Accounting — Accounting Standards
Learning Outcomes
- Understand the significance of issuance of Accounting Standards.
- Grasp the objectives, benefits and limitations of Accounting Standards.
- Learn the process of formulation of Accounting Standards by the Council of the Institute of Chartered Accountants of India.
- Familiarize with the list of applicable Accounting Standards in India.
7.1 Introduction of Accounting Standards
- Accounting as a 'language of business' communicates the financial results of an enterprise to various stakeholders by means of financial statements.
- If the financial accounting process is not properly regulated, there is possibility of financial statements being misleading, tendentious and providing a distorted picture of the business, rather than the true.
- To ensure transparency, consistency, comparability, adequacy and reliability of financial reporting, it is essential to standardize the accounting principles and policies.
- 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.
KNOWLEDGE NUGGET
- Accounting Standards: Written policy documents covering recognition, measurement, presentation and disclosure
- Purpose: Promote dissemination of timely and useful financial information
- Issued by: Expert accounting body, government or regulatory body
- Accounting standards are written policy documents issued by the expert accounting body or by the government or other regulatory body covering the aspects of recognition, measurement, presentation and disclosure of accounting transactions and events in the financial statements.
- The ostensible purpose of the standard setting bodies is to promote the dissemination of timely and useful financial information to investors and certain other parties having an interest in the company's economic performance.
Accounting Standards Deal With:
- (i) Recognition of events and transactions in the financial statements;
- (ii) Measurement of these transactions and events;
- (iii) Presentation of these transactions and events in the financial statements in a manner that is meaningful and understandable to the reader; and
- (iv) The disclosure requirements which should be there to enable the public at large and the stakeholders and the potential investors in particular, to get an insight into what these financial statements are trying to reflect and thereby facilitating them to take prudent and informed business decisions.
7.2 Objectives of Accounting Standards
- The whole idea of accounting standards is centered around harmonisation of accounting policies and practices followed by different business entities so that the diverse accounting practices adopted for various aspects of accounting can be standardised.
- Accounting Standards standardise diverse accounting policies with a view to:
- (i) eliminate the non-comparability of financial statements and thereby improving the reliability of financial statements; and
- (ii) provide a set of standard accounting policies, valuation norms and disclosure requirements.
- Accounting standards reduce the accounting alternatives in the preparation of financial statements within the bounds of rationality, thereby ensuring comparability of financial statements of different enterprises.
OBJECTIVES OF ACCOUNTING STANDARDS — SUMMARY
- Harmonisation: Standardise diverse accounting policies
- Eliminate Non-comparability: Improve reliability of financial statements
- Provide Standard Framework: Standard accounting policies, valuation norms and disclosure requirements
- Reduce Alternatives: Ensure comparability of financial statements
7.3 Benefits and Limitations of Accounting Standards
Benefits
- Accounting standards seek to describe the accounting principles, the valuation techniques and the methods of applying the accounting principles in the preparation and presentation of financial statements so that they may give a true and fair view.
BENEFITS OF ACCOUNTING STANDARDS
- (i) Standards reduce to a reasonable extent or eliminate altogether confusing variations in the accounting treatments used to prepare financial statements.
- (ii) There are certain areas where important information are not statutorily required to be disclosed. Standards may call for disclosure beyond that required by law.
- (iii) The application of accounting standards would, to a limited extent, facilitate comparison of financial statements of companies situated in different parts of the world and also of different companies situated in the same country.
Limitations
LIMITATIONS OF ACCOUNTING STANDARDS
- (i) Difficulties in making choice between different treatments: Alternative solutions to certain accounting problems may each have arguments to recommend them. Therefore, the choice between different alternative accounting treatments may become difficult.
- (ii) Restricted scope: Accounting standards cannot override the statute. The standards are required to be framed within the ambit of prevailing statutes.
7.4 Process of Formulation of Accounting Standards in India
- The 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.
- The ICAI has taken significant initiatives in the setting and issuing procedure of Accounting Standards to ensure that the standard-setting process is fully consultative and transparent.
- The 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 in the country.
COMPOSITION OF ASB
- Representatives of industries (ASSOCHAM, CII, FICCI)
- Regulators
- Academicians
- Government departments
Note: ASB is independent in formulation of accounting standards. Council of ICAI cannot make modifications without consulting ASB.
Standard-Setting Procedure of ASB
- 1. Identification of broad areas by ASB for formulation of AS.
- 2. Constitution of study groups by ASB to consider specific projects and to prepare preliminary drafts of the proposed accounting standards.
- 3. Consideration of the preliminary draft prepared by the study group of ASB and revision, if any, of the draft on the basis of deliberations.
- 4. Circulation of draft of accounting standard (after revision by ASB) to the Council members of the ICAI and specified outside bodies such as Department of Company Affairs (DCA), Securities and Exchange Board of India (SEBI), Comptroller and Auditor General of India (C&AG), Central Board of Direct Taxes (CBDT), Standing Conference of Public Enterprises (SCOPE), etc. for comments.
- 5. Meeting with the representatives of the specified outside bodies to ascertain their views on the draft of the proposed accounting standard.
- 6. Finalisation of the exposure draft of the proposed accounting standard and its issuance inviting public comments.
- 7. Consideration of comments received on the exposure draft and finalisation of the draft accounting standard by the ASB for submission to the Council of the ICAI for its consideration and approval for issuance.
- 8. Consideration of the final draft by the Council of the ICAI, and if found necessary, modification of the draft in consultation with the ASB is done.
- 9. Issuance: 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 The Central Government of India.
