A PROJECT REPORT

ON
ACCOUNTING STANDARDS

PRESENTED BY:
GEORGE JOSEPH

UNDER GUIDANCE OF:

PROF. ANIL TILAK

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 CONTENTS

ACCOUNTING STANDARD-1 3

ACCOUNTING STANDARD-6 15

ACCOUNTING STANDARD-10 30

ACCOUNTING STANDARD-13 42

BIBLIOGRAPHY 53

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 ACCOUNTING STANDARD-1

Accounting is the art of recording transactions in the best manner possible, so as

to enable the reader to arrive at judgments/come to conclusions, and in this
regard it is utmost necessary that there are set guidelines. These guidelines are
generally called accounting policies. The intricacies of accounting policies
permitted Companies to alter their accounting principles for their benefit. This
made it impossible to make comparisons. In order to avoid the above and to
have a harmonised accounting principle, Standards needed to be set by
recognised accounting bodies.

This paved the way for Accounting Standards to come into existence.
Accounting Standards in India are issued By the Institute of Chartered
Accountants of India (ICAI). At present there are 30 Accounting Standards
issued by ICAI.

INTRODUCTION

1. This statement deals with the disclosure of significant accounting policies

followed in preparing and presenting financial statements.

2. The view presented in the financial statements of an enterprise of its state of

affairs and of the profit or loss can be significantly affected by the accounting
policies followed in the preparation and presentation of the financial statements.
The accounting policies followed vary from enterprise to enterprise. Disclosure
of significant accounting policies followed is necessary if the view presented is
to be properly appreciated.

3. The disclosure of some of the accounting policies followed in the preparation

and presentation of the financial statements is required by law in some cases.

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4. The Institute of Chartered Accountants of India has, in Statements issued by
it, recommended the disclosure of certain accounting policies, e.g.,translation
policies in respect of foreign currency items.

5.A few enterprises in India have adopted the practice of including in their
annual reports to shareholders a separate statement of accounting policies
followed in preparing and presenting the financial statements.

6. In general, however, accounting policies are not at present regularly and fully
disclosed in all financial statements. Many enterprises include in the Notes on
the Accounts, descriptions of some of the significant accounting policies. But
the nature and degree of disclosure vary considerably between the corporate and
the non-corporate sectors and between units in the same sector.

7. Even among the few enterprises that presently include in their annual reports
a separate statement of accounting policies, considerable variation exists. The
statement of accounting policies forms part of accounts in some cases while in
others it is given as supplementary information.

8. The purpose of this Statement is to promote better understanding of financial

statements by establishing through an accounting standard the disclosure of
significant accounting policies and the manner in which accounting policies are
disclosed in the financial statements. Such disclosure would also facilitate a
more meaningful comparison between financial statements of different
enterprises.

OBJECTIVE OF ACCOUNTING STANDARDS

Objective of Accounting Standards is to standardize 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.

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Accounting Standards are formulated with a view to harmonise different
accounting policies and practices in use in a country. The objective of
Accounting Standards is, therefore, to reduce the accounting alternatives in the
preparation of financial statements within the bounds of rationality, thereby
ensuring comparability of financial statements of different enterprises with a
view to provide meaningful information to various users of financial statements
to enable them to make informed economic decisions.

The Companies Act, 1956, as well as many other statutes in India require that
the financial statements of an enterprise should give a true and fair view of its
financial position and working results. This requirement is implicit even in the
absence of a specific statutory provision to this effect. The Accounting
Standards are issued with a view to describe the accounting principles and the
methods of applying these principles in the preparation and presentation of
financial statements so that they give a true and fair view. The Accounting
Standards not only prescribe appropriate accounting treatment of complex
business transactions but also foster greater transparency and market discipline.
Accounting Standards also helps the regulatory agencies in benchmarking the
accounting accuracy.

NATURE OF ACCOUNTING POLICIES

1. The accounting policies refer to the specific accounting principles and the
methods of applying those principles adopted by the enterprise in the
preparation and presentation of financial statements.

