Chapter 3 :Accounting Standards
B. Com (Hons)
Institute of Lifelong Learning
Site:
Course: Financial Accounting
Book: Chapter 3 :Accounting Standards
B.Com(Hons.) I year
Paper No: II- Financial Accounting
Accounting as an information Syatem & Nature of Financial Accounting
Principles
Fellow
Dr.Kawal Gill, Associate Professor
Department/College: Shri Guru Gobind Singh College of Commerce
Author
Monika Gupta, Assistant Professor
College/Department: Moti Lal Nehru college, University of Delhi
Reviewer
Dr. C.S. Savita (Retd.)
College/ Department: Shyam Lal College, University of Delhi
3.1: Introduction
The use of the word ‘Standard’ in accounting literature is of a recent origin. What is
described as ‘standard’ today, used to be generally known as ‘principles’ a few years
ago. The British introduced the term ‘standards’ in place of ‘principles’ when they set up
their Accounting Standards Steering Committee at the end of 1969, and the Americans
adopted the same term (‘standard’) in 1973, when the Accounting Principles Board was
wound up and the Financial Accounting Standards Board was created. In India, this
term has mainly become popular since the formation of Accounting Standards Board
(ASB) in April 1977 by the Institute of Chartered Accountants of India.
Institute of Lifelong Learning, University of Delhi
Chapter 3 :Accounting Standards
Value addition: Image
Organizational Structure of FASB, USA
Source: http://knol.google.com/k/-/-/dojo5r8xc1mx/bhjyf6/fasb-
structure.jpg
3.2: Defining the Term “Standard”
The term ‘Accounting Standard’ may be defined as written statements issued from time
to time by institution of the accounting profession or institutions in which it has sufficient
involvement and which are established expressly for this purpose. Accounting standards
deal mainly with financial measurements and disclosures used in producing a set of fairly
presented financial statements. They also draw the boundaries within which acceptable
conduct lies and in that and many other respects, they are similar in nature of laws.
3.3: Importance of Accounting Standards
Accounting standards have evolved out of the concern and criticism which the flexibility
in accounting practice has created. The benefits of accounting standards may be listed
as follows:
1. To Improve the Credibility and Reliability of Financial Statements
Financial statements of business enterprises are used by a diverse group of users for
making sound economic decisions such as shareholders (existing and potential),
suppliers (existing and potential), trade creditors, customers, employees, taxation
authorities, and other interested parties. It is necessary, therefore, that the financial
statements, the users use and upon which they rely, present a fair picture of the
position and progress of the enterprise. It is the function of accounting (and auditing)
standards to create this general sense of confidence by providing a framework within
which credible financial statements can be produced.
Institute of Lifelong Learning, University of Delhi
Chapter 3 :Accounting Standards
2. Benefits to Accountants and Auditors
Accountants and auditors with the passage of time and a changing climate of opinion,
have to work in an environment where they face the threat of stern sanctions and bad
name to their professions. Given the increasing risks, the accounting profession realised
that it needed to know what accounting standards are to prevail. Thus, accounting
standards are beneficial not only to the business enterprises but also to the accountants
and auditors as well.
3. Determining Managerial Accountability
Accounting standards facilitate in determining specific corporate accountability and
regulation of the company and thus help in measuring the effectiveness of
management’s stewardship. They help in assessing managerial skill in maintaining and
improving the profitability of the company, they depict the progress of the company, its
solvency and liquidity and generally they are important factors in increasing the
effectiveness of management’s performance of its duties and of its leadership.
3.4: Standard Setting in India
Standards Set by ASB of ICAI
Recognising the need to harmonise the diverse accounting policies and practices in India
and keeping in view the international development in the field of accounting, the
Institute of Chartered Accountants of India constituted the Accounting Standards Board
(ASB) in April 1977. The ASB is entrusted with the following functions:
1. To formulate accounting standards which may be established by the Council of
ICAI in India.
2. To propagate the Accounting Standards and persuade the concerned parties to
adopt them in the preparation and presentation of financial statements.
3. To issue guidance notes on the Accounting Standards and give clarifications on
issues arising thereof.
4. To review the Accounting Standards at periodical intervals.
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 unless otherwise
stated, no standard will have retrospective application.
Institute of Lifelong Learning, University of Delhi
Chapter 3 :Accounting Standards
Value addition: Image
Steps in Accounting Standards Setting In Inida
Source: http://www.aasb.com.au/images/standard-setting-process.gif
Existing Procedure for Setting Standards
1. The existing procedure for formulating and issuing accounting standard followed
by the Accounting Standards Board of the ICAI is as follows:
• ASB determines the broad areas in which Accounting Standards need to be
formulated and the priority with regard to issuance thereof.
