- Introduction to Accounting Standards
- Indian Accounting Standards
- Accounting Standards and Auditors
- Procedure for Issuing Accounting Standards
- Compliance with Accounting Standards
- Scope of Accounting Standards
- Accounting Standards and their Applicability
Accounting practices differ from country to country because various factors such as, culture, economic development, level of inflation, legal systems. Countries that are exposed to rapid price changes are more receptive to departure from historical cost financial reporting, whereas countries that witness complexities in economic activities faster than other countries are quicker in responding by developing accounting standards to meet the challenges.
Quality accounting standards become necessary in a sound capital market system as they reduce uncertainty, enhance the confidence of the investors and increase overall efficiency of the business enterprise as well of the user of the financial statements and reports. Formerly, the usefulness of the financial statements was limited to the country’s vicinity but it now extends to other countries because of liberalization, privatization and globalization.
United States of America which has a volatile capital market has developed high quality accounting standards to reduce uncertainty and to boost the confidence level of the investors. Countries such as Japan and Germany have concern for creditors protection as most of the financing is done by commercial banks and not by individual shareholders. Hence, the principle of conservatism is given importance while setting the accounting standards as such countries intend to safeguard the interest of the society at large in the long run.
However, it is observed that an agrarian economy will have less pressure to develop an elaborate set of accounting standards. India has adopted liberalization policy from 1990-1991 onwards, which has paved the way for international business. This has necessitated India to develop quality accounting standards, so that it will have universal acceptability at par with International Accounting Standards.
The need to harmonize diverse accounting policies and practices was recognized by ICAI which resulted in the setting up of Accounting Standards Board (ASB) on April 21, 1977.
The main function of ASB is to formulate accounting standards taking into consideration the applicable laws, customs, usages and business environment so that such standards may be established by the council of ICAI. The accounting standards will be issued under the authority of the council.
In addition to formulating accounting standards, ASB has been entrusted with the responsibility of:
(i) Propagating the accounting standards;
(ii) Persuading the concerned parties to adopt them in the preparation and presentation of financial statements;
(iii) Issuing guidance notes on Accounting Standards;
(iv) Giving clarifications on issues arising therefrom; and
(v) Reviewing the accounting standards at periodical intervals.
The Accounting Standards have become mandatory from the respective date(s) mentioned in the Accounting Standard(s) format.
Institute of Chartered Accountants of India is one of the members of the International Accounting Standards Committee (IASC) and has agreed to support the objectives of IASC. The ASB in India will give due consideration to International Accounting Standards, issued by IASC and try to integrate them to the extent possible, in the light of the conditions and practices prevailing in India.
The mandatory status of the accounting standards implies that it is the duty of the auditors to examine whether the accounting standards are complied with, in the presentation of financial statements (profit and loss account, and balance sheet) covered by their audit. In the event of any deviation from the accounting standards, the auditors have the duty to make ‘adequate disclosures’ in their audit reports, so that the users of financial statements may be aware of such deviations.
For discharging the above functions, ASB has to keep in view the ‘purpose and limitations’ of published financial statements and the attest function of the auditors. ASB has to enumerate and describe the basic concepts to which accounting principles should be oriented and state the accounting principles to which the practices and procedures should conform. Further, ASB has to clarify the phrases commonly used in such financial statements in the terminology wherever necessary.
It also has to examine the current alternative practices in vogue and identify such alternatives which should be preferred. In fact, ICAI issues the accounting standards for use in the presentation of ‘General Purpose Financial Statements’, which include ‘Balance Sheet’, ‘Statement of Profit and Loss’, and other statements and explanatory notes for the use of shareholders, creditors, employees, other users and the public at large.
It is the responsibility of the ‘management of the enterprise’ to ensure compliance with and disclosure of accounting standards while preparing and presenting the financial statements. It is the auditor’s responsibility to form his/her opinion and report on such financial statements.
Before issuing accounting standards, ASB has to ensure that the following procedures are adhered to:
1. It has to determine the broad areas in which accounting standards need to be formulated and their priority.
2. Study groups represented by the members of the institute and others (included based on the specific subjects) has to assist ASB in the preparation of the accounting standards.
3. ASB will ascertain the views of the representatives of the Government, public sector undertakings, industries and other organizations while formulating the accounting standards.
4. After such consultations, the exposure draft of the proposed standard will be prepared and issued for comments by the members of the Institute and the public at large.
The proposed draft of the accounting standards should include the following basic points:
1. A statement of concepts and fundamental accounting principles relating to the standard.
2. Definition of the terms used in the standards.
3. The manner in which the accounting principles have been applied for formulating the standards.
4. The presentation and disclosure requirement in complying with the standards.
5. Class of enterprises to which the standards will apply.
6. The date from which the standards will be effective.
Accounting Standards Board has to finalize the proposed standards after taking into consideration the comments received and submit the finalized draft to the ICAI council. The proposed final draft will be ‘scrutinized’ by the council. If found necessary it will be ‘modified’ in consultation with ASB and then, the relevant accounting standards on the relevant subject will be issued under the ‘Authority of the Council’.
