ACCOUNTING STANDARDS
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Accounting Standards (ASs)
Accounting Standards (ASs) provide framework and standard accounting policies for treatment of
transactions and events so that the financial statements of different enterprises become comparable.
Accounting Standards standardise diverse accounting policies with a view to:
eliminate the non-comparability of financial
provide a set of standard accounting policies,
statements and thereby improving the reliability
valuation norms and disclosure requirements
of financial statements
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Aspects dealt with by Accounting Standards
Recognition of events and transactions in the financial statements.
Measurement of these transactions and events.
Presentation of these transactions and events in the financial statements in a manner that is
meaningful and understandable to the reader.
Disclosure relating to these transactions and events to enable the public at large and stakeholders and
investors to facilitate them to take prudent and informed business decisions.
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Advantages of Accounting Standards
Standards reduce to a reasonable extent or eliminate altogether confusing variations in the accounting
treatments used to prepare financial statements.
It assists in improving quality of work performed by accountant. It provides the accountancy profession with
useful working rules.
It strengthens the accountant’s resistances against the pressure from directors to use accounting policy which
may be suspect in that situation in which they perform their work.
It ensures the various users of financial statements to get complete crystal information on more consistencies.
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Formulation of Accounting Standards
Institute of Chartered Accountants of India (ICAI), being a premier accounting body in the country, took upon
itself the leadership role by constituting the Accounting Standards Board (ASB) in 1977
ASB considers International Financial Reporting Standards (IFRSs) while framing Indian Accounting Standards
(ASs) in India and try to integrate them, in the light of the applicable laws, customs, usages and business
environment.
The composition of ASB includes, representatives of industries (namely, ASSOCHAM, CII, FICCI), regulators,
academicians, government departments etc.
Although ASB is a body constituted by the Council of the ICAI, it (ASB) is independent in the formulation of
accounting standards.
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Standard Setting Process of ASB
• Identification of broad areas for formulation of AS.
• Constitution of study groups to prepare preliminary drafts of the proposed accounting
standards.
• Consideration of the preliminary draft prepared by the study group of ASB and revision,
if any.
• Circulation of draft of accounting standard (after revision by ASB) to the Council
members of the ICAI and specified outside bodies.
• Meeting with the representatives of the 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 and its issuance
inviting public comments.
• Consideration of comments received on the exposure draft and finalisation of the draft.
• Consideration of the final draft of the proposed standard by the Council of the ICAI.
• The accounting standard on the relevant subject (for non-corporate entities) is then
issued by the ICAI.
• For corporate entities the accounting standards are issued by MCA in consultation with
NFRA. (Section 133 CA2013: Central Government to prescribe accounting standards)
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List of Accounting Standards in India
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List of Accounting Standards in India
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List of Accounting Standards in India
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Applicability of AS (Non-corporate entities)
• Accounting Standards board of ICAI, at its 400th meeting, held on March 18-
19,2021, has “significantly simplified the accounting standards applicability
criteria for Micro and small size non-company entities”
• For the purpose of applicability of accounting standards, the enterprises are
classified as Level I, Level II, Level III & Level IV entities.
• Level I entities are large size entities. Level I entities are required to comply in
full with all the Accounting Standards.
• Level II entities are medium size entities, Level III entities are small size entities
and Level IV entities are micro entities.
• Certain exemptions/relaxations have been provided to Level II, Level III and
Level IV Non-company entities. Ex- AS 3 not applicable to these entities.
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Applicability of AS (Corporate entities)
• Every company, other than companies on which Indian Accounting Standards as
notified under Companies (Indian Accounting Standards) Rules, 2015 are
applicable, and its auditor(s) shall comply with the Accounting Standards.
• Small and Medium-Sized companies are given exemptions and relaxations in
respect of applicability of Accounting Standards.
• Example – AS 3 (Cash Flow Statement) and AS 17 (Segment Reporting) are not
applicable to SMCs in their entirety.
• Further, SMCs have been given relaxation in respect of other AS like AS 15, 19,
20, 28 etc.
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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.
Accounting standards cannot override the statute. The standards are required to be framed within the ambit of
prevailing statutes.
Users are likely to think that said statements prepared using accounting standard are infallible.
The working rules may rigid or bureaucratic to some user of financial statements.
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Concept Check Question (MCQ)
Q. Accounting Standards (ASs):
(a) Are oral policy documents issued by the Government
(b) Increase the accounting alternatives in the preparation of
financial statements
(c) Deal with recognition, measurement and presentation of
events and transactions in financial statements
(d) All of the above are true
Ans. c
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OVERVIEW OF AS
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Key Features of Major Accounting Standards
AS 1 - Disclosure of Accounting
AS 2 - Valuation of Inventories AS 3 - Cash Flow Statements
Policies
AS 4 - Contingencies and Events AS 5 - Net Profit or Loss for the
AS 10 - Property, Plant and
occurring after the Balance Period, Prior Period Items and
Equipment
Sheet Date Changes in Accounting Policies
AS 11 - The Effects of Changes in AS 12 - Accounting for AS 13 - Accounting for
Foreign Exchange Rates Government Grants Investments
AS 16 - Borrowing Costs
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AS 1 - Disclosure of Accounting Policies
AS 1 requires enterprises to disclose significant accounting policies actually adopted by them in preparation of
their financial statements.