2. There is no single list of accounting policies which are applicable to all

circumstances. The differing circumstances in which enterprises operate in a
situation of diverse and complex economic activity make alternative accounting
principles and methods of applying those principles acceptable. The choice of
the appropriate accounting principles and the methods of applying those

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principles in the specific circumstances of each enterprise calls for considerable
judgement by the management of the enterprise.

3. The various statements of the Institute of Chartered Accountants of India

combined with the efforts of government and other regulatory agencies and
progressive managements have reduced in recent years the number of
acceptable alternatives particularly in the case of corporate enterprises. While
continuing efforts in this regard in future are likely to reduce the number still
further, the availability of alternative accounting principles and methods of
applying those principles is not likely to be eliminated altogether in view of the
differing circumstances faced by the enterprises.

AREAS IN WHICH DIFFERING ACCOUNTING POLICIES ARE

ENCOUNTERED

The following are examples of the areas in which different accounting policies
may be adopted by different enterprises.

• Methods of depreciation, depletion and amortization

• Treatment of expenditure during construction
• Conversion or translation of foreign currency items
• Valuation of inventories
• Treatment of goodwill
• Valuation of investments
• Treatment of retirement benefits
• Recognition of profit on long-term contracts
• Valuation of fixed assets
• Treatment of contingent liabilities.

The above list of examples is not intended to be exhaustive.

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Accounting Standards establish rules relating to recognition, measurement and
disclosures, thereby ensuring that all enterprises that follow them are and that
their financial statements are true, fair and transparent. High quality accounting
standards are a necessary and important element of a sound capital market
system. In Public capital markets such as those in United States, high quality
accounting standards reduce uncertainty and increase overall efficiency.

ACCOUNTING STANDARDS-SETTING IN INDIA

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.

The Institute of Chartered Accountants of India (ICAI) being a member body of

the IASC, constituted the Accounting Standards Board (ASB) on 21st April,
1977, with a view to harmonize the diverse accounting policies and practices in
use in India. After the avowed adoption of liberalization and globalization as
the corner stone’s of Indian economic policies in early ‘90s, and the growing
concern about the need of effective corporate governance of late, the
Accounting Standards have increasingly assumed importance. While
formulating accounting standards, the ASB takes into consideration the
applicable laws, customs, usages and business environment prevailing in the
country. The ASB also gives due consideration to International Financial
Reporting Standards (IFRSs)/ International Accounting Standards (IASs) issued
by IASB and tries to integrate them, to the extent possible, in the light of
conditions and practices prevailing in India.

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COMPOSITION OF THE ACCOUNTING STANDARDS BOARD:

The composition of the ASB is broad-based with a view to ensuring

participation of all interest groups in the standard-setting process. These
interest-groups include industry, representatives of various departments of
government and regulatory authorities, financial institutions and academic and
professional bodies. Industry is represented on the ASB by their apex level
associations, viz., Associated Chambers of Commerce & Industry
(ASSOCHAM), Confederation of Indian Industries (CII) and Federation of
Indian Chambers of Commerce and Industry (FICCI). As regards government
departments and regulatory authorities, Reserve Bank of India, Ministry of
Company Affairs, Comptroller & Auditor General of India, Controller General
of Accounts and Central Board of Excise and Customs are represented on the
ASB. Besides these interest-groups, representatives of academic and
professional institutions such as Universities, Indian Institutes of Management,
Institute of Cost and Works Accountants of India and Institute of Company
Secretaries of India are also represented on the ASB. Apart from these interest
groups, certain elected members of the Central Council of ICAI are also on the
ASB.

