Unit – I

Introduction to Accounting Standards

Meaning Accounting Standards (ASs) are written policy documents issued by expert accounting body
or by government or other regulatory body covering theaspects of recognition, measurement,
treatment, presentation and disclosure ofaccounting transactions in the financial statements.

OR

Accounting Standards (AS) are basic policy documents. Their main aim is to ensure
transparency, reliability, consistency, and comparability of the financial statements. They
do so by standardizing accounting policies and principles of a nation/economy. So
the transactions of all companies will be recorded in a similar manner if they follow
these accounting standards.

These Accounting Standards (AS) are issued by an accounting body or a regulatory

board or sometimes by the government directly. In India, the Indian Accounting
Standards are issued by the Institute of Chartered Accountants of India (ICAI).

Accounting Standards mainly deal with four major issues of accounting, namely

i. Recognition of financial events

ii. Measurement of financial transactions
iii. Presentation of financial statements in a fair manner
iv. Disclosure requirement of companies to ensure stakeholders are not misinformed

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/ Advantages 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.

 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.

 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.

 Rec or di ng o nly m on et a ry it e ms.

 Rec o mm enda t ion o f a l t er na t iv e met h ods.
 T ime va lu e o f mo ney .
 T h e t en de nc y fo r sec r et r es er ve s .
 Allo c a t ion o f p rob l em s .
 Rest ra in a c c ou nt ing p r inc ip l es.
 Ma int a in ing sec r ec y .
 Rec or di ng o f p a st ev ent s .
Procedure Adopted by the Expert Committee in the issue of an Accounting Standard(
AS)

1. Determination of the need of an AS

First, the Accounting Standard Board determines the broad areas in which accounting
standards needs to be formulated.

2. Constituting Study Group

Study Group will be constituted consisting the members of the Institute of Chartered
Accountants of India. The motive behind constitution of this group is to assist the
accounting Standard Board in its activities.

3. Drafting the Standard

The Study Group Prepares draft of the proposed Standard. Te proposed draft enlists
the following areas
a) Objective of the standard.
b) Scope of the Standard.
c) Definitions of the terms used in the standard
d) Recognition & Measurement Principles
e) Presentation & Disclosure requirements.

4. Analyzing the Draft

ASB in this stage considers the Preliminary draft prepared by the Study Group. In
case anything needs to be revised than Accounting Standard Board takes the following
steps.
a) ASB makes the revision
b) ASB refers the same to the study Group

5. Circulation of the Draft

In this step the ASB circulates the AS draft to the council members of the Institute of
Chartered Accountants of India and the following specifies bodies for their comments.
a) The Institute of Works & Cost Accountants of India
b) The Institute of Company Secretaries of India.
c) Ministry of company affairs.
d) Comptroller & Auditor General of India
e) Central Board of Direct Taxes
f) Standing Committee of Public Enterprises
g) Reserve Bank of India
h) India Banks Association
i) Securities & Exchange Board of India
j) Associated Chamber of Commerce & Industry, Confederation of Indian Industry
and Federation of Indian chambers of commerce & Industry
k) Any other body considered relevant by the ASB
 6. Holding Discussion and Finalizing Exposure Draft
ASB holds meeting with the representatives of above mentioned bodies for the
purpose of determining their views on the Draft Accounting Standard. Based on
analyses of the discussion ASB finalizes the exposure draft of proposed accounting
standards.

7. Circulation the exposure Draft

The exposure Draft of the proposed standards is issued for comments the members of
the ICAI and the public.

8. Finalizing the exposure draft

Based on the comments received, the ASB finalizes the draft of the proposed
standards.
It then submits the same to the council of the ICAI.

9. Modifying & Issuing the Accounting Standard.

The council of the ICAI considers the considers the finalized draft standard and if
necessary modifies the same in consultation with the ASB. The ICAI then issues the
Accounting Standard after modification if any on the relevant subject.

Convergence of IFRS and Indian AS

Indian Accounting Standards are formulated by the Accounting Standard Board (ASB)
of the ICAI as notified by the Ministry of Corporate Affair. These standards are framed
keeping in mind the economic environment and practices of India. They are made to suit
the Indian companies and the disclosure requirements of the Indian government.

The IFRS, on the other hand, are made keeping global standards and environment in
mind. Convergence would mean bridging the gap between the two, i.e the IFRS and the
India AS. Convergence will involve alignment of the two sets of standards. The
compromise is done by adopting the policies of the IFRS either fully or at least partially.

Following are the few benefits of Convergence.

Benefits of Convergence

1] Beneficial to the Economy

If the accounting standards are converged it will promote international business and
increase the influx of capital into the country. This will help India’s economy grow and
expand. International investing will also mean more capital for domestic companies as
well.

2] Beneficial to Investors
Convergence is a boon for investors who wish to invest in foreign markets or economies.
It makes it much easier for them to study and compare the financial statements of foreign
companies. Since the financial statements are made using the same set of standards it is
also easier for the investors to understand and analyze them.

