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.

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. 

Change in an Accounting Policy  Disclose change which has material effect in the current period or is reasonably expected to have material impact in later periods.  In case of change which has material effect in the current period, disclose, to the extent ascertainable, the amount by which any item in the financial statements is affected by such change.  If not ascertainable, wholly or in part, indicate the fact.

Consideration in Selection of Accounting Policies

Primary Consideration-Financial statements should represent true and fair view

Major considerations in achieving the primary consideration Prudence, Substance over form, Materiality 

Fundamental Accounting Assumptions - Disclose  if not followed

• Going Concern
• Consistency
• Accrual

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

Excluded inventories (not dealt with by AS 2)

• work in progress arising under construction contracts
• work in progress arising in the ordinary course of business of service providers
• shares, debentures and other financial instruments held as stock-in-trade
• producers’ inventories of livestock, agricultural and forest products, and mineral oils, ores and gases to the extent that they are measured at net realisable value in accordance with well-established practices in those industries

Inventories are assets:

• held for sale in the ordinary course of business;
• in the process of production for such sale; orin 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.

Cash comprises cash on hand and demand deposits with banks. Cash equivalents are short term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value.

Reporting methods (Cash flow from operating activities)  

• Direct method

Major classes of gross cash receipts and payments in respect of operating activities are presented

• Indirect Method

Net Profit/Loss is adjusted for effects of transactions of non-cash nature, deferrals or accruals of past or future operating cash receipts or payments, and  income and expense items associated with investing or financing cash flow

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.

A contingency is a condition or situation, the ultimate outcome of which, gain or loss, will be known or determined only on the occurrence or non occurrence, of one or more uncertain future events.

Events occurring after the balance sheet date are those significant events, both favourable and unfavourable, that occur between the balance sheet date and the date on which the financial statements are approved by the Board of Directors in the case of a company and, by the corresponding approving authority in the case of any other entity.

Two types of events can be identified:

• Adjusting events: those which provide further evidence of conditions that existed at the balance sheet date; and
• Non-adjusting events: those which are indicative of conditions that arose subsequent to 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.

• Ordinary activities are any activities which are undertaken by an enterprise as part of its business and such related activities in which the enterprise engages in furtherance of, incidental to, or arising from, these activities. 
• Extraordinary items are income or expenses that arise from events or transactions that are clearly distinct from the ordinary activities of the enterprise and, therefore, are not expected to recur frequently or regularly. 
• Prior period items are income or expenses which arise in the current period as a result of errors or omissions in the preparation of the financial statements of one or more prior periods.

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. 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

c) Interest, royalties and dividends

Revenue is the gross inflow of cash, receivables or other consideration arising in the course of the ordinary activities of an enterprise from the sale of goods, from the rendering of services, and from the use by others of enterprise resources yielding interest, royalties and dividends. 

Methods of Revenue recognition –

Completed service contract method is a method of accounting which recognises revenue in the Statement of Profit and Loss only when the rendering of services under a contract is completed or substantially completed. 

Proportionate completion method is a method of accounting which recognises revenue in the Statement of Profit and Loss proportionately with the degree of completion of services under a contract

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.

The objective of this Standard is to prescribe the accounting treatment for property, plant and equipment (PPE)

PPE are tangible items that:

• are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and
• are expected to be used during more than a period of twelve months.

Recognition

The cost of an item of PPE should be recognised as an asset if, and only if:

(a) it is probable that future economic benefits associated with the item will flow to the enterprise; and

(b) the cost of the item can be measured reliably

Recognition of costs ceases when the item is in the location and condition necessary for it to be capable of operating in the manner intended by management.

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.

•  Foreign currency is a currency other than the reporting currency of an enterprise.

•  Foreign operation is a subsidiary, associate, joint venture or branch of the reporting enterprise, the activities of which are based or conducted in a country other than the country of the reporting enterprise.

•  Forward exchange contract means an agreement to exchange different currencies at a forward rate.

•  Reporting currency is the currency used in presenting the financial statements.

•  Monetary items are money held and assets and liabilities to be received or paid in fixed or determinable amounts of money.

• Non-monetary items are assets and liabilities other than monetary items