Standard Setting in India: An Overview

Standards Setting Bodies in India:

In India, we have standard setting bodies which are, in practice, the national regulators, who have the legal authority to set and implement regulatory rules and procedures in the financial sector. For example, the Reserve Bank of India (RBI) is responsible for regulation and supervision of banks and other financial institutions and money, foreign exchange and Government securities markets.

The Securities and Exchange Board of India (SEBI) is charged with the duty to protect the interests of investors in securities and to promote the development of, and to regulate the securities market by measures as it deems fit.

The Insurance Regulatory and Development Authority (IRDA) is entrusted with the task of protecting the interests of the policy holders, to regulate, promote and ensure orderly growth of the insurance industry and for matters therewith or incidental thereto.

The Ministry of Corporate Affairs, inter alia, provides legal framework for incorporation and proper functioning of companies, surveillance over the working of corporate sector to ensure financial health and compliance with statutory provisions, prescribing cost audit rules and appointment of cost auditors, investigation of complaints, coordination with other regulatory bodies such as other Government departments and autonomous institutions like SEBI, RBI and stock exchanges and monitoring the development of professional bodies, i.e., Institute of Chartered Accountants of India (ICAI), Institute of Company Secretaries (ICS) and Institute of Cost and Works Accountants of India (ICWAI).

Further, we have self-regulatory organizations such as the Indian Banks Association (IBA), Fixed Income Money Market and Derivatives Association of India (FIMMDA), Association of Merchant Bankers of India (AMBI), Association of Mutual Funds of India (AMFI), Foreign Exchange Dealers Association of India (FEDAI), Primary Dealers Association of India (PDAI), clearing house associations and stock exchanges, among others, which play a critical role in developing codes of conduct and setting and maintaining standards for different segments of the financial system with a view to promoting and protecting interests of institutions, investors and depositors in India.

India’s Standing Committee on International Financial Standards and Codes:

With a view to promote and assist in the task of adoption and implementation of International Financial Standards in India, a Standing Committee on International Financial Standards and Codes was set up on December 8, 1999.

The Committee has been entrusted with the task of monitoring developments in global standards and codes being evolved by standards setting bodies as part of the effort to create a sound international financial architecture and to consider all aspects of applicability of these standards to Indian Financial System.

The Committee is also assigned with the task of periodically reviewing the progress in regard to the codes and practices and making available its reports to all concerned organisations in public and private sectors with an aim of sensitizing public opinion and creating awareness for the concerned subject areas.

Advisory Groups in India:

To assist the Standing Committee, Advisory Groups were constituted in different areas of the financial system under the Chairmanship of eminent experts, generally not holding official positions in government or other regulatory bodies in ten major areas – accounting and auditing, banking supervision, bankruptcy, corporate governance, data dissemination, fiscal transparency, insurance regulation, transparency of monetary and financial policies, payments and settlement system and securities market regulation.

The Advisory Groups had, in general, the following terms of reference:

(i) To study present status of applicability and relevance and compliance of relevant standards and codes,

(ii) To review the feasibility of compliance and the time frame over which this could be achieved given the prevailing legal and institutional practices,

(iii) To compare the levels of adherence in India vis-a-vis in industrialised and also emerging economies particularly to understand India’s position and prioritise actions on some of the more important codes and standards, and

(iv) To chalk out a course of action for achieving the best practices.

Standards set by ASB:

Recognising the need to harmonies the diverse accounting policies and practice in India and keeping in view the international development in the field of accounting, the Institute of Chartered Accountants of India constituted the Accounting Standards Board (ASB) in April 1977.

The ASB is entrusted with the following functions:

(1) To formulate accounting standards which may be established by the Council of ICAI in India. While formulating standards, the ASB is required to take into consideration the applicable laws, customs and usages and business environment; it is also required to give due consideration to International Accounting Standards issued by IASC and to integrate them, to the extent possible, in the light of the conditions and practices prevailing in India.

(2) To propagate the Accounting Standards and persuade the concerned parties to adopt them in the preparation and presentation of financial statements.

(3) To issue guidance notes on the Accounting Standards and give clarifications on issues arising therefrom.

(4) To review the Accounting Standards at periodical intervals.

The date from which a particular standard will come to effect, as well as the class of enterprises to which it will apply, will also be specified by the Institute. Unless otherwise stated, no standard will have retrospective application.

Normally before formulating the standards, ASB will hold discussions with the representatives of the Government, Public Sector Undertakings, Industry and other organisations, for ascertaining their views.

An exposure draft of the proposed standard will be prepared and issued for comments by members of the Institute and the public at large. After considering the comments received, the draft of the proposed standard will be finalised by ASB and submitted to the Council which will study it, modify it if necessary and issue it under its own authority.

