Accounting Standards Essentials

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Introduction to Accounting Standards Accounting Standards (ASs) are written policy documents issued by the Government to ensure uniformity, comparability, and transparency in financial reporting. Issued by the Government with support from regulatory bodies (e.g., Ministry of Corporate Affairs - MCA). In consultation with the National Financial Reporting Authority (NFRA) for corporates. Aspects Covered by Accounting Standards: Recognition of events and transactions. Measurement of these transactions and events. Presentation of these transactions and events. Disclosure requirements. Benefits of Accounting Standards: Standardisation of alternative accounting treatments: Reduces variations in accounting treatments. Requirements for additional disclosures: Ensures transparent reporting of accounting policies. Comparability of financial statements: Improves both intra-enterprise (over years for same company) and inter-enterprise (between different companies) comparisons. Reduces creative accounting: Curbs manipulation of financial statements. Standards Setting Process (ICAI) The Institute of Chartered Accountants of India (ICAI) established the Accounting Standards Board (ASB) in 1977 to formulate accounting standards. Step I: Identification of area for AS formulation. Step II: Constitution of study groups to prepare preliminary drafts (objective, scope, definitions, recognition, measurement, presentation, disclosure). Step III: Preparation of draft and its circulation to ICAI Council members and specified external bodies (MCA, SEBI, C&AG, CBDT, SCOPE) for comments. Step IV: Ascertainment of views from different bodies. Step V: Finalisation of exposure draft (E.D.) and issuance for public comments. Step VI: Consideration of comments received on E.D. and finalisation by ASB for submission to ICAI Council. Step VII: Modification of the draft by ICAI Council in consultation with ASB, if necessary. Step VIII: Issue of AS: ICAI issues for non-corporate entities; MCA issues for corporate entities in consultation with NFRA. Number of Accounting Standards (India) Initially, ICAI issued 29 ASs. AS 6 ('Depreciation Accounting') withdrawn due to revision of AS 10. AS 8 ('Accounting for Research and Development') withdrawn due to issuance of AS 26. Effectively, there are 27 Accounting Standards currently. List of Accounting Standards (AS) and their Applicability Dates AS No. AS Title Date of Applicability 1 Disclosure of Accounting Policies 01/04/1993 2 Valuation of Inventories (Revised) 01/04/1999 3 Cash Flow Statement 01/04/2001 4 Contingencies and Events Occurring after the Balance Sheet Date (Revised) 01/04/1998 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies 01/04/1996 7 Construction Contracts 01/04/2002 9 Revenue Recognition 01/04/1993 10 Property, Plant and Equipment (Revised) 01/04/2016 11 The Effects of Changes in Foreign Exchange Rates (Revised) 01/04/2004 12 Accounting for Government Grants 01/04/1994 13 Accounting for Investments (Revised) 01/04/1995 14 Accounting for Amalgamations (Revised) 01/04/1995 15 Employee Benefits 01/04/2006 16 Borrowing Costs 01/04/2000 17 Segment Reporting 01/04/2001 18 Related Party Disclosures 01/04/2001 19 Leases 01/04/2001 20 Earnings Per Share 01/04/2001 21 Consolidated Financial Statements (Revised) 01/04/2001 22 Accounting for Taxes on Income 01/04/2006 23 Accounting for Investments in Associates in Consolidated Financial Statements 01/04/2002 24 Discontinuing Operations 01/04/2004 25 Interim Financial Reporting 01/04/2002 26 Intangible Assets 01/04/2003 27 Financial Reporting of Interests in Joint Ventures 01/04/2002 28 Impairment of Assets 01/04/2008 29 Provisions, Contingent Liabilities and Contingent Assets (Revised) 01/04/2004 Need for Convergence Towards Global Standards (IFRS) The global economic scenario necessitates high-quality, globally accepted accounting standards. Raising funds from international markets: Requires common accounting language for cross-border transactions. Comparability of Financial Statements: Facilitates comparison for international analysts and investors. Uniformity, Comparability, Transparency: Reduces confusion, error, and fraud by providing a single set of global standards. Global Investment: Improves investor confidence and facilitates accounting for companies with global operations. International Accounting Standards Board (IASB) Established in June 1973 as the International Accounting Standards Committee (IASC). Responsible for developing International Accounting Standards (IAS). Restructured in 1997-1999, becoming IASB on April 1, 2001. IASB publishes International Financial Reporting Standards (IFRS). IFRS comprises: IFRS issued by IASB. IAS issued by IASC. Interpretations issued by the Standard Interpretations Committee (SIC). Interpretations issued by the IFRS Interpretations Committee of the IASB (called IFRIC). IFRS are "principles-based" standards, establishing broad rules. Becoming IFRS Compliant Countries can become IFRS compliant via two techniques: Technique I - Adoption: Country sets a timetable for entities