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ACCOUNTING STANDARD (Indian GAAP)
INTRODUCTION
Over a period of time a number of Generally Accepted Accounting Principles in the form of concepts and conventions have been developed and accepted to bring comparability and uniformity in the financial statements of various business entities. But the difficulty is that GAAP also allow a large number of alternative treatments for the same item. Different enterprises may adopt different accounting policies for the same transaction. As a result, the financial statements become inconsistent and incomparable. Hence, there is an urgent need of certain accounting standards to harmonize & standardize these diverse accounting policies for preparation of financial statements. The International Accounting Standards Committee (IASC) came into existence on 29 th June, 1973 to develop accounting standards.
MEANING OF ACCOUNTING STANDARDS
Accounting standards are written documents issued by
expert accounting body or by government or other
regulatory body covering the aspects of recognition,
measurement, presentation and disclosure of accounting
transactions in the financial statements.
Accounting standards are rule based accounting
standards (rule of recognition, measurement,
presentation and disclosure), which are applicable on
companies on which Indian Accounting Standards are not
applicable.
DEFINITION OF ACCOUTING STANDARD Kohler defines accounting standards as, “a code of conduct imposed on accountants by custom, law or professional body.”
NATURE OF ACCOUNTING STANDARDS
1. Accounting standards lay down the norms of accounting policies and practices by way of codes to direct as to how the transactions are events should be dealt in accounts and **disclosed in the financial statements.
- Accounting standards limit the area within which** accountants have to function.
**3. Provide uniformity: The users of financial statements require the accounting information which is comparable. The presence of wide variety of principles and conventions created confusion among them, rather than providing a solid and uniform treatment of the transactions. Accounting standards provide uniformity in the preparation and presentation of financial statements.
- Ensure comparability of financial statements: The comparability is possible only if the same accounting standards are used in the preparation of the financial statements of the different enterprises in the same industry. It is a positive step to protect the industry of the users of the accounting information.
- Improve understandability of financial statements: Accounting standards improve better understanding of financial statements.
- Improve the reliability and credibility of financial statements: There are number of users (internal & external), who are interested in the accounting information of a business**
enterprise. It is therefore, necessary that financial statements should present a true and fair view of the financial position and operating results of an enterprise. Accounting standards generate confidence among the users of accounting information which increases the reliability and credibility of the accounting information.
**7. Reduce the chance of frauds and manipulation: The choice of different methods of treatment of stock or providing depreciation on fixed assets may be manipulated to show the desired results. Use of accounting standards in the preparation of financial statements has reduced the chance of frauds, manipulation, insufficient disclosures and the use of inappropriate accounting policies.
- Helpful to accountants and auditors Accounting standards are needed not only by business enterprises but also by business enterprises but also by accountants and auditors. It is their duty to ensure that accounting standards have been followed in the preparation and presentation of financial statements. So, the use of accounting standards make them free from court cases, other legal formalities, penalties due to inadequate disclosure of accounting information and adoption of inappropriate accounting policies.**
ACCOUNTING STANDARD BOARD
The Institute of Chartered Accountants of India (ICAI), recognizing the need to harmonize the diverse accounting policies and practices, constituted an Accounting Standard Board (ASB) on 21 st April, 1977. PROCEDURE FOR ISSUING ACCOUNTING STANDARDS I. Determination of the broad areas: The ASB determines a) the broad areas in which the accounting standards need to be formulated and b) the priority in regard to the selection there of. II. Constituting study group: In the preparation of the accounting standards, the ASB will be assisted by the study groups in the formulation of study group, the provision is made for wide participation by the members of the ICAI and others. III. Preparation of the preliminary draft (Prior to a main or official draft) The study group makes a draft of the proposed standard containing a) Objectives of standard b) Definition of the terms used in the standard c) Concepts and fundamental accounting
principles relating to the standard d) Presentation and disclosure requirements. IV. Consideration of the preliminary draft by the ASB: The ASB will consider the preliminary draft prepared by the study group and if any revision of the standard is required on the basis of the deliberations, the ASB will make the same or will refer the same to the study group. V. Circulating the draft of accounting standard by the ASB to the members of ICAI and specified bodies: ASB circulate the AS Draft to the members of the ICAI and the following specified bodies for their comments- a) The Institute of Cost and Works Accountants of India (ICWAI) b) The Institute of company secretaries of India (ICSI) c) Department of company affairs (DCA) d) Central Board of Direct taxes (CBDT) e) Reserve Bank of India (RBI) f) Indian Banks Association (IBA) g) Securities of Exchange Board of India h) Associated Chambers of Commerce and Industry (ASSOCHAM) Federation of India Chambers of Commerce and Industry (FICCI)
VIII. Submission of the final draft by the ASB to the Council of the ICAI Considering the comments received, the ASB finalizes the draft of the proposed standard and submits the same to the Council of the ICAI. IX. Modifying and issuing the Accounting Standard The Council of the ICAI considers the finalized draft standard, and if, necessary modifies the same in consultation with ASB and then issues the Accounting Standard on the relevant subject.