Existing Procedure for Setting Standards:

1. The existing procedure for formulating and issuing accounting standard followed by the Accounting Standards Board of the ICAI is as follows:

i. ASB determines the broad areas in which Accounting Standards need to be formulated and the priority with regard to issuance thereof.

ii. In the preparation of Accounting Standard, ASB is assisted by Study Groups constituted to consider specific subjects. In the formation of Study Groups, provision is made for wide participation by the members of the Institute and others.

iii. The Board considers the draft as submitted by the study group and finalizes the same for issue to all members of the Council of the ICAI as well as to the bodies listed below for their comments.

Associated Chambers of Commerce and Industry, Federation of Indian Chambers of Commerce and Industry, Institute of Cost and Works Accountants of India, Standing Conference of Public Enterprises, Institute of Company Secretaries of India, Central Board of Direct Taxes, Department of Company Affairs, Comptroller and Auditor General of India, Reserve Bank of India, Indian Banks’ Association, Securities and Exchange Board of India, Confederation of Indian industries.

iv. ASB holds a meeting with the representatives of specified outside bodies listed above to ascertain their views.

v. On the basis of the comments received from the Council members as well as the outside bodies, the Board finalizes the Exposure Draft and exposes it for public comments.

a. To all members of the profession through the medium of their Journal.

b. To principal Chambers of Commerce and Industry through direct communications.

c. To all recognised Stock Exchanges through direct communication.

d. To the Institute of Cost and Works Accountants of India through direct communication.

e. To the Institute of Company Secretaries of India through direct communication.

f. To the Ministry of Corporate Affairs, Central Board of Direct Taxes and the Comptroller and Auditor General by direct communication.

g. To principal financial institutions, Reserve Bank of India, Life Insurance Corporation, General Insurance Corporation, Unit Trust of India and Indian Banks’ Association by direct communication.

h. To all Regional Councils and Branches of the ICAI by direct Communication.

i. To all Council Members.

j. To Securities and Exchange Board of India by direct communication.

vi. After taking into account the comments received from various quarters, the draft of the proposed standard is finalised by the Board and submitted to the Council for its consideration.

vii. The Council of the Institute considers the final draft of the proposed Standard, and if necessary, modifies the same in consultation with ASB.

2. The Accounting Standard on the relevant subject is then issued under the authority of the Council.

The Advisory Group on Accounting and Auditing set up by Reserve Bank of India in its report (January 2001) has proposed the following procedure for standard setting in India.

Existing Standards:

In India, the Accounting Standards Board (ASB) of the Institute of Chartered Accountants of India (ICAI) is responsible for setting Accounting Standard (AS). The ASB comprises members of the Central Council of ICAI as well as certain members from the professional, industry and various other segments and government agencies.

The ASB of ICAI has issued 32 accounting standards so far. The list of accounting standards issued is given hereunder:

1. AS-1 Disclosure of Accounting Policies.

2. AS-2 (Revised), Valuation of Inventories.

3. As-3 (Revised) Cash Flows 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-6 (Revised) Depreciation Accounting.

7. AS-7 (Revised) Accounting for Construction Contracts.

8. AS-8 Accounting for Research and Development. (Withdrawn and included in AS26)

9. AS-9 Revenue Recognition.

10. AS-10 Accounting for Fixed Assets.

11. AS-11 (Revised) Accounting for the effects of changes in Foreign Exchange Rates.

12. AS-12 Accounting for Government Grants.

13. AS-13 Accounting for Investments.

14. AS-14 Accounting for Amalgamations.

15. AS-15 Employee Benefits (Revised) 2005.

16. AS-16 Borrowing Costs.

17. AS-17 Segment Reporting.

18. AS-18 Related Party Disclosures.

19. AS-19 Leases.

20. AS-20 Earnings Per Share.

21. AS-21 Consolidated Financial Statements.

22. AS-22 Accounting for Taxes on Income.

23. AS-23 Accounting for Investments in Associates in Consolidated Financial Statements.

24. AS-24 Discontinuing Operations.

25. AS-25 Interim Financial Reporting.

26. AS-26 Intangible Assets.

27. AS-27 Financial Reporting of Interest in Joint Venture.

28. AS-28 Impairment of Assets.

29. AS-29 Provisions, Contingent Liabilities and Contingent Assets.

30. AS-30 Financial Instruments: Recognition and Measurement.

31. AS-31 Financial Instruments: Presentation.

32. AS-32 Financial Instruments: Disclosures.

The Institute of Chartered Accountants of India (ICAI), has decided to conform with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB), London, for all accounting periods commencing on or after April 1, 2011.

As in countries like Australia, New Zealand and members of the European Union (EU), the IFRSs will also be adopted in India for listed/public interest entities such as banks, insurance companies and others.

With this decision India joins the 102 countries that presently employ IFRSs in their preparation of financial statements. By 2011, this number is expected to reach 150. Of the 32 accounting standards issued by ICAI, 25 are already based on International standards. Hence, the transition to IFRSs should not pose a problem for Indian accountants.

ICAI will further consult with the National Advisory Committee on Accounting Standards established by the Ministry of Corporate Affairs, Government of India, and various regulators such as the Reserve Bank of India, the Insurance Regulatory and Development Authority and the Securities and Exchange Board of India, to facilitate the transition.