THE ACCOUNTING STANDARDS-SETTING PROCESS

The accounting standard setting, by its very nature, involves reaching an

optimal balance of the requirements of financial information for various
interest-groups having a stake in financial reporting. With a view to reach
consensus, to the extent possible, as to the requirements of the relevant interest-
groups and thereby bringing about general acceptance of the Accounting
Standards among such groups, considerable research, consultations and
discussions with the representatives of the relevant interest-groups at different
stages of standard formulation becomes necessary. The standard-setting

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procedure of the ASB, as briefly outlined below, is designed in such a way so as
to ensure such consultation and discussions:

Identification of the broad areas by the ASB for formulating the Accounting
Standards.

Constitution of the study groups by the ASB for preparing the preliminary
drafts of the proposed Accounting Standards.

Consideration of the preliminary draft prepared by the study group by the ASB
and revision, if any, of the draft on the basis of deliberations at the ASB.

Circulation of the draft, so revised, among the Council members of the ICAI
and 12 specified outside bodies such as Standing Conference of Public
Enterprises (SCOPE), Indian Banks’ Association, Confederation of Indian
Industry (CII), Securities and Exchange Board of India (SEBI), Comptroller and
Auditor General of India (C& AG), and Department of Company Affairs, for
comments.

Meeting with the representatives of specified outside bodies to ascertain their

views on the draft of the proposed Accounting Standard.

Finalisation of the Exposure Draft of the proposed Accounting Standard

on the basis of comments received and discussion with the representatives of
specified outside bodies.

Issuance of the Exposure Draft inviting public comments.

Consideration of the comments received on the Exposure Draft and finalisation

of the draft Accounting Standard by the ASB for submission to the Council of
the ICAI for its consideration and approval for issuance.

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Consideration of the draft Accounting Standard by the Council of the Institute,
and if found necessary, modification of the draft in consultation with the ASB.

THE PRINCIPLES GOVERNING SELECTION OF AN ACCOUNTING

POLICY:

The primary consideration in the selection of accounting policies by an

enterprise is that the financial statements prepared and presented on the basis of
such accounting policies should present a true and fair view of the state of
affairs of the enterprise as at the balance sheet date and of the profit and loss for
the period ended on that date. For this purpose , the major considerations
governing the selection and application of accounting policies are :

1. PRUDENCE

In the view of the uncertainty attached to future event, profits are not anticipated
but recognised only when realised though not necessarily in cash. Provision is
made for all known liabilities and losses even though the amount cannot be
determined with certainty and represents only a best estimate in the light of
available information.

2. SUBSTANCE AND FORM

The accounting treatment and presentation in financial statements of

transactions and events should be governed by their substance and merely by
the legal form. A typical example where substance takes precedence over form
is in the case of finance leases. In finance leases, the lessee in substance is the
owner of the asset whilst the less or is merely the legal owner. The accounting
of finance leases is based on the substance rather than form of the transaction.

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3. MATERIALITY

Financial statements should disclose all “material” items, i.e. items the
statements. The concept of materiality recognizes that some matters individually
or in the aggregate, are important for the fair presentation of the financial
statements taken as a whole. The IASC (International Accounting Standards
Committee) defines audit materiality as follows: ‘Information is the if its
omission or misstatement could influence the economic decisions of users taken
on the basis of the financial statement.’ Materiality depends on the size of the
item or error judged in the particular circumstances of its omission or
misstatement. Thus materiality provides a threshold or cut-off point rather being
primary qualitative characteristics which information must have, if it is to be
useful. There are no hard and fast rules for determining materiality. What is
material is a matter of professional judgment. For example, an amount material
to the financial statements of one entity may not be material to financial
statements of another entity of a difference size or nature. Further, what is
material to the financial statements of a particular entity might change from one
period to another.

THE FUNDAMENTAL ACCOUNTING ASSUMPTIONS

Certain fundamentals accounting assumptions underlie the preparations and

presentation of financial statements. They are usually not specifically stated
because there acceptance and use are assumed. Disclosure is necessary if they
are not followed, otherwise disclosure is not required. The following have been
generally accepted as fundamental accounting assumptions:

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A. Going Concern

The enterprise is normally viewed as going concern, that is, as continuing in

operation for the foreseeable future. It is assumed the enterprise has neither the
intention nor the necessity of liquidation or of curtailing materiality the scale of
the operations.