LIST OF ACCOUNTING STANDARDS
So far, a total of 32 Accounting Standards have been issued by the ICAI, out of which 29 are notified by the Central Government under section 133 of the Companies Act, 2013. AS-6, AS-8, AS-30, AS-31 and AS-32 have been withdrawn by ICAI through different announcements. Therefore, now effectively there are only 27 accounting standards.
NUMBER OF THE
ACCOUNTING
STANDARD (AS)
Title of the Accounting Standard AS-1 Disclosure of Accounting Policies AS-2(Revised) Valuation of Inventories AS-3 Cash Flow Statement AS-4 (Revised) 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 AS-6 Depreciation (Withdrawn) AS-7 Construction Contracts AS-8 Accounting for Research and Development (Withdrawn and included in AS-26) AS-9 Revenue Recognition AS-10 (Revised) Property, Plant and Equivalent (PPE) (AS- 6 ‘Depreciation’ included) AS-11 (2003) The effects of changes in Foreign Exchanges Rates AS-12 Accounting for Govt. Grants AS-13 (Revised) Accounting for investments AS-14 (Revised) Accounting for Amalgamations AS-15 (2005) Employees Benefit AS-16 Borrowing Costs AS-17 Segment Reporting AS-18 Related party Disclosures
- All commercial, industrial and business reporting enterprise, whose turnover exceeds ₹ 1 crore but does not exceed ₹ 50 crores for the immediately preceding accounting year.
- All commercial, industrial and business reporting enterprise having borrowings in excess of ₹ 1 crore but not in excess of ₹ 10 crores at any time during the preceding accounting year.
- Holding and subsidiary entities of any one of the above. LEVEL III – Enterprise which are not covered under Level I and Level II. All accounting standards applicable to Level I and there is some relaxation for Level II & Level III. INTERNATIONAL ACCOUNTING STANDARDS
International Accounting Standards (IAS) were the first
international accounting standards that were issued by the
International Accounting Standards Committee (IASC).
The international accounting standards committee (IASC)
was formed in June 1973 in London.
IASC issued 41 Accounting Standards between 1973 to
Presently, there are 24 IAS.
The IASC survived for 27 years, until 2001, when the
organization was reconstructed and the International
Accounting Standards Board (IASB) came into existence.
So earlier, IASB was called IASC.
International Accounting Standards were replaced in 2001
by the International Financial Standards (IFRS).
IASB has adopted all outstanding IAS and SIC (Standing
Interpretation Committee) issued by the IASC as its own
standards. Those IAS and SIC continue to be in force to the
extent they are not amended or withdrawn by the IASB.
New standards issued by the IASB are known as IFRS.
MEANING OF INTERNATIONAL FINANCIAL REPORTING
STANDARDS (IFRS)
International Financial Reporting Standards (IFRS) are a
new set of accounting standards, issued by International
Accounting Standard Board (ASB) explaining how different
types of business transactions and events showed be
reported in financial statements to make them consistent,
transparent, reliable and easily comparable around the
world.
