Applicability of Accounting Standards

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Status of Accounting Standards (AS) Developed by the Accounting Standards Board (ASB) of ICAI. Issued under the authority of ICAI's Council, approved by MCA for Corporate entities. Cannot override laws and local regulations. Mandatory from dates notified by MCA, generally applicable to all enterprises with exceptions. Mandatory status depends on whether the governing statute requires compliance. For companies, compliance is required per Section 129(1) and 133 of the Companies Act, 2013. Auditors must report compliance per Section 143(3)(e) of the Companies Act, 2013. Assessing AS applicability: Does it apply to the enterprise concerned? Does it apply to the financial statement concerned? Does it apply to the financial item concerned? Enterprises to which AS apply: Any enterprise (corporate, co-operative, or other forms) engaged in commercial, industrial, or business activities. Includes non-profit oriented entities and those established for charitable/religious purposes. Does NOT apply to enterprises solely carrying on non-commercial, non-industrial, or non-business activities (e.g., collecting donations for flood relief). If even a small proportion of activities are commercial/industrial/business, AS apply to all activities. Implication of Mandatory Status: For enterprises not statutorily required to comply (e.g., partnership firm): ICAI members performing attest functions must examine compliance. Deviations require adequate disclosures in reports. Management is responsible for financial statement preparation and disclosure. Auditor's responsibility is to form an opinion and report. For companies (Companies Act, 2013): Financial statements must comply with AS notified under Section 133. Auditor reports on AS compliance per Section 143(3)(e). Non-compliance requires disclosure in financial statements: deviation, reasons, and financial effects (Section 129(5)). Financial statements are not considered non-compliant for true and fair view if they don't disclose matters not required by specific acts (e.g., Insurance Act, Banking Regulation Act, Electricity Act, other laws). Financial items to which AS apply: Apply only to material items. Materiality: An item is material if its omission or misstatement is likely to affect economic decisions. It's about information content, not just size (e.g., a ₹50,000 penalty might be material even for a large company). Materiality is judged on a case-to-case basis. Material items should be shown separately. Accounting Standards and Income Tax Act, 1961: AS aim to reduce diversity in accounting principles and improve comparability/transparency. Deductions/exemptions in taxable income are matters of fiscal policy. An expense required by AS for profit/loss statement does not automatically mean it's deductible for income tax (e.g., depreciation on finance lease assets). Revenue recognition in financial statements cannot be avoided just because it's exempt under Section 10 of the Income Tax Act, 1961. Income Computation and Disclosure Standards (ICDS): Section 145(2) of the Income Tax Act, 1961, empowers Central Government to notify ICDS. Ten ICDSs notified for all assessees (except individuals/HUFs not required to get accounts audited) following mercantile system, for computing income under "Profit and gains of business or profession" or "Income from other sources" from AY 2017-18. Notified ICDSs: ICDS I: Accounting Policies ICDS II: Valuation of Inventories ICDS III: Construction Contracts ICDS IV: Revenue Recognition ICDS V: Tangible Fixed Assets ICDS VI: The Effects of Changes in Foreign Exchange Rates ICDS VII: Government Grants ICDS VIII: Securities ICDS IX: Borrowing Costs ICDS X: Provisions, Contingent Liabilities and Contingent Assets Applicability of Accounting Standards to Non-Company Entities ICAI issued 'Criteria for Classification of Entities and Applicability of Accounting Standards'. Non-company entities classified into four levels: Level I, Level II, Level III, and Level IV. Level IV, III, II entities are referred to as Micro, Small, and Medium Entities (MSMEs). AS apply to non-company