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Accounting standards

Accountancy (11th) Chapter-2 Theory base of Accounting

Accounting standards

The term standard denotes a discipline, which provides both guidelines and yardsticks for evaluation. As guidelines, accounting standard provides uniform practices and common techniques of accounting. As a general rule, accounting standards are applicable to all corporate enterprises. They are made operative from a date specified in the standard. The Institute of Chartered Accountant of India (ICAI) constituted the Accounting Standards Board (ASB) in April, 1977 for developing accounting standards. However, the International Accounting Standards Committee (IASC) was set up in 1973, with its headquarter in London (U.K.).

The Accounting Standards Board is entrusted with the responsibility of formulating standards on significant accounting matters keeping in view the international developments, and legal requirements in India.

The main function of the ASB is to identify areas in which uniformity in standards is required and to develop draft standards after discussions with representatives of the Government, public sector undertaking, industries and other agencies.

In the initial years the standards are of recommendatory in nature. Once an awareness is created about the benefits and relevance of accounting standards, steps are taken to make the accounting standards mandatory for all companies. In case of non compliance, the companies are required to disclose the reasons for deviations and its financial effect :

Till date, the IASC has brought out 40 accounting standards.

The ICAI has so far issued 29 accounting standards for corporates
For non- corporates , there are 32 standards.

Need for Accounting Standards

Accounting extends information to various users of information. Accounting information can serve the interest of different users only if it possesses uniformity and full disclosure of relevant information. There can be alternate accounting treatment and valuation norms which may be used by any business entity. Accounting standard facilitate the scope of those alternatives which fulfil the basic qualitative characteristics of true and fair financial statement. Benefits of Accounting Standards

1. Accounting standard helps in eliminating variations in accounting treatment to prepare financial statements.

2. Accounting standard may call for disclosures of certain information which may not be required by law, but such information might be useful for general public, investors and creditors.

3. Accounting standard facilitate comparability between financial statements of inter and intra companies.

Limitations of Accounting Standards

1. Accounting standard makes choice between different alternate accounting treatments difficult to apply

2. It is rigidly followed and fails to extend flexibility in applying accounting standards.

3. Accounting standard cannot override the statue. The standards are required to be farmed within the ambit of prevailing status.

AS-1 Disclosure of accounting policies (January 1979).

Accounting Policies refer to the specific accounting principles and methods of applying those principles adopted by the enterprise in the preparation and presentation of financial statements. Disclosure of accounting policies or of changes therein cannot remedy wrong or inappropriate treatment of the item in the books of accounts.

AS-2 Valuation of Inventories (June 1981). This standard deals with the principles of valuing inventories for the financial statements.

Inventories are assets:

held for sale in the ordinary course of business;

in the process of production for such sale; or in the form of materials or supplies to be consumed in the production process or in the rendering of services.

Measurement- lower of cost and net realisable value

AS-3 (Revised) Cash flow statement (June 1981, Revised in March 1997).

This standard deals with the financial statement which summaries for a given period the sources and applications of an enterprise.

AS-4 Contingencies and events occurring after the Balance Sheet date (November 1982, Revised in April, 1995)

This standard deals with the treatment of contingencies and events occurring after the balance sheet date.

AS-5 Net profit or loss for the period, prior period (period before the date of balance sheet) items and changes in accounting policies (November 1982, Revised in February 1997).

This standard deals with the treatment in financial statement of prior period and extraordinary items and changes in accounting policies.

AS-6 Depreciation Accounting (November 1982).

This standard applies to all depreciable assets. But this standard does not apply to assets in the category of forests, plantations and similar natural resources and wasting assets.

AS-7 Accounting for construction contracts (December 1983, revised in April 2003).

This standard deals with accounting for construction contracts in the financial statements of contractors.

A construction contract is a contract specifically negotiated for the construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use.

AS-8 Accounting for Research and Development (January 1985).

This standard deals with the treatment of costs of research and development in financial statements.

AS-9 Revenue Recognition (November 1985).

This Standard deals with the bases for recognition of revenue in the Statement of Profit and Loss of an enterprise.

AS-10 Property, Plant and Equipment.

This standard deals with recognition of fixed assets grouped into various categories, such as land, building, plant and machinery, vehicles, furniture and gifts, goodwill, patents, trading and designs.

