Accounting Standards

Introduction to Accounting Standards

Financial statements provide inputs for most business and economic decisions.

However when these statements are not transparent and reliable, it could have a huge negative
impact on growth of business enterprises and economy at large.

Hence it is essential to regulate the accounting process that helps in preparing financial
statements.

In order to provide transparency, consistency, comparability, adequacy and reliability of financial

reporting, it is essential to standardize the accounting principles and policies.

AS provide a framework and standard accounting policies so that financial statements of different
enterprises become comparable.
Meaning of Accounting Standards

• They are written policy documents issued by expert accounting body or by government or other
regulatory body covering the aspects of recognition, treatment, measurement, presentation and
disclosure of accounting transactions and events in the financial statements.
• It is a sort of law; a guide to action.
• It deals with:
• 1. Recognition of events and transactions in the financial statements
• 2. Measurement of these transactions and events;
• 3. Presentation of these transactions and events in the financial statements in a manner that is
meaningful and understandable to the reader;
• 4. The disclosure requirements to enable all shareholders and stakeholders to get an insight into what
these statements are trying to reflect.
Objectives of
Accounting Standards
• 1. Eliminate the non-comparability
of financial statements and thereby
improving the reliability of financial
statements
• Provide a set of standard
accounting policies, valuation
norms and disclosure
requirements.
Significance

• Useful to investors in judging the yield and risk involved in alternative investments in
different companies and different countries, since investors are spread across the globe.
• The standards enable the public accountants to deal with their clients by providing rules
of authority to which the accountants have to adhere. This makes the accountants ensure
commitments and integrity in the profession.
• AS raise the standards of auditing itself in its task of reporting on the financial statements.
• Government officials, tax authorities and others find accounting reports produced in
accordance with established standards to be reliable and acceptable.
• Financial statements will be reliable documents for the purpose of analysis and
interpretation by analysts, researchers and consultants for economic forecasting and
planning.
Limitations of accounting standards

Alternative solutions to certain accounting problems may each have

arguments to recommend them. Therefore, the choice between
different alternative accounting treatments may become difficult.

There may be a trend towards rigidity and away from flexibility in

applying the accounting standards.
Accounting standards in Indian Context
• In India, adhering to accounting standards is mandatory as per the
requirements of laws governing business enterprises.
• In India AS are issued by Accounting Standard Board of the Institute of
Chartered Accountants of India in consultation with the National
Advisory Committee on Accounting Standards.
• The Institute of Chartered Accountants of India, recognizing the need
to harmonise the diverse accounting principles and practices at
present in use in India, constituted the Accounting Standard Board
ASB on 21st April, 1977.
 • To formulate accounting standards by considering the
applicable laws, customs, usages and business environment.
• To support the objectives of International Accounting
Standards Committee (IASC) as the institute is one of the
members of IASC. ASB will give due consideration to

Scope and International Accounting standards while formulating the

Accounting standards to th extent possible in the light of the
conditions prevailing in India.

functions of • To propagate the AS and persuade the concerned parties to

adopt them in the preparation and presentation of financial

ASB statements.
• To issue guidance notes on the AS and give clarifications on
issues arising therefrom.
• To review the AS at periodical intervals.
• Till now 32 AS has been issued. However, one among them has
been withdrawn and merged with another AS. Hence, as on
date, there are 31 AS.
Procedure for issuing AS by ASB
• ASB shall determine the broad areas in which AS need to be formulated and
the priority regard to the selection thereof.
• ASB will be assisted by study groups;
• ASB will hold a dialogue with the representatives of the government,
publicsector undertaking, industry and other organisations for their views.
• A draft of the proposed standard will be prepared and issued for comments
by members of the institute and the public at large.
• After considering the comments, the draft will be finalized by ASB and
submitted to the council of the institute.
• The Council will consider the final draft and modify if necessary and later it
will be issued.
 • Initially all MNC’s across the world prepare
financial statements for each country in which
they did business, in accordance with each
country’s GAAP evolved from International
Accounting Standard (IAS) issued by International
Introduction to Accounting Standards Committee (IASC) from
1973 to 2001.

