Accounting Standards in India

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Accounting Standards in India

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Accounting Standards in India
 Introduction
 What are Accounting Standards?
 What are the objectives of Accounting Standards?
 Who issues Accounting Standards in India?
 What is the duty of Statutory Auditor for Compliance with Accounting Standards?
 How many Accounting Standards have been prescribed? Are these applicable to all companies irrespective
of its size?
Introduction

Financial statements are prepared to summarize the end-result of all the business activities by an enterprise during
an accounting period in monetary terms. These business activities vary from one enterprise to other. To compare
the financial statements of various reporting enterprises poses some difficulties because of the divergence in the
methods and principles adopted by these enterprises in preparing their financial statements. In order to make
these methods and principles uniform and comparable to the extent possible – standards are evolved.
What are Accounting Standards?

Accounting Standards are the statements of code of practice of the regulatory accounting bodies that are to be
observed in the preparation and presentation of financial statements. In layman terms, accounting standards are
the written documents issued by the expert institutes or other regulatory bodies covering various aspects of
measurement, treatment, presentation and disclosure of accounting transactions.

What are the objectives of Accounting Standards?

The basic objective of Accounting Standards is to remove variations in the treatment of several accounting aspects
and to bring about standardization in presentation. They intent to harmonize the diverse accounting policies
followed in the preparation and presentation of financial statements by different reporting enterprises so as to
facilitate intra-firm and inter-firm comparison.
Who issues Accounting Standards in India?

The Institute of Chartered Accountants of India (ICAI) recognizing the need to harmonize the diverse accounting
policies and practices at present in use in India constituted Accounting Standards Board (ASB) on April 21, 1977.
The main role of ASB is to formulate Accounting Standards from time to time.
What is the duty of Statutory Auditor for Compliance with Accounting Standards?

Section 211(3A) of Companies Act, 1956 provides that every profit and loss account and balance sheet of the
company shall comply with the accounting standards.
The statutory auditors are required to make qualification in their report in case any item is treated differently from
the prescribed Accounting Standard. However, while qualifying, they should consider the materiality of the relevant
item. In addition to this Section 227(3)(d) of Companies Act, 1956 requires an auditor to report whether, in his
opinion, the profit and loss account and balance sheet are complied with the accounting standards referred to in
Section 211(3C) of Companies Act, 1956.
How many Accounting Standards have been prescribed? Are these applicable to all companies
irrespective of its size?

In all 29 Accounting Standards have been prescribed. However their applicability is dependent on its size – Level I /
II / III company. The following table lists out the Accounting Standards and its applicability.

Level I Company:

Enterprises, which fall in any one or more of the following categories, at any time during the accounting period, are
classified as Level I enterprises:

i) Enterprises whose equity or debt securities are listed whether in India or outside India.

ii) Enterprises, which are in the process of listing their equity or debt securities as evidenced by the board of
directors’ resolution in this regard.

iii) Banks including co-operative banks.

iv) Financial Institutions

v) Enterprises carrying on insurance business.

vi) All commercial, industrial and business reporting enterprises, whose turnover for the immediately preceding
accounting period on the basis of audited financial statements exceeds Rs. 500 million. Turnover does not include
‘other income’.

vii) All commercial, industrial and business reporting enterprises having borrowings, including public deposits, in
excess of Rs. 100 million at any time during the accounting period.

viii) Holding and subsidiary enterprises of any one of the above at any time during the accounting period.

Level II Company:

Enterprises, which are, not Level I enterprises but fall in any one or more of the following categories are classified
as Level II enterprises;
i) All commercial, industrial and business reporting enterprises, whose turnover for the immediately preceding
accounting period on the basis of audited financial statements exceeds Rs. 4 million, but does not exceed Rs. 500
million. Turnover does not include ‘other income’.

ii) All commercial, industrial and business reporting enterprises having borrowing, including public deposits, in
excess of Rs. 10 million but not in excess of Rs. 100 million at any time during the accounting period.

iii) Holding and subsidiary enterprises of any one of the above at any time during the accounting period.