• In the preparation of Accounting Standard, ASB is assisted by Study Groups
constituted to consider specific subjects. In the formation of Study Groups,
provision is made for wide participation by the members of the Institute and
others.
• The Board considers the draft as submitted by the study group and finalises the
same for issue to all members of the Council of the ICAI as well as to the bodies
listed below for their comments.
Associated Chambers of Commerce and Industry, Federation of Indian Chambers of
Commerce and Industry, Institute of Cost and Works Accountants of India, Standing
Institute of Lifelong Learning, University of Delhi
Chapter 3 :Accounting Standards
Conference of Public Enterprises, Institute of Company Secretaries of India, Central
Board of Direct Taxes, Department of Company Affairs, Comptroller and Auditor General
of India, Reserve Bank of India, Indian Banks’ Association, Securities and Exchange
Board of India, Confederation of Indian Industries.
• ASB holds a meeting with the representatives of specified outside bodies listed
above to ascertain their views.
• On the basis of the comments received from the Council members as well as the
outside bodies, the Board finalises the Exposure Draft and exposes it for public
comments:-
- To all members of the profession through the medium of their Journal.
- To principal Chambers of Commerce and Industry through direct
communications.
- To all recognised Stock Exchanges through direct communication.
- To the Institute of Cost and Works Accountants of India through direct
communication.
- To the Institute of Company Secretaries of India through direct communication.
- To the Department of Company Affairs, Central Board of Direct Taxes and the
Comptroller and Auditor General by direct communication.
- To principal financial institutions, Reserve Bank of India, Life Insurance
Corporation, General Insurance Corporation, Unit Trust of India and Indian Banks’
Association by direct communication.
- To all Regional Councils and Branches of the ICAI by direct Communication.
- To all Council Members.
- To Securities and Exchange Board of India by direct communication.
• After taking into account the comments received from various quarters, the draft
of the proposed standard is finalised by the Board and submitted to the Council
for its consideration.
• The Council of the Institute considers the final draft of the proposed Standard,
and if necessary, modifies the same in consultation with ASB.
2. The Accounting Standard on the relevant subject is then issued under the
authority of the Council.
3.5: Existing Accounting Standards in India
The ASB of ICAI has issued 32 accounting standards Dates from which
so far. The list of accounting standards issued is mandatory
given hereunder. (Accounting periods
commencing on or
after)
Institute of Lifelong Learning, University of Delhi
Chapter 3 :Accounting Standards
1. AS – 1 Disclosure of Accounting Policies. 1.4.1991
2. AS – 2 (Revised), Valuation of Inventories. 1.4.1999
3. AS – 3 (Revised), Cash Flows Statements. 1.4.2001
4. AS – 4 (Revised), Contingencies and Events Occurring 1.4.1995
after the Balance Sheet Date.
5. AS – 5 (Revised), Net Profit or Loss for the Period, Prior
Period Items and Changes in Accounting Policies. 1.4.1996
6. As – 6 (Revised), Depreciation Accounting.
1.4.1995
7. AS – 7 (Revised), Accounting for Construction
Contracts.
1.4.2003
8. AS – 8 Accounting for Research and Development.
(Withdrawn and included in AS – 26)
1.4.1993
9. AS – 9 Revenue Recognition.
1.4.1993
10. AS – 10 (Revised), Accounting for Fixed Assets.
1.4.2004
11. AS – 11 (Revised), Accounting for the Effects of
Changes in Foreign Exchange Rates.
1.4.1994
12. AS – 12 Accounting for Government Grants.
13. AS – 13 (Revised), Accounting for Investments and 1.4.1995
venture capital funds.
1.4.1995
14. AS – 14 (Revised), Accounting for Amalgamations.
15. AS – 15 Accounting for Retirement Benefits in the
Institute of Lifelong Learning, University of Delhi
Chapter 3 :Accounting Standards
Financial Statement of Employers.
1.4.1995
16. AS – 16 Borrowing Costs.
1.4.2000
17. AS – 17 Segment Reporting.
18. AS – 18 Related Party Disclosures. 1.4.2001
19. AS - 19 Leases. 1.4.2001
20. AS – 20 (Revised), Earnings Per Share. 1.4.2001
21. AS – 21 Consolidated Financial Statements. 1.4.2001
22. As – 22 Accounting for Taxes on Income.
1.4.2001
23. AS – 23 Accounting for Investments in Associates in
Consolidated Financial Statements.
1.4.2001
24. AS – 24 Discontinuing Operations. 1.4.2002
25. AS – 25 Interim Financial Reporting. 1.4.2002
26. AS – 26 Intangible Assets.
1.4.2002
27. As – 27 Financial Reporting of Interest in Joint Venture.
1.4.2003
28. As – 28 Impairment of Assets.
1.4.2002
29. AS – 29 Provisions, Contingent Liabilities and
Contingent Assets.
