Introduction
What are Accounting Standards?
An Accounting Standard is a guideline that directs and
standardizes accounting practices. Accounting standards provide
a standardized framework to ensure that the financial statements
of businesses are meaningful and standardized so that
interpreting and understanding them would be easy.
A set of standards compiled together are called principles.
Businesses are typically mandated to follow a set of accounting
standards which are either specific to the country or
internationally accepted ones like IFRS, or the GAAP.
Why use accounting standards?
Accounting standards ensure that the financial statements are
prepared fairly and consistently across the businesses. Without
accounting standards, users of financial statements would be
required to understand the accounting principles of each company
whose financial statements are under study.
Each publicly traded company in a particular jurisdiction is
required to report their financial statements following the
accounting standards adopted by them.
IFRS accounting standards:
IFRS stands for International Financial Reporting Standards,
initially called International Accounting Standards (IAS) they are
designed to serve as a common language for business affairs.
With globalization, the world has become the local market place
and to facilitate this adopting a uniform accounting standard was
important.
IFRS began as an effort to standardize accounting across the
European Union but the value of standardization quickly made the
concept attractive around the world. IFRS as IAS were first issued
by the Board of the International Accounting Standards
Committee (IASC) between 1973 and 2001. On 1 April 2001, the
new International Accounting Standards Board (IASB) took over
from the IASC the responsibility for setting International
Accounting Standards. During its first meeting the new Board
adopted existing IAS and Standing Interpretations Committee
standards (SICs). The IASB has continued to develop standards
calling the new standards “International Financial Reporting
Standards”.
Objectives of Accounting Standards
Accounting is often considered the language of business, as it
communicates to others the financial position of the company.
And like every language has certain syntax and grammar rules the
same is true here. These rules in the case of accounting are the
Accounting Standards (AS). They are the framework of rules and
regulations for accounting and reporting in a country. Let us see
the main objectives of forming these standards.
1. The main aim is to improve the reliability of financial
statements. Now because the financial statements have to be
made following the standards the users can rely on them.
They know that not conforming to these standards can have
serious consequences for the companies.
2. Then there is comparability. Following these standards will
allow for inter-firm and intra-firm comparisons. This allows
us to check the progress of the firm and its position in the
market.
3. It also looks to provide one set of accounting policies that
include the necessary disclosure requirements and the
valuation methods of various financial transactions.
Benefits of Accounting Standards
Accounting Standards are the ruling authority in the world of
accounting. It makes sure that the information provided to
potential investors is not misleading in any way. Let us take a
look at the benefits of AS.
1] Attains Uniformity in Accounting
Accounting Standards provides rules for standard treatment and
recording of transactions. They even have a standard format for
financial statements. These are steps in achieving uniformity
in accounting methods.
2] Improves Reliability of Financial Statements
There are many stakeholders of a company and they rely on the
financial statements for their information. Many of these
stakeholders base their decisions on the data provided by these
financial statements. Then there are also potential investors who
make their investment decisions based on such financial
statements.
So it is essential these statements present a true and fair picture of
the financial situation of the company. The Accounting Standards
(AS) ensure this. They make sure the statements are reliable and
trustworthy.
3] Prevents Frauds and Accounting Manipulations
Accounting Standards (AS) lay down the accounting principles
and methodologies that all entities must follow. One outcome of
this is that the management of an entity cannot manipulate with
financial data. Following these standards is not optional, it is
compulsory.
So these standards make it difficult for the management to
misrepresent any financial information. It even makes it harder
for them to commit any frauds.
4] Assists Auditors
Now the accounting standards lay down all the accounting
policies, rules, regulations, etc in a written format. These policies
have to be followed. So if an auditor checks that the policies have
been correctly followed he can be assured that the financial
statements are true and fair.
5] Comparability
This is another major objective of accounting standards. Since all
entities of the country follow the same set of standards their
financial accounts become comparable to some extent. The users
of the financial statements can analyze and compare the financial
performances of various companies before taking any decisions.
Also, two statements of the same company from different years
can be compared. This will show the growth curve of the
company to the users.
6] Determining Managerial Accountability
The accounting standards help measure the performance of the
management of an entity. It can help measure the management’s
ability to increase profitability, maintain the solvency of the firm,
and other such important financial duties of the management.
Management also must wisely choose their accounting policies.
Constant changes in the accounting policies lead to confusion for
the user of these financial statements. Also, the principle of
consistency and comparability are lost.
Limitations of Accounting Standards
There are a few limitations of Accounting Standards as well. The
regulatory bodies keep updating the standards to restrict these
limitations.