Level III Company:

Enterprises, which are not covered under Level I and Level II are considered as Level III enterprises.
Applicability
Level II and Level III enterprises are considered as SMEs
Level I enterprises are required to comply fully with all the accounting standards.

No relaxation is given to Level II and Level III enterprises in respect of recognition and measurement principles.
Relaxations are provided with regard to disclosure requirements. Accordingly, Level II and Level III enterprises are
fully exempted from certain accounting standards, which mainly lay down disclosure requirements. In respect of
certain other accounting standards, which lay down recognition, measurement and disclosure requirements,
relaxations from certain disclosure requirements are given.
Sr. No. Particulars Applicability
1 Disclosure of Accounting Policies I, II, III
2 Valuation of Inventories I, II, III
3 Cash Flow Statements I
4
Contingencies and Events Occurring After
the Balance Sheet Date
I, II, III
5
Net Profit or Loss for the period, Prior period
Items and Changes in Accounting Policies.
I, II, III
6 Depreciation Accounting I, II, III
7 Construction Contracts I, II, III
8
Accounting for Research and Development
(This standard has been withdrawn w.e.f.
01.04.2004 for all levels of enterprises and
AS 26 is applicable)
As withdrawn
9 Revenue recognition I, II, III
10 Accounting for Fixed Assets I, II, III
11
The Effect of Changes in Foreign Exchange
Rates
I, II, III
12 Accounting for Government Grants I, II, III
13 Accounting for Investments I, II, III
14 Accounting for Amalgamations I, II, III
15 Accounting for Retirement Benefits in the I, II, III
Financial Statements of Employers
16 Borrowing Costs I, II, III
17 Segment Reporting
I
II-with modification
III- with modification
18 Related Party Disclosures
I
II-with modification
III- with modification
19 Leases
I
II-with modification
III- with modification
20 Earning Per Share
I
II-with modification
III- with modification
21 Consolidated Financial Statements I
22 Accounting for Taxes on Income I,II,III
23
Accounting for Investments in Associates in
Consolidated Financial Statements
I
24 Discontinuing Operations I
25 Interim Financial Reporting I
26 Intangible Assets I,II,III
27
Financial Reporting of Interests in Joint
Ventures
I-with clarification
II-with clarification
III-with clarification
28 Impairment of Assets
I
II-with modification
III-with modification
29
Provisions, Contingent Liabilities and
Contingent Asset

List of Indian Accounting Standards

Ind AS 101 First-time Adoption of Indian Accounting Standards
Ind AS 102 Share based Payment
Ind AS 103 Business Combinations
Ind AS 104 Insurance Contracts
Ind AS 105 Non current Assets Held for Sale and Discontinued Operations
Ind AS 106 Exploration for and Evaluation of Mineral Resources
Ind AS 107 Financial Instruments: Disclosures
Ind AS 108 Operating Segments
Ind AS 1 Presentation of Financial Statements
IND AS 2 Valuation Of Inventories
This accounting standard is very helpful to calculate the value of inventories. ASB comprise all
stocks which is purchased for sale or production in inventories.

Value of stock is not fixed by single formula but this standard provides following guidelines for
calculating the value of inventories.

1st stock must be valued on cost or net realizable value which is lower .

2nd Every company is free to use FIFO, LIFO or weighted average method for proper calculation of
the value of inventories.

3rd Cost of inventories
= cost of raw material + cost of direct labour + cost of direct expenses

4th
Companies are also free to use standard cost method or retail cost method for calculating the value
of inventories.

5th Inventories does not encompass the value of tools which is used for repair of machinery



IND AS5 Net Profit or Loss for the period, Prior period Items and
Changes in Accounting Policies.

ICAI’s this standard explains two simple rules

1. All ordinary and extraordinary item relating to the financial statement should be disclosed if it
effects on profit or loss period before changing of accounting policies.

2. If accounting policies are changed. Then it is the duty of enterprise to disclose all important
items relating to income and expenditures, so that profit or losses before the period and after
period of changes of accounting policies can easily compare with other enterprises business.

IND AS6 DEPRECIATING ACCOUNT

Accounting standard 6 explains rules and regulations regarding charging of depreciation on any
fixed asset. These rules can be explained in following way.