IFRS • During this period, a series of AS were released

which were numbered numerically starting from
IAS 1 and concluded with IAS 41 in DEC 2000.
• IASC lasted for 27 years till the year 2001. When
it was restructured to become International
Accounting Standards Board – IASB.
• At the time of establishment of IASB, they agreed to adopt the revised set of standards
issued by IASC, i.e., IAS 1 – 41, but any standards to be published after that would
follow a series known as International Financial Reporting Standard – IFRS.
• IFRS are increasingly becoming the set of globally accepted AS that meets the needs of
the world’s increasingly integrated global capital markets.
• The adaptation requires high quality, transparent and comparable information is
welcomed by investors, creditors, financial analysts and other users of financial
statements.
• This enables comparability among entities located in different parts of the world.
• A use of single set of AS facilitates investments and other economic decision across
borders, increases market efficiency and reducing cost of raising capital.
Meaning of IFRS
• They are a set of international AS, stating how particular types of
transaction and other events should be reported in the financial
statements.
• They are referred to as “principles based” standards because they
describe principles rather than dictate rigid accounting rules for
treatment of certain items.
• They are the guidelines and rules set by IASB which the company and
organization can follow while preparing their financial statements.
IFRS includes
• IFRS issued by IASB
• IAS issued by IASC
• Interpretations originated from international financial reporting
interpretations committee –IFRICs
• Interpretations originated from standing interpretations committee –
SICs.
 • Principle based standards as compared to rule
based GAAP.
• Under IFRS, historical cost concept has been
abandoned and replaced by a current cost system
for more accurate financial reporting. The concept
Features of of fair value accounting has taken over historical
cost accounting in financial reporting to improve the
IFRS relevance of the information contained in financial
reports and getting the balance sheet right.
• Presentation of financial statements IAS 1 is
significantly different from presentation of GAAP. It
requires clean segregation of assets and liabilities
into current and non-current groups whereas in
GAAP liquidity basis is preferred.
 • Under IFRS, an entity measures its assets and
liabilities and revenues and expenses in its
functional currency – currency of the primary
environment in which the entity operates which
may be different from the local currency of a
country.
• IFRS requires annual reassessment of useful life of
Features the assets.Under IFRS, depreciation is to be allowed
till the time of actual de-recognition of asset from
the books.
• IFRS mandates component accounting. Each major
part of an item of equipment with a cost that is
significant in relation to the total cost of an item has
to be maintained and depreciated separately.
 • In India, ICAI and various regulators such as SEBI,
RBI are concerned, the aim has always been to
comply with the IFRS to the extent possible with

Relevance the objective to formulate sound financial

reporting standards.
• They consider IFRS and tries to integrate them to
of IFRS in the extent possible in the light of laws, customs,
practices and business environment prevailing in
India.
India • In few cases deviations were made where it was
considered that these were not consistent with
the laws and business environment prevailing
within the country.
 Common basis Clarity and
of comparison productivity

Consistent Improved access

financial to international
Advantages of reporting basis capital markets

adopting IFRS Lower cost of Escape multiple

capital reporting

Reflect true Benchmarking

value of with global
acquisition peers
 Wide gap

Challenges of Increased responsibility

adopting of
IFRS Tax implications

Distributable profits
• Accounting Standards In India – AS
31 (totally 32 and 1 was withdrawn)
• International Accounting Standards –
IAS 41 + 15 IFRS
• Ind AS
Pathway of AS
 • Convergence means to achieve or harmony with
IFRS.
• It can be considered to design and maintain
national accounting standards in a way that
financial statements prepared in accordance
Meaning of with IFRS.
Convergence • Convergence does not mean that IFRS should be
adopted word by word.
with IFRS • Increasing complexity of business transactions
and globalization of capital markets call for a
single set of high quality AS.
• Thus IFRS came to existence to serve as single
set of globally accepted accounting standards.
Government of India
towards IND AS
• Initially Ind AS were expected to be implemented
from the year 2011. However keeping in view the
fact that certain issues including tax issues were
still to be addressed, the Ministry of Corporate
Affairs decided to postpone the date of
implementation of Ind As.
• In July 2014, the finance Minister of India at that
time in his Budget Speech, announced an urgency
to converge the existing AS with IFRS through
adoption of the new Ind AS by the Indian
companies from the financial year 2015-16
voluntarily and from the financial year 2016-17
on a mandatory basis.
• Moving in this direction, the Ministry of Corporate Affairs has issued
the companies rules, 2015 vide notification dated Feb 16, 2015
covering the revised roadmap of implementation of Ind AS for
companies other Banking companies, Insurance Companies and
NBFC’s and Ind AS.
• As per the notification, Ind AS converged with IFRS shall be
implemented on voluntary basis from 1st April 2015 and mandatorily
from 1st April, 2016.