1] Difficulty between Choosing Alternatives
There are alternatives for certain accounting treatments or
valuations. Like for example, stocks can be valued by LIFO,
FIFO, weighted average method, etc. So choosing between these
alternatives is a tough decision for the management. The AS does
not provide guidelines for the appropriate choice.
2] Restricted Scope
Accounting Standards cannot override the laws or the statutes.
They have to be framed within the confines of the laws prevailing
at the time. That can limit their scope to provide the best policies
for the situation.
Characteristics
On the basis of the meaning of accounting
standard, we can state that the document is a
director, authoritarian, solution provider, and
coordinator in the arena of the accounting
procedure.
As a director
The accounting standard directs the accounting
and bookkeeping records, practice, procedure, and
policies. It is a guideline for accountants.
As an authoritarian
It can reject the outcomes of accounting practice
and procedure and policies so that if the financial
reports of conflicts it can be contrasted.
A Solution Provider
As it’s is a set of guidelines it can deliver solutions
to the accountants for accounting procedure. It is a
source of information for the financial operators on
the base of which financial reports are formulated.
A coordinator
In standard accounting, there is coordination and
consistency which enhance the accounting
and bookkeeping services of the company. All set
of guidelines are fair and strict. Further, That’s the
key to eliminate the varying effect of policies in
accounting standards. Even the finest part is it
provides solutions to conflicting issues which
resolved through the guidelines and act as
coordinator to provide a solution to the accountant.
CAI’s AS-1: Disclosure of Accounting Policies
(as on 01/02/2022)
AS-1 deals with the disclosure of significant accounting
policies followed in preparing and presenting financial
statements, by way of a separate statement/ notes forming
part of such financial statements, to facilitate meaningful
comparison of financial statements of different enterprises/
periods.
ICAI’s AS-2: Valuation of Inventories (as on
01/02/2022)
This Standard deals with the determination of value at
which inventories are carried in the financial statements,
including the ascertainment of cost of inventories and any
write-down thereof to net realisable value.
ICAI’s AS-3: Cash Flow Statements (as on
01/02/2022)
This Standard deals with the provision of information
about the historical changes in cash and cash equivalents
of an enterprise by means of a Cash Flow Statement
which classifies cash flows during the period from
operating, investing and financing activities.
ICAI’s AS-4: Contingencies and Events
Occurring After Balance Sheet Date (as on
01/02/2022)
This Standard deals with the treatment of contingencies
and events occurring after the balance sheet date.
ICAI’s AS-5: Net profit or Loss for the period,
Prior Period Items and Changes in Accounting
Policies (as on 01/02/2022)
This Standard should be applied by an enterprise in
presenting profit or loss from ordinary activities,
extraordinary items and prior period items in the
Statement of Profit and Loss, in accounting for changes in
accounting estimates, and in disclosure of changes in
accounting policies.
ICAI’s AS-7: Construction Contracts (as on
01/02/2022)
This Standard prescribes the accounting for construction
contracts in the financial statements of contractors.
ICAI’s AS-9: Revenue Recognition (as on
01/02/2022)
This Standard deals with the bases for recognition of
revenue in the Statement of Profit and Loss of an
enterprise. The Standard is concerned with the recognition
of revenue arising in the course of the ordinary activities of
the enterprise from: a) Sale of goods; b) Rendering of
services; and c) Interest, royalties and dividends.
ICAI’s AS-10: Property, Plant and Equipment (as on
01/02/2022)
The objective of this Standard is to prescribe the
accounting treatment for property, plant and equipment
(PPE).
ICAI’s AS-11: The Effects of Changes in
Foreign Exchange Rates (as on 01/02/2022)
AS 11 lays down principles of accounting for foreign
currency transactions and foreign operations, i.e., which
exchange rate to use and how to recognise in the financial
statements the financial effect of changes in exchange
rates.
ICAI’s AS-12: Government Grants (as on
01/02/2022)
This Standard deals with accounting for government
grants. Government grants are sometimes called by other
names such as subsidies, cash incentives, duty
drawbacks, etc.
ICAI’s AS-13: Accounting for Investments (as
on 01/02/2022)
This Standard deals with accounting for investments in the
financial statements of enterprises and related disclosure
requirements.
ICAI’s AS-14: Accounting for Amalgamations
(as on 01/02/2022)
This Standard deals with accounting for amalgamations
and the treatment of any resultant goodwill or reserves.
ICAI’s AS-15: Employee Benefits (as on
01/02/2022)
The objective of this Standard is to prescribe the
accounting treatment and disclosure for employee benefits
in the books of employer except employee share-based
payments. It does not deal with accounting and reporting
by employee benefit plans.
ICAI’s AS-16: Borrowing Costs (as on
01/02/2022)
This Standard should be applied in accounting for
borrowing costs. This Standard does not deal with the
actual or imputed cost of owners’ equity, including
preference share capital not classified as a liability.
ICAI’s AS-17: Segment Reporting (as on
01/02/2022)
The objective of this Standard is to establish principles for
reporting financial information, about the different types of
segments/ products and services an enterprise produces
and the different geographical areas in which it operates.
ICAI’s AS-18: Related Party Disclosures (as on
01/02/2022)
This Standard should be applied in reporting related party
relationships and transactions between a reporting
enterprise and its related parties. The requirements of this
Standard apply to the financial statements of each
reporting enterprise and also to consolidated financial
statements presented by a holding company.
ICAI’s AS-19: Leases (as on 01/02/2022)
The objective of this Standard is to prescribe, for lessees
and lessors, the appropriate accounting policies and
disclosures in relation to finance leases and operating
leases.
ICAI’s AS-20: Earnings Per Share (as on
01/02/2022)
AS 20 prescribes principles for the determination and
presentation of earnings per share which will improve
comparison of performance among different enterprises
for the same period and among different accounting
periods for the same enterprise.
ICAI’s AS-21: Consolidated Financial
Statements (as on 01/02/2022)
The objective of this Standard is to lay down principles
and procedures for preparation and presentation of
consolidated financial statements. These statements are
intended to present financial information about a parent
and its subsidiary(ies) as a single economic entity to show
the economic resources controlled by the group,
obligations of the group and results the group achieves
with its resources.
ICAI’s AS-22: Accounting for Taxes on Income
(as on 01/02/2022)
The objective of this Standard is to prescribe accounting
treatment of taxes on income since the taxable income
may be significantly different from the accounting income
due to many reasons, posing problems in matching of
taxes against revenue for a period.
ICAI’s AS-23: Accounting for Investments in
Associates (as on 01/02/2022)
This Standard should be applied in accounting for
investments in associates in the preparation and
presentation of consolidated Financial Statements (CFS)
by an investor.
ICAI’s AS-24: Discontinuing Operations (as on
01/02/2022)
The objective of AS 24 is to establish principles for
reporting information about discontinuing operations,
thereby enhancing the ability of users of financial
statements to make projections of an enterprise’s cash
flows, earnings generating capacity, and financial position
by segregating information about discontinuing operations
from information about continuing operations. AS 24
applies to all discontinuing operations of an enterprise.
ICAI’s AS-25: Interim Financial Reporting (as
on 01/02/2022)
This Standard applies if an entity is required or elects to
publish an interim financial report. The objective of AS 25
is to prescribe the minimum content of an interim financial
report and to prescribe the principles for recognition and
measurement in complete or condensed financial
statements for an interim period.
ICAI’s AS-26: Intangible Assets (as on
01/02/2022)
AS 26 prescribes the accounting treatment for intangible
assets (i.e. identifiable non-monetary asset, without
physical substance, held for use in the production or
supply of goods or services, for rental to others, or for
administrative purposes).
ICAI’s AS-27: Financial Reporting of Interests
in Joint Ventures (as on 01/02/2022)
The objective of AS 27 is to set out principles and
procedures for accounting for interests in joint ventures
and reporting of joint venture assets, liabilities, income and
expenses in the financial statements of venturers and
investors.
ICAI’s AS-28: Impairment of Assets (as on
01/02/2022)
The objective of AS 28 is to prescribe the procedures that
an enterprise applies to ensure that its assets are carried
at no more than their recoverable amount. The asset is
described as impaired if its carrying amount exceeds the
amount to be recovered through use or sale of the asset
and AS 28 requires the enterprise to recognise an
impairment loss in such cases. It should be noted that AS
28 deals with impairment of all assets unless specifically
excluded from the scope of the Standard.
ICAI’s AS-29: Provisions, Contingent
Liabilities and Contingent Assets (as on
01/02/2022)
The objective of AS 29 is to ensure that appropriate
recognition criteria and measurement bases are applied to
provisions and contingent liabilities and that sufficient
information is disclosed in the notes to the financial
statements to enable users to understand their nature,
timing and amount. The objective of this Standard is also
to lay down appropriate accounting for contingent assets.
Accounting standards list – Non-Mandatory
ICAI announced withdrawing the following accounting
standards:
AS 30 - Financial Instruments Recognition and
Measurement
AS 31- Financial Instruments Presentation
AS 32- Financial Instruments Disclosures