1.4.2004
30. As – 30 Financial Instruments: Recognition and
Measurement. 1.4.2009
31. As – 31 Financial Instruments: Presentation
Institute of Lifelong Learning, University of Delhi
Chapter 3 :Accounting Standards
1.4.2009
32. AS – 32 Financial Instruments: Disclosures
1.4.2009
1.4.2009
1.4.2009
3.6: Compliance of Accounting Standards
Compliance of accounting standards has been made mandatory. Sub-section (3A) to
section 211 (inserted by the Companies Amendment Act, 1999) requires that every
profit and loss account and balance sheet shall comply with the accounting standards
recommended by the Institute of Chartered Accountants of India (ICAI) and prescribed
by the Central Government in consultation with the National Advisory Committee on
Accounting Standards (NACAS) constituted under sub-section 210A(1).
As per newly inserted clause 50 of the Listing Agreement, it is mandatory for the
companies listed in a recognised stock exchange to comply with all applicable accounting
standards in the preparation and presentation financial statements.
(i) Deviation from accounting standards – Sub-section (3B) to section 211 of
Companies Act requires that in case the profit and loss account and balance sheet of a
company do not comply with the requirements of the accounting standards, disclosure
should be made stating –
• Deviations from the accounting standards;
• the reasons for such deviation; and
• the financial effect, if any, arising due to such deviation.
(ii) Duties of the statutory auditors as regards mandatory accounting
standards – The statutory auditors are required to make qualification in their report in
case any item is treated differently from the prescribed treatment in the relevant
accounting standard. However, while qualifying they should consider the materiality of
the relevant item. In case of non-disclosure of significant accounting policies the
auditors are required to specify the fact in their report.
The newly inserted sub-section(3) of section 227 of Companies Act requires the auditors
to report whether, in his opinion, the profit and loss account and balance sheet comply
with the accounting standards referred to in section 211(3C).
Income-tax Act, 1961 – Pursuant to an amendment in the Income Tax Act, 1961 in
1995, it has been provided that the Central Government may notify in the Official
Gazette from time to time accounting standards to be followed by any class of assesses
or in respect of any class of income.
3.7: Disclosure of Accounting Standards
The Institute of Chartered Accountants of India (ICAI) issued AS-1 titled ‘Disclosure of
Accounting Policies’ in November 1979. This standard is now mandatory and deals with
Institute of Lifelong Learning, University of Delhi
Chapter 3 :Accounting Standards
the disclosure of significant accounting policies followed in preparing and presenting
Financial Statements.
AS-1 contains explanations on following points:
1. Fundamental Accounting Assumptions
Certain fundamental accounting assumptions underlie the preparation and presentation
of financial statements. The following have been generally accepted as fundamental
accounting assumptions:
(a) Going Concern - The enterprise is normally viewed as a going concern, that is, as
continuing in operation for the foreseeable future.
(b) Consistency – It is assumed that accounting policies are consistent from one period
to another.
(c) Accrual – Revenues and costs are accrued, that is, recognised as they are earned or
incurred (and not as money is received or paid) and recorded in the financial statements
of the periods to which they relate.
2. Nature of Accounting Policies
(i) 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.
(ii) 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.
3. 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:
o Method of depreciation, depletion and amortisation
o Treatment of expenditure during construction
o Conversion or translation of foreign currency items
o Valuation of inventories
o Treatment of goodwill
o Valuation of investments
o Treatment of retirement benefits
o Recognition of profit on long-term contracts
o Valuation of fixed assets
o Treatment of contingent liabilities.
The above list of examples is not intended to be exhaustive.
4. Considerations in the Selection of Accounting Policies
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 represent a true and fair view of the state of affairs of the enterprise as at the
balance sheet date and of the profit or loss for the period ended on that date.
For this purpose, the major considerations governing the selection and application of
accounting policies are:
(a) Prudence – In view of the uncertainty attached to future events, 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 can not be
determined with certainty and represents only a best estimate in the light of available
information.
Institute of Lifelong Learning, University of Delhi
Chapter 3 :Accounting Standards
(b) Substance over Form – The accounting treatment and presentation in financial
statements of transactions and events should be governed by their substance and not
merely by the legal form.
(c) Materiality – Financial statements should disclose all “material” items, i.e., items
the knowledge of which might influence the decisions of the user of the financial
statements.
5. Disclosure of Accounting Policies
(i) 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.
(ii) Such disclosure should form part of the financial statements.
(iii) 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.
(iv) Examples of matters in respect of which disclosure of accounting policies adopted
will be required are contained in point No. 3. This list of examples is not, however,
intended to be exhaustive.
(v) Any change in an accounting policy which has a material effect should be
disclosed.