1. Depreciation must be charged on fixed assets, which are used in business for more than one
year.

2. Depreciation should charge with consisted method of charging depreciation. Two famous
method of charging depreciation are straight line and reducing balance method.

3. Rate of depreciation should be according to company law 1956 and if it is not written in it then
companies are free to charge depreciation with appropriate rate of depreciation.

4. Any company can also change the method of charging depreciation. But its effect in the form of
deficiency or surplus also should show in profit and loss account of business.

5. Deficiency due to changing the method of depreciation will be debited in profit and loss account
and surplus due to changing the method of depreciation will be credited in profit and loss account
of business.

IND AS 10 ACCOUNTING FOR FIXED ASSETS
Scope
2. This Standard shall be applied in the accounting for, and disclosure of, events
after the reporting period.
Definitions
3. The following terms are used in this Standard with the meanings specified:
Events after the reporting period are those events, favourable and unfavourable, that occur
between the end of the reporting period and the date when the financial statements are approved
by the Board of Directors in case of a company, and, by the corresponding approving authority in
case of any other entity for issue. Two types of events can be identified:
(a) those that provide evidence of conditions that existed at the end of the reporting period
(adjusting events after the reporting period); and
(b) those that are indicative of conditions that arose after the reporting period (non-adjusting
events after the reporting period).
24. The process involved in approving the financial statements for issue will vary, depending upon
the management structure, statutory requirements and procedures followed in preparing and
finalizing the financial statements.
5. In some cases, an entity is required to submit its financial statements to its shareholders for
approval after the financial statements have been approved by the Board for issue. In such cases,
the financial statements are approved for issue on the date of approval by the Board, not the date
when shareholders approve the financial statements.
6. In some cases, the management of an entity is required to issue its financial statements to a
supervisory board (made up solely of non-executives) for approval. In such cases, the financial
statements are approved for issue when the management approves them for issue to the
supervisory board.

Ind AS 7 Statement of Cash Flows
Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors
Ind AS 10 Events after the Reporting Period
Ind AS 11 Construction Contracts
Ind AS 12 Income Taxes
Ind AS 16 Property, Plant and Equipment
Ind AS 17 Leases
Ind AS 18 Revenue
Ind AS 19 Employee Benefits
Ind AS 20 Accounting for Government Grants and Disclosure of Government Assistance
Ind AS 21 The Effects of Changes in Foreign Exchange Rates
Ind AS 23 Borrowing Costs
Ind AS 24 Related Party Disclosures
Ind AS 27 Consolidated and Separate Financial Statements
Ind AS 28 Investments in Associates
Ind AS 29 Financial Reporting in Hyperinflationary Economies
Ind AS 31 Interests in Joint Ventures
Ind AS 32 Financial Instruments: Presentation
Ind AS 33 Earnings per Share
Ind AS 34 Interim Financial Reporting
Ind AS 36 Impairment of Assets
Ind AS 37 Provisions, Contingent Liabilities and Contingent Assets
IND AS 38 INTANGIBLE ASSETS
Accounting Standard (AS) 26, 'Intangible Assets', issued by the Council of the Institute of Chartered
Accountants of India, comes into effect in respect of expenditure incurred on intangible items
during accounting periods commencing on or after 1-4-2003 and is mandatory in nature from that
date for the following:
(i) Enterprises whose equity or debt securities are listed on a recognized stock exchange in India,
and enterprises that are in the process of issuing equity or debt securities that will be listed on a
recognized stock exchange in India as evidenced by the board of directors' resolution in this regard.
(ii) All other commercial, industrial and business reporting enterprises, whose turnover for the
accounting period exceeds Rs. 50 crores.
Definitions
The following terms are used in this Statement with the meanings specified:
An intangible asset is an 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.
An asset is a resource:
(a) Controlled by an enterprise as a result of past events; and
(b) From which future economic benefits are expected to flow to the enterprise.
Monetary assets are money held and assets to be received in fixed or determinable amounts of
money.
Non-monetary assets are assets other than monetary assets.
Research is original and planned investigation undertaken with the prospect of gaining new
scientific or technical knowledge and understanding.
Development is the application of research findings or other knowledge to a plan or design for the
production of new or substantially improved materials, devices, products, processes, systems or
services prior to the commencement of commercial production or use.
Amortisation is the systematic allocation of the depreciable amount of an intangible asset over its
useful life.
Depreciable amount is the cost of an asset less its residual value.
Ind AS 39 Financial Instruments: Recognition and Measurement
Ind AS 40 Investment Property















