.e. identifiable non-monetary asset, without physical substance, held for use in the production or supply of goods or services, for rental to others, or for administrative purposes).
AS 27 Financial Reporting of Interests in Joint Ventures: The objective of AS 27 is to set out principles and procedures for accounting for interests in joint ventures and reporting of joint venture assets, liabilities, income and expenses in the financial statements of venturers and investors.
AS 28 Impairment of Assets: The objective of AS 28 is to prescribe the procedures that an enterprise applies to ensure that its assets are carried at no more than their recoverable amount. The asset is described as impaired if its carrying amount exceeds the amount to be recovered through use or sale of the asset and AS 28 requires the enterprise to recognise an impairment loss in such cases. It should be noted that AS 28 deals with impairment of all assets unless specifically excluded from the scope of the Standard.
AS 29 Provisions, Contingent Liabilities and Contingent Assets: The objective of AS 29 is to ensure that appropriate recognition criteria and measurement bases are applied to provisions and contingent liabilities and that sufficient information is disclosed in the notes to the financial statements to enable users to understand their nature, timing and amount. The objective of this Standard is also to lay down appropriate accounting for contingent assets.