(vi) Disclosure of accounting policies or of changes therein cannot remedy a wrong or
inappropriate treatment of the item in the accounts.
Value addition: Do you Know?
International Financial Reporting Standards
• International Financial Reporting Standards (IFRS) are new reporting
standards to bring harmonization in Financial Reporting Standards
Internationally.
• The major objective of IFRS is to have same meaning of financial
statements prepared by an organization throughout the world.
• The Institute of Chartered Accountants of India (ICAI) has announced
that IFRS will be mandatory in India for financial statements for the
periods beginning on or after 1 April 2011.
• This will be done by revising existing accounting standards to make them
compatible with IFRS.
• Reserve Bank of India has stated that financial statements of banks need
to be IFRS-compliant for periods beginning on or after 1 April 2011.
• The ICAI has also stated that IFRS will be applied to companies above
Rs.1000 crore from April 2011.
• It is an initiative of International Accounting Standards Board, is an
independent, privately-funded accounting standard-setter based in
London, England.
• It is responsible for developing International Financial Reporting
Standards (the new name for International Accounting Standards issued
after 2001), and promoting the use and application of these standards.
Source: http://en.wikipedia.org/wiki/International_Financial_
Reporting_Standards
Institute of Lifelong Learning, University of Delhi
Chapter 3 :Accounting Standards
Value addition: Image
Structure of International Accounting Standards Board
Source: http://archive.iasb.org.uk/docs/picturefiles/structure.jpg
3.8: Difficulties in Standard Setting
Difficulties in Standard Setting may vary from one country to another. There may be
difficulties in economic, legal, social and accounting environment. Accounting Standard
setters have pressures from the economic environment and needs to compromise
between the conflicting interests of different parties. At present there is not a single
theory in accounting which commands universal acceptance. There is no best answer to
the different terms like profit wealth, value, capital, maintenance, distributable income
and so forth. The search for an agreed conceptual framework could be regarded as
essential to orderly standard setting and a responsible way for the standard setter to
act. The existence of multiple accounting agencies in a country also make the task of
standard setting more difficult.
Summary
· The FASB (Financial Accounting Standards Board) is currently the dominant body
in the development of accounting principles.
The IASB is another professional body which is engaged in the development of the
accounting standards.
The ICAI is an associate member of the IASC and the ASB constituted by the ICAI is
formulating accounting standards in our country.
The IASB and ICAI both consider going concern, accrual and consistency as fundamental
accounting assumptions.
Exercises
1. Define the term ‘Standard’.
1. Explain the benefits of accounting standards.
Institute of Lifelong Learning, University of Delhi
Chapter 3 :Accounting Standards
2. How are standards set by the Institute of Chartered Accountants of India?
3. Discuss the procedure in setting accounting standards in India.
4. List the accounting standards issued so far by the ICAI.
5. What is the status of compliance with regard to accounting standards in India?
6. What are the duties of statutory auditors if a business enterprise does not follow
accounting standards?
7. Discuss the recommendations of AS-1 Disclosure of Accounting Policies.
8. What are the accounting assumptions as per AS-1?
9. How will you define accounting policies? What are the considerations in the
selection of accounting policies?
10. What are the disclosure rules with regard to accounting policies?
Glossary
Accounting Standards: Standards to be observed in the presentation of financial
statements.
References
1. Suggested Readings
Anthony, R.N., and J.S. Reece, “Accounting Principles”, Richard D Irwin. Inc.
Monga, J.R., “Financial Accounting: Concepts and Applications”, Mayoor Paper Backs,
New Delhi.
Shukla, M.C., T.S. Grewal and S.C. Gupta, “Advanced Accounts”, Vol-I, S. Chand & Co.,
New Delhi.
Gupta, R.L., and M. Radhaswamy, “Advanced Accountancy”, Vol-I, Sultan Chand & Sons,
New Delhi.
Maheshwari, S.N. and S.K. Maheshwari, “Financial Accounting”, Vikas Publishing House,
New Delhi.
Sehgal, Ashok, and Deepak Sehgal, “Advanced Accounting”, Part-I, Taxmann Applied
Services, New Delhi.
Tulsian, P.C., “Advanced Accounting”, Tata Mc Graw Hill, New Delhi.
Jain, S.P., and K.L. Narang, “Financial Accounting”, Kalyani Publishers, New Delhi.
Gupta, Nirmal, “Financial Accounting” Sahitya Bhawan, Agra.
“Compendium of Statements and Standards of Accounting”, The Institute of Chartered
Accountants of India, New Delhi.
2. Web Links
http://www.fasb.org/home
http://en.wikipedia.org/wiki/International_Accounting_Standards_Board
http://en.wikipedia.org/wiki/International_Financial_Reporting_Standards -
Structure_of_IFRS
Institute of Lifelong Learning, University of Delhi