FINANCIAL STATEMENTS
Qualitative characteristics of financial statements
Qualitative characteristics of financial statements include:
 Relevance (Materiality)
 Faithful representation
Enhancing qualitative characteristics include:
 Comparability
 Verifiability
 Timeliness
 Understandability
[edit]Elements of financial statements (IAS 1 article 10)
 The financial position of an enterprise is primarily provided in the Statement of Financial Position. The
elements include:
 Asset: An asset is a resource controlled by the enterprise as a result of past events from which
future economic benefits are expected to flow to the enterprise.
 Liability: A liability is a present obligation of the enterprise arising from the past events, the
settlement of which is expected to result in an outflow from the enterprise' resources, i.e., assets.
 Equity: Equity is the residual interest in the assets of the enterprise after deducting all the liabilities
under the Historical Cost Accounting model. Equity is also known as owner's equity. Under the units
of constant purchasing power model equity is the constant real value of shareholders´ equity.
 The financial performance of an enterprise is primarily provided in the Statement of Comprehensive
Income (income statement or profit and loss account). The elements of an income statement or the
elements that measure the financial performance are as follows:
 Revenues: increases in economic benefit during an accounting period in the form of inflows or
enhancements of assets, or decrease of liabilities that result in increases in equity. However, it does
not include the contributions made by the equity participants, i.e., proprietor, partners and
shareholders.
 Expenses: decreases in economic benefits during an accounting period in the form of outflows, or
depletions of assets or incurrences of liabilities that result in decreases in equity.
Revenues and expenses are measured in nominal monetary units under the Historical Cost
Accounting model and in units of constant purchasing power (inflation-adjusted) under the Units of
Constant Purchasing Power model.
 Statement of Changes in Equity
 Statement of Cash Flows
 Notes to the Financial Statements
Recognition of elements of financial statements
An item is recognized in the financial statements when:
 it is probable future economic benefit will flow to or from an entity.
 the resource can be reliably measured – otherwise the stable measuring unit assumption is applied
under the Historical Cost Accounting model: i.e. it is assumed that the monetary unit of account
(the functional currency) is perfectly stable (zero inflation or deflation); it is simply assumed that
there is no inflation or deflation ever, and items are stated at their original nominal Historical Cost
from any prior date: 1 month, 1 year, 10 or 100 or 200 or more years before; i.e. the stable
measuring unit assumption is applied to items such as issued share capital, retained earnings,
capital reserves, all other items in shareholders´ equity, all items in the Statement of
Comprehensive Income (except salaries, wages, rentals, etc., which are inflation-adjusted annually),
etc.
Under the Units of Constant Purchasing Power model, all constant real value non-monetary items are
inflation-adjusted during low inflation and deflation; i.e. all items in the Statement of Comprehensive
Income, all items in shareholders´ equity, Accounts Receivables, Accounts Payables, all non-monetary
payables, all non-monetary receivables, provisions, etc.

ASSETS are a company’s resources—things the company owns. Examples of assets include cash,
accounts receivable, inventory, prepaid insurance, investments, land, buildings, equipment, and
goodwill. From the accounting equation, we see that the amount of assets must equal the combined
amount of liabilities plus owner’s (or stockholders’) equity.


LIABILITIES are a company’s obligations—amounts the company owes. Examples of liabilities include
notes or loans payable, accounts payable, salaries and wages payable, interest payable, and income
taxes payable (if the company is a regular corporation). Liabilities can be viewed in two ways:
 as claims by creditors against the company’s assets, and
 a source—along with owner or stockholder equity—of the company’s assets.







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