OBJECTIVES/BENEFITS/IMPORTANCE OF IFRS
1. HELPUL TO INVESTORS: Investors require high quality,
relevant, reliable, transparent and comparable
information in financial statements in order to make
economic decisions. The use of IFRS meet their
requirement.
2. INCREASED TRANSPARENCY: When compared to
Indian GAAP, IFRS contains a lot of additional
disclosures in various areas, adding more
transparency to the Indian business environment. This
gives added security to stakeholders and investors.
Increased transparency also leads to better
communication between the entity’s stakeholders
and its management.
3. ELIMINATION OF MULTIPLE REPORTING: At present the
companies located in different countries have to prepare one set of financial statements for the home country and the other set for the foreign country. Large business houses in India like TATA, BIRLA, AMBANI have firms registered outside India in London, Japan, China, America, etc. Firms registered in India prepare their accounts as per Indian Accounting Standards, whereas firms registered in other countries prepare their financial statements as per the reporting standards of the respective country. Adoption of IFRS ensures the elimination of multiple financial reporting
standards by these firms as they are following a single set of financial reporting.
4. BETTER ACCESS TO GLOBAL CAPITAL MARKETS: During the
last decade the firm requires funds at cheaper cost which is available in American, European, Japanese capital markets. The companies also borrow the funds from different sources from financial institutions such as IMF, World Bank, BRICK Bank, etc. The adoption and implementation of IFRS will help in accessing global markets for the requirement of funds and also makes available funds at cheaper cost.
5. EASY COMPARISONS: Across the globe, firms are using IFRS
to report their financial results. The adoption of IFRS by Indian business firms, the comparison of two entities become easier. Investors, bankers and lenders also find it easy to compare the two financial statements following same reporting procedure.
6. BETTER QUALITY OF FINANCIAL REPORTING: Application of
IFRS is ensuring better quality of financial reporting due to the regular application of accounting principles and improves the reliability of financial statements. IFRS follows a concept of fair value which can help Indian firms to reflect their true worth of Assets in the financial statements. Since a single body (IASB) is preparing IFRS, these are very consistent, reliable and easy to adopt ensuring better quality of financial reporting.
7. DIFFICULT TO COMMIT FRAUD AND MANIPULATE THE
ACCOUNTS: There are tough and rigid rules for the
- IFRS – 8 Operating segments
- IFRS – 9 Financial instruments
- IFRS – 10 Consolidated financial statements
- IFRS – 11 Joint arrangements
- IFRS – 12 Disclosure of interest in other entities
- IFRS – 13 Fair value measurement
- IFRS – 14 Regulatory Deferral Accounts
- IFRS – 15 Revenue from contracts with customers
- IFRS – 16 Leases
- IFRS – 17 Insurance contracts
- IAS 1 Presentation of financial statements
- IAS 2 Inventories
- IAS 7 Statement of cash flows
- IAS 8 Accounting policies, changes in Accounting estimates and errors
- IAS 10 Events after the reporting period
- IAS 11 Construction contracts
- IAS 12 Income taxes
- IAS 16 Property, plant and equipment
- IAS 17 Leases
- IAS 18 Revenue
- IAS 19 Employee benefit
- IAS 20 Accounting for govt. grants & disclosure of Govt. assistance
- IAS 21 The effects of changes in foreign exchange rates
- IAS 23 Borrowing costs
- IAS 24 Related party disclosures
- IAS 26 Accounting & reporting by retirement Benefit plans
- IAS 27 Separate financial statements
- IAS 28 Investments in Associates & Joint ventures
- IAS 29 Financial reporting in Hyperinflationary Economies
- IAS 32 Financial instruments presentation
- IAS 33 Earning per share
- IAS 34 Interim Financial Reporting
- IAS 36 Impairment of assets
- IAS 37 Provisions, contingent liabilities & contingent Assets
- IAS 38 Intangible assets
- IAS 39 Financial instruments :- Recognition & measurement
- IAS 40 Investment property
- IAS 41 Agriculture