B. Consistency

It is assumed that accounting policies are consistent from one period to another.

C. Accrual

Revenues and cost are accrued, that is, recognised as they are earned or incurred
(and not as money received or paid) and recorded in the financial statements of
the period which they relate. The accrual concept forces the matching of
revenues against relevant cost, for example, though warranty expenses are
incurred much after the turnover takes place, it has to be estimated and provided
for when the turnover is affected, as it is a cost incurred to achieve that
turnover.

PRINCIPLES FOLLOWING A “NOT GOING CONCERN”

The company should prepare the accounts on the basis that it is not a going
concern or that it will be closed in the near future. All the assets of such a
company should be valued as its net realisable value. All the liabilities should
be valued at the expected settlement price. In addition, further liabilities may
have to be provided in respect of employee termination or premature
termination of various contracts including the lease of the premises. Adequate
disclosure/adjustments should be made in financial statements about the
impending closure and the fact that accounts are prepared on the basis. Since the
accounts would be true and fair, there no need for the auditor to make a
qualification. The auditor should however add a paragraph in his report

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detailing the going situation (matter of emphasis and not qualification). If the
financial statement is not prepared on the above basis, the auditor will have to
qualify the financial statements.

DIFFERENT ACCOUNTING POLICIES FOR SIMILAR ITEMS

This is the contrary to the fundamental accounting assumptions of consistency,

which require use consistence policies year after year and also in the same year
for all similar items. In the case of depreciation, Expert Advisory Committee
(EAC) of ICAI has given an opinion that different methods of depreciation for
the for the same class of assets used in different plants of company can be
applied if the management considers it appropriate to do so after taking into
account important factors such as the type of assets, the nature of the use of
such assets and circumstances prevailing in the business. Whilst such
exceptions may be justifiable it would be difficult to justify valuing the same
type of inventory at to different factories by applying to different accounting
policies.

DISCLOSURE OF ACCOUNTING STANDARDS

To ensure proper understanding of financial statements, it is necessary that all

significant accounting policies adopted in the preparation and presentation of
financial statements should be disclosed. Such disclosure should form part of
the financial statements. It would be helpful to the reader of financial statements
if they are all disclosed as such in one place instead of being scattered over
several statements, schedules and notes.

Examples of matters in respect of which disclosure of accounting policies

adopted will be required are contained in paragraph 14. This list of examples is
not, however, intended to be exhaustive. Any change in an accounting policy
which has a material effect should be disclosed. The amount by which any item

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in the financial statements is affected by such change should also be disclosed
to the extent ascertainable. Where such amount is not ascertainable, wholly or in
part, the fact should be indicated. If a change is made in the accounting policies
which has no material effect on the financial statements for the current period
but which is reasonably expected to have a material effect in later periods, the
fact of such change should be appropriately disclosed in the period in which the
change is adopted.

Disclosure of accounting policies or of changes therein cannot remedy a wrong

or inappropriate treatment of the item in the accounts. All significant accounting
policies adopted in the preparation and presentation of financial statements
should be disclosed.

The disclosure of the significant accounting policies as such should form part of
the financial statements and the significant accounting policies should normally
be disclosed in one place.

Any change in the accounting policies which has a material effect in the current
period or which is reasonably expected to have a material effect in later periods
should be disclosed. In the case of a change in accounting policies which has a
material effect in the current period, the amount by which any item in the
financial statements is affected by such change should also be disclosed to the
extent ascertainable. Where such amount is not ascertainable, wholly or in part,
the fact should be indicated.

If the fundamental accounting assumptions, viz. Going Concern, Consistency

and Accrual are followed in financial statements, specific disclosure is not
required. If a fundamental accounting assumption is not followed, the fact
should be disclosed

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