KEY POINTS — FORMULATION PROCESS
- ASB constituted: 1977 by ICAI
- Considers: IFRSs while framing Indian AS
- Non-Corporate Entities: Standards issued by ICAI
- Corporate Entities: Standards issued by Central Government
7.5 List of Accounting Standards in India
The 'Accounting Standards' issued by the Accounting Standards Board establish standards which have to be complied by the business entities so that the financial statements are prepared in accordance with generally accepted accounting principles.
| Sl. No. | Number of the Accounting Standard (AS) | Title of the Accounting Standard |
|---|---|---|
| 1. | AS 1 | Disclosure of Accounting Policies |
| 2. | AS 2 (Revised) | Valuation of Inventories |
| 3. | AS 3 (Revised) | Cash Flow Statements |
| 4. | AS 4 (Revised) | Contingencies and Events Occurring after the Balance Sheet Date |
| 5. | AS 5 (Revised) | Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies |
| 6. | AS 7 (Revised) | Accounting for Construction Contracts |
| 7. | AS 9 | Revenue Recognition |
| 8. | AS 10 | Property, Plant and Equipment |
| 9. | AS 11 (Revised) | The Effects of Changes in Foreign Exchange Rates |
| 10. | AS 12 | Accounting for Government Grants |
| 11. | AS 13 | Accounting for Investments |
| 12. | AS 14 | Accounting for Amalgamations |
| 13. | AS 15 (Revised) | Employee Benefits |
| 14. | AS 16 | Borrowing Costs |
| 15. | AS 17 | Segment Reporting |
| 16. | AS 18 | Related Party Disclosures |
| 17. | AS 19 | Leases |
| 18. | AS 20 | Earnings Per Share |
| 19. | AS 21 | Consolidated Financial Statements |
| 20. | AS 22 | Accounting for Taxes on Income |
| 21. | AS 23 | Accounting for Investments in Associates in Consolidated Financial Statements |
| 22. | AS 24 | Discontinuing Operations |
| 23. | AS 25 | Interim Financial Reporting |
| 24. | AS 26 | Intangible Assets |
| 25. | AS 27 | Financial Reporting of Interests in Joint Ventures |
| 26. | AS 28 | Impairment of Assets |
| 27. | AS 29 | Provisions, Contingent Liabilities & Contingent Assets |
Note: The list of accounting standards given above does not form part of syllabus. It has been given here for the knowledge of students only.
Summary
- 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 statements
- provide a set of standard accounting policies, valuation norms and disclosure requirements
- By setting the accounting standards, the accountant has following benefits:
- Comparability of financial statements
- Requirements of additional disclosures
- Following are the limitations of accounting standards:
- Difficulties in making choice between different treatments.
- Accounting standards cannot override the statute.
Test Your Knowledge
True and False
- 1. Accounting standards are written policy documents issued by the expert accounting body or by the government or other regulatory body covering the aspects of recognition, measurement, presentation and disclosure of accounting transactions and events in the financial statements. True
- 2. Accounting standards can override the statute. False
- 3. Difficulties in making choice between different treatments is one of the benefits of accounting standards. False
- 4. Requirements for additional disclosures is limitation of accounting standards. False
- 5. ASB stands for Accounting standardisation benchmarking. False
- 6. There are no limitation to accounting standards. False
Multiple Choice Questions
| 1. Accounting Standards for Non-Corporate entities in India are issued by | (a) Central Govt. (b) State Govt. (c) Institute of Chartered Accountants of India |
| 2. Accounting Standards | (a) Harmonise accounting policies. (b) Eliminate the non-comparability of financial statements. (c) Both the above |
| 3. It is essential to standardize the accounting principles and policies in order to ensure | (a) Transparency. (b) Consistency. (c) Both the above |
High-Yield Interactive Quiz — Accounting Standards
Q1. Accounting Standards are written policy documents covering which aspects of accounting transactions?
Correct Answer: C. Accounting Standards cover the aspects of recognition, measurement, presentation and disclosure of accounting transactions and events in the financial statements.
Q2. The Accounting Standards Board (ASB) was constituted in which year?
Correct Answer: B. The Accounting Standards Board (ASB) was constituted in 1977 by the Institute of Chartered Accountants of India (ICAI).
Q3. Which of the following is a limitation of Accounting Standards?
Correct Answer: C. Accounting Standards cannot override the statute. The standards are required to be framed within the ambit of prevailing statutes.
Q4. For corporate entities, Accounting Standards in India are issued by:
Correct Answer: B. For corporate entities, the accounting standards are issued by The Central Government of India. For non-corporate entities, they are issued by ICAI.
Q5. AS 1 deals with:
Correct Answer: B. AS 1 deals with Disclosure of Accounting Policies.
Q6. Which of the following is a benefit of Accounting Standards?
Correct Answer: C. Standards may call for disclosure beyond that required by law. This is a benefit of Accounting Standards.
Q7. The ASB considers which standards while framing Indian Accounting Standards?
Correct Answer: B. The ASB considers International Financial Reporting Standards (IFRSs) while framing Indian Accounting Standards (ASs) in India.
Q8. Which of the following is NOT a limitation of Accounting Standards?
Correct Answer: C. Facilitates comparison of financial statements is a benefit, not a limitation of Accounting Standards.
Q9. AS 2 (Revised) deals with:
Correct Answer: B. AS 2 (Revised) deals with Valuation of Inventories.
Q10. Which of the following is an objective of Accounting Standards?
Correct Answer: B. One of the key objectives of Accounting Standards is to eliminate the non-comparability of financial statements and improve reliability.
Q11. AS 10 deals with:
Correct Answer: C. AS 10 deals with Property, Plant and Equipment.
Q12. The process of formulation of Accounting Standards in India is designed to be:
Correct Answer: B. The ICAI has taken significant initiatives to ensure that the standard-setting process is fully consultative and transparent.