It aims to promote better understanding of financial statements by requiring disclosure of significant
accounting policies in orderly manner.
The standard also requires disclosure of changes in accounting policies such that the users can compare
financial statements of same enterprise for different accounting periods. (Ex. FIFO to weighted average),
It talks about 3 fundamental accounting assumptions – Going concern, consistency and accrual. If they are not
followed, this fact should be disclosed in financial statements.
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AS 2 - Valuation of Inventories
Inventories are assets held for sale in the ordinary course of business or in the process of production for such
sale or for consumption in the production of goods or services for sale.
Inventories should be valued at lower of cost and net realisable value (NRV) on an item-by-item basis. NRV is
estimated selling price less the estimated costs of completion and the estimated costs necessary to make sale.
Costs of inventories comprise all costs of purchase, costs of conversion and other costs incurred in bringing the
inventories to their present location and condition.
Abnormal amounts of wasted materials, Storage costs, Administrative overheads, Selling and distribution costs
are excluded from cost of inventories.
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AS 4 – Events occurring after the Balance Sheet Date
Exception
Assumption of going concern is no
longer appropriate. Then, it
becomes adjusting event.
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AS 5 - Net Profit or Loss for the Period, Prior Period
Items and Changes in Accounting Policies
AS 5 requires the classification and disclosure of extraordinary and prior period items, and the disclosure of
certain items within profit or loss from ordinary activities.
Extraordinary items: Income or expenses that arise from events or transactions that are clearly distinct from the
ordinary activities of the enterprise and, therefore, are not expected to recur frequently or regularly. For
example, losses sustained as a result of an earthquake.
Exceptional items : When items of income and expense within profit or loss from ordinary activities are of such
size, nature or incidence that their disclosure is relevant, such items should be disclosed separately. Example -
Disposals of items of fixed assets, long term investments.
Prior period items are income or expenses which arise in the current period as a result of errors or omissions in
the preparation of the financial statements of one or more prior periods. The nature and amount of prior
period items should be separately disclosed.
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AS 10 - Property, Plant and Equipment (PPE)
PPE are tangible items that are held for use in production or supply of goods or services, for rental to others, or
for administrative purposes; and are expected to be used during more than a period of twelve months.
After recognition as an asset, an item of property, plant and equipment should be carried at its cost less any
accumulated depreciation and any accumulated impairment losses.
Cost of an item of PPE not only comprises of Purchase price but also any directly attributable costs for bringing
the asset to the ‘location and condition’ necessary for it to be capable of operating.
The depreciation method used should reflect the pattern in which the future economic benefits of the asset are
expected to be consumed by the enterprise.
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AS 11 - The Effects of Changes in Foreign Exchange Rates
A foreign currency transaction is any transaction that is denominated in or needs to settle in any foreign currency.
Initial Recognition Subsequent Recognition
Recorded by applying the exchange Non-monetary items
rate between the foreign currency Monetary Items like like Fixed Assets
and the reporting currency at the Debtors (using the (using the exchange
date of the transaction. closing rate) rate at the date of the
transaction)
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AS 12 - Accounting for Government Grants
Government grants are assistance by government in cash or kind to an enterprise for past or future compliance
with certain conditions
Two broad approaches may be followed for the accounting treatment of government grants: ‘capital approach’,
under which a grant is treated as part of shareholders’ funds and ‘income approach’, under which a grant is
taken to income over one or more periods.
Government grants may take the form of non-monetary assets, such as land or other resources, given at
concessional rates. In these circumstances, it is usual to account for such assets at their acquisition cost. Non-
monetary assets given free of cost are recorded at a nominal value.
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AS 13 - Accounting for Investments
Investments are assets held by an enterprise for earning income by way of dividends, interest, and rentals, for
capital appreciation, or for other benefits to the investing enterprise.
A current investment is an investment that is by its nature readily realisable and is intended to be held for not
more than one year from the date on which such investment is made. They are valued at lower of cost and fair
value.
A long term investment is an investment other than a current investment. Long term investments are usually
carried at cost.
On disposal of an investment, the difference between the carrying amount and the disposal proceeds, net of
expenses, is recognised in the profit and loss statement.
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AS 16 - Borrowing Costs
A qualifying asset is an asset that
necessarily takes a substantial period of
time to get ready for its intended use or
sale. Examples of qualifying assets are
manufacturing plants, power generation
facilities etc.
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Concept Check Question (MCQ)
Q. Which of the following is incorrectly matched?
1. AS 1 - Disclosure of Accounting Policies
2. AS 10 - Property, Plant and Equipment
3. AS 13 - Accounting for Investments
4. AS 16 - Accounting for Government Grants
Ans. 4
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