5. Compliance with Accounting Standards:
It is the responsibility of ICAI to give wide publicity among the users and educate the members (auditors) about the utility of the standards and the need for compliance. In the initial years, the accounting standards are recommendatory in character. Once awareness has been created, steps has to be taken to ensure compliance of the accounting standards (both with regards to implementation and disclosure).
Auditors have to ensure that the accounting standards are implemented in the presentation of financial statements covered by their ‘audit reports’. If there is any deviation, the auditors should disclose the same in their reports, so that the users of such statements are aware of such deviations.
It is observed that with the enforcement of implementation and disclosure of accounting standards, the quality of presentation of financial statements have largely improved. Further, the compliance has been very stringent particularly after globalization, so that the Indian accounting standards match with the international standards.
6. Scope of Accounting Standards:
While formulating accounting standards, ASB has to make efforts to take into consideration the provisions of the applicable laws, customs, usages and the business environment of our country. However, due to subsequent amendments in the law, if a particular accounting standard is found to be not in conformity with such law, then the provisions of the amended law will prevail and the financial statements should be prepared in conformity with such law.
The ICAI determines the extent of disclosure to be made in financial statements and the related auditor’s reports. Such disclosure are in the form of explanatory notes (which will be in the nature of clarification) and, therefore, need not be treated as adverse comments.
The accounting standards are intended to apply only to items which are material. No standards will have retrospective application, unless otherwise stated. However, the ICAI makes it clear as to the- (i) date from which a particular standard will come
into effect; (ii) the class of enterprises to which it will apply (mandatory status); and (iii) any limitations with regard to the applicability of the specific standard.
To achieve uniformity in the presentation of the financial statements, ICAI uses its best endeavour to persuade the Government, appropriate authorities, industrial and business community to adopt the accounting standards. ICAI’s endeavour is to formulate accounting standards in a simple way (not to complicate it) and to implement them effectively throughout the country. Sufficient scope is provided for the accounting standards to undergo revision in greater degree depending on the change in business environment.
7. Accounting Standards and their Applicability:
The applicability of Accounting Standards from April 1, 2004 is based on the categorization, which is defined under three levels – level I, level II and level III.
The categorizations are as follows:
Level I enterprises are those which fall at any time under the categories listed below:
1. Enterprises whose equity or debt securities are listed whether in India or outside India.
2. Enterprises which are in the process of listing their equity or debt securities as evidenced by the board of directors’ resolution in this regard.
3. Banks including co-operative banks.
4. Financial institutions.
5. Enterprises carrying on insurance business.
6. All commercial, industrial and business reporting enterprises, whose turnover (excluding other income) for the immediately preceding accounting period on the basis of audited financial statements exceeds Rs.50 crore.
7. All commercial, industrial and business reporting enterprises having borrowings, including public deposits, in excess of Rs.10 crore at any time during the accounting period.
8. Holding and subsidiary enterprises of any one of the above at any time during the accounting period.
Level II enterprises are those which do not fall under level I, but satisfy the following conditions:
1. All commercial, industrial and business reporting enterprises, whose turnover (excluding ‘other income’) for the immediately preceding accounting period on the basis of audited financial statements exceeds Rs.40 lakh but does not exceed Rs.50 crore.
2. All commercial, industrial and business reporting enterprises having borrowings, including public deposits, in excess of Rs.1 crore but not in excess of Rs.10 crore at any time during the accounting period.
Level III enterprises are those enterprises that do not fall under level I and level II. It should be noted that all the 32 Accounting Standards (issued as on April 1, 2008) are fully applicable to level I enterprises. But the applicability for level II and III categories (small and medium enterprises) is considered by dividing them into ‘three more’ categories for applicability.
These are as follows:
1. Those small and medium enterprises (SMEs) to which accounting standards are fully applicable.
2. Those SMEs to which accounting standards are applicable but relaxation is given with regard to certain disclosure requirements.
3. Those SMEs to which accounting standards are not applicable.
However, the applicability of accounting standards for companies is in accordance with the Companies (Accounting Standards) Rules 2006. This means accounting standards issued by ICAI have to be followed by the enterprises other than companies.
Co-Operative Societies and Applicability of Accounting Standards:
Cooperative societies can claim exemption from the application of accounting standards, ‘only when’ they are not carrying on with commercial, industrial or business activities. ICAI has made it clear that even if a very small proportion of the activities of the cooperative society are considered to be of commercial, industrial or business nature, then accounting standard will apply and will be subject to the attest function of the members of the Institute (auditors).
Charitable Institutions and Applicability of Accounting Standards:
Accounting standards do not apply to ‘purely charitable’ institutions. However, if charitable institutions are engaged in business or commercial activities, then the accounting standards will apply to their entire activities, whether charitable or non-charitable; and however insignificant the non-charitable activity may be.
Role of Auditors:
As accounting standards are issued for use in the presentation of general purpose financial statements issued to the public (other than purely non-commercial entity) their compliance is the responsibility of the auditors under their attest function. Hence, compliance with accounting standards is required to be examined by the auditors irrespective of the type of organization, say, corporate enterprises, sole proprietorship, partnership, societies registered under Societies Regulation Act, Trusts, Hindu Undivided Families and Association of Persons.