to use IFRS as issued by IASB. Technique II - Convergence: Country develops high-quality, compatible accounting standards, aligning with IFRS (fully or partially). Indian Accounting Standards (Ind AS) are similar to IFRS with "carve-outs" for Indian environment. Carve-outs/ins in Ind AS India decided to converge with IFRS, not adopt, leading to specific differences in Ind AS: Terminology differences: To align with Indian law (e.g., 'statement of profit and loss' instead of 'statement of comprehensive income'). Removal of options in accounting principles and practices: To maintain consistency and comparability (not carve-outs). Difference in economic environment: Deviations from IFRS accounting principles due to Indian economic conditions are called 'Carve-outs' . Additional guidance: Guidance given in Ind AS over and above IFRS is termed 'Carve in' . Formulation of Ind AS: Departures can result in Carve-outs (deviation from IFRS accounting principles) or not result in carve-outs (removal of options in practices). Convergence to IFRS in India ICAI, NFRA, SEBI, RBI aim to comply with IFRS to formulate globally accepted financial statements. ICAI integrated IFRS with Indian laws, customs, practices, and business environment. Need for adoption due to overseas acquisitions by Indian companies. ICAI constituted a Task Force to examine issues for full convergence. Two separate sets of accounting standards: Ind AS converged with IFRS (eliminating differences). Existing notified AS. Indian Accounting Standards (Ind AS) IFRS converged standards issued by the Central Government of India under ASB (ICAI) supervision and NFRA consultation. NFRA recommends these standards to MCA, which spells out applicable standards for companies. Ind AS are named and numbered similar to IAS/IFRS, typically adding 100 to the IFRS number (e.g., IFRS 1 becomes Ind AS 101). Roadmap for Implementation of Ind AS: For Companies other than Banks, NBFCs and Insurance Companies Phase I (1st April 2015 or thereafter - Voluntary Basis): Any company (other than Banks, NBFCs, and Insurance companies) and its holding, subsidiary, JV, or Associate Company. 1st April 2016 (Mandatory Basis): Companies listed/in process of listing on Stock Exchanges in India or Outside India having net worth of INR 500 crore or more. Unlisted Companies having net worth of INR 500 crore or more. Parent, Subsidiary, Associate and JV of above. Phase II (1st April 2017 - Mandatory Basis): All companies listed/in process of listing not covered in Phase I (other than companies listed on SME Exchanges). Unlisted companies having net worth of INR 250 crore or more but less than INR 500 crore. Parent, Subsidiary, Associate and JV of above. Special Points to Consider: Companies listed on SME exchange are not required to apply Ind AS. Once Ind AS are applicable, an entity must follow them for all subsequent financial statements. Companies not covered by the roadmap continue to apply ASs notified in 2006. For Non-Banking Financial Companies (NBFCs) Phase I (From 1st April, 2018): NBFCs (listed or unlisted) with net worth INR 500 crores or more. Holding, Subsidiary, JV, and Associate companies of above NBFCs (if not already covered by corporate roadmap). Phase II (From 1st April, 2019): NBFCs with listed equity/debt securities or in process of listing, with net worth less than INR 500 crores. Unlisted NBFCs with net worth INR 250 crores or more but less than INR 500 crores. Holding, Subsidiary, JV, and Associate companies of above companies (if not already covered by corporate roadmap). Applicable to both Consolidated and Individual Financial Statements. NBFCs with net worth below INR 250 crores continue to apply ASs. Voluntary adoption of Ind AS is not allowed (only when required by roadmap). For Scheduled Commercial Banks (excluding RRBs) Initially from 1st April 2018, deferred to 1st April 2019, then deferred till further notice by RBI. Urban Cooperative banks (UCBs) and Regional Rural banks (RRBs) are not required to apply Ind AS. For Insurers/Insurance companies MCA outlined roadmap from 1st April 2018. IRDAI deferred implementation for two years (to 1st April 2020), then deferred till further notice. List of Ind AS (Selected Examples) Ind AS IAS/IFRS Title of Ind AS/IFRS AS/GN AS/GN Title 101 IFRS 1 First Time Adoption of Indian Accounting Standards - - 102 IFRS 2 Share Based Payment GN Guidance Note on Accounting for Share-based Payments 103 IFRS 3 Business Combinations AS 14 Accounting for Amalgamations 108 IFRS 8 Operating Segments AS 17 Segment Reporting 110 IFRS 10 Consolidated Financial Statements AS 21 Consolidated Financial Statements 116 IFRS 16 Leases AS 19 Leases 1 IAS 1 Presentation of Financial Statements AS 1 Disclosure of Accounting Policies 2 IAS 2 Inventories AS 2 Valuation of Inventories 10 IAS 10 Events after the Reporting Period AS 4 Contingencies and Events Occurring After the Balance Sheet date 12 IAS 12 Income Taxes AS 22 Accounting for Taxes on Income 26 IAS 26 Intangible Assets AS 26 Intangible Assets 37 IAS 37 Provisions, Contingent Liabilities and Contingent Assets AS 29 Provisions, Contingent Liabilities and Contingent Assets