AS-11 Accounting for the effects of change in foreign exchange Rates. (August 1991 and Revised in 1993).

This standard deals with the issues relating to accounting for effect of change in foreign exchange rates.

Exchange difference is the difference resulting from reporting the same number of units of a foreign currency in the reporting currency at different exchange rates.

AS-12 Accounting for Government grants .

This standard deals with the 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.

AS-13 Accounting for investments.

This standard deals with accounting aspect concerning investments in the financial statements. These include classification, determination of cost for initial recognition, disposal and re-classification of investment.

AS-14 Accounting for amalgamation.

This standard deals with accounting treatment of any resultant goodwill or reserves in amalgamation of companies.

AS-15 Accounting for retirement / Employee Benefits

This standard deals with accounting for retirement benefits in the financial statements of employers.

AS-16 Borrowing Costs .

This standard deals with the uses involved relating to capitalization of interest on borrowing for purchase of fixed assets

AS-17 Segment reporting.

This standard applies to companies which have an annual turnover of Rs 50 crores or more.

These companies have to present financial statements and consolidated financial statements.

AS-18 Related party disclosures

This standard requires certain disclosure which must be made for transactions between the enterprise and related parties.

AS-19 Leases

This standard deals with the accounting treatment of transactions related to lease agreements.

AS-20 Earning per share.

This standard deals with the presentation and computation of earning per share (EPS).

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.

AS-21 Consolidated financial statements

This standard deals with the preparation of consolidated financial statements with an intention to provide information about the activities of a group.

AS-22 Accounting for taxes on Income

This standard deals with determination of the account of tax expenses for the related revenue.

AS-23 Accounting for investments in Associates in consolidated financial statements

This standard deals with the principles and procedures to be followed for recognizing, in the consolidated financial statement.

AS-24 Discontinued operations

This standard deals with the principles of discontinuing operations of an enterprise with the activities which are continuing.

AS-25 Interim financial reporting

This standard deals with the minimum content of interim financial report.

AS-26 Intangible Assets

This standard prescribed the accounting treatment for intangible assets which are not covered by any other specific accounting standard.

AS-27 Financial reporting of interest for joint venture

This standard sets principles and procedure for accounting for interest in joint venture.

AS-28 Impairment of Assets

This standard prescribed procedure to ensure that an asset is carried at no more than its carrying amount and procedures as to when to recognise an asset as impaired.

AS-29 Provision for contingent liabilities and contingent assets

This standard deals with measurement and recognition criteria in three areas, namely provisions, contingent liabilities and contingent assets

Applicability of Accounting Standards Except the purely charitable organisation which does not have any commercial, industrial and business activity, accounting standard is applicable to:

1. Sole proprietorship unit

2. Partnership firm

3. Societies

4. Trusts

5. Hindu undivided family

6. Association of persons

7. Cooperative societies

8. Companies

9. International Financial Reporting System

Need for IFRS

1. To Avoid manipulations of figures

The important economic decisions are made on the basis of financial statements. In order to avoid manipulations of figures in the financial accounts, there is a need for consistent way of deciding which elements require recognition and measurement and how information is presented in the financial statements. Hence, IFRS helps to prevent material manipulation or errors in financial statements.

2. Global harmonization

IFRS helps in global harmonisation. Unless accounting activities are regulated, different countries will apply different set of accounting rules and regulations are prevalent in each country. This will restrict uniformity and comparability of financial statements. Hence, IFRS promotes global standards for each of business growth.

3. Global investment

It facilitates global investment. The convergence of financial reporting and accounting standards is a valuable process that contributes to the free flow of global investments and achieves substantial benefits for all capital market stakeholders. To uniform accounting policies and procedures almost all countries have agreed to apply IFRS. But the name of this IFRS has been converged as Ind AS. In substance , Ind AS is not different from IFRS. Ind AS is accounting standard notified by ministry of corporate affairs and has wide range of convergence as compared to existing accounting standards.

1 Presentation of Financial Statements

2 Inventories

7 Cash Flow Statements

8 Accounting Policies, Changes in Accounting Estimates and Errors

10 Events after the Balance Sheet Date

11 Construction Contracts

12 Income Taxes

16 Property, Plant and Equipment

17 Leases

18 Revenue

19 Employee Benefits

20 Accounting for Government Grants and Disclosure of Government Assistance