3] Beneficial to the Industry

With globally accepted standards the industry can also surge ahead. So convergence is
important for the industry as well. It will allow the industry to lower the cost of foreign
capital. If companies are not burned by adopting two different sets of standards it will
allow them easier entry into the market.

4] More Transparency

Convergence will benefit the users of the financial statements as well. It will make it
easier for them to understand the financial statements. And this will generate better
transparency and raise the confidence of the investors to invest funds.

5] Cost Saving

Firstly it will exempt companies from maintaining separate accounting books according
to separate standards. This will save a lot of work hours and money for the finance
department. And also planning and executing auditing will also become easier.

It will be especially helpful for those companies that have subsidiaries in many
countries. And the cost of capital will also reduce since capital would be more accessible
and easily available.

INTERNATIONAL FINANCIALREPORTING STANDARDS

INTRODUCTION

Accounting is the art and science of recording business

transactions in best possible manner with proper selection and
adoption of accounting policies and principles. Over the time it was
felt necessary to ensure easy comparability the enterprises should
follow uniform accounting methods. In India the Institute of
Chartered Accountants of India governs the profession of
accountancy. The institute ensures professionalism and prudence in
preparation and presentation of financial statements by issuing
guidelines, accounting standards from time to time.

In today’s world of globalization business enterprises have

become more dependent on each other, across the nation and across
the world. The globalization has forced more and more countries to
open their doors for business expansion across borders and to
foreign investments. Traditionally companies raised funds from
domestic capital markets and financial institutions. The business was
restricted to very few countries. The rapid expansion of international
trade and internationalization of firms, the development of new
communication technologies, and the

emergence of international competitive forces has made it extremely

necessary to have uniform and internationally acceptable accounting
standards. Now it has been realized that under this global business
scenario the business community is badly in need of a common
accounting language that should be spoken by all of them across the
world.

A financial reporting system supported by a strong

governance, high quality standards and firm regulatory framework is
the key to economic development. Indeed, sound financial reporting
standards underline the trust that investors place in financial
reporting information and thus play an important role in contributing
to the economic development of a country. Different countries have
local accounting standards which spell out the accounting treatment
and disclose your requirements for preparing of financial statements,
some sort of compatibility or convergence is necessary to enable all
the stake holders to take appropriate economic decisions. This is
sought to be ensured through the International Financial Reporting
Systems (IFRS) adopted by International Accounting Standards
Board (IASB). Most of the countries have started adopting IFRS or
making their local GAAP convergent with IFRS. Major stock
exchanges across the world today accept IFRS.
 analyses of the discussion ASB finalizes the exposure draft of proposed
accounting standards.

10. Circulation the exposure Draft

The exposure Draft of the proposed standards is issued for comments
the members of the ICAI and the public.

11. Finalizing the exposure draft

Based on the comments received, the ASB finalizes the draft of
the proposed standards.
It then submits the same to the council of the ICAI.

12. Modifying & Issuing the Accounting Standard.

The council of the ICAI considers the considers the finalized draft
standard and if necessary modifies the same in consultation with the ASB.
The ICAI then issues the Accounting Standard after modification if any
on the relevant subject.

Convergence of IFRS and Indian AS

Indian Accounting Standards are formulated by the Accounting Standard

Board (ASB) of the ICAI as notified by the Ministry of Corporate Affair.
These standards are framed keeping in mind the economic environment and
practices of India. They are made to suit the Indian companies and the
disclosure requirements of the Indian government.

The IFRS, on the other hand, are made keeping global standards and
environment in mind. Convergence would mean bridging the gap between
the two, i.e the IFRS and the India AS. Convergence will involve alignment
of the two sets of standards. The compromise is done by adopting the
policies of the IFRS either fully or at least partially.

Following are the few benefits of Convergence.

Benefits of Convergence

6] Beneficial to the Economy

If the accounting standards are converged it will promote international

business and increase the influx of capital into the country. This will help
India’s economy grow and expand. International investing will also mean
more capital for domestic companies as well.

7] Beneficial to Investors

Convergence is a boon for investors who wish to invest in foreign markets or

economies. It makes it much easier for them to study and compare the
financial statements of foreign companies. Since the financial statements
are made using the same set of standards it is also easier for the investors
to understand and analyze them.
8] Beneficial to the Industry

With globally accepted standards the industry can also surge ahead. So
convergence is important for the industry as well. It will allow the industry
to lower the cost of foreign capital. If companies are not burned by
adopting two different sets of standards it will allow them easier entry
into the market.

9] More Transparency

Convergence will benefit the users of the financial statements as well. It

will make it easier for them to understand the financial statements. And
this will generate better transparency and raise the confidence of the
investors to invest funds.

10] Cost Saving

Firstly it will exempt companies from maintaining separate accounting

books according to separate standards. This will save a lot of work hours
and money for the finance department. And also planning and executing
auditing will also become easier.

It will be especially helpful for those companies that have subsidiaries in

many countries. And the cost of capital will also reduce since capital would
be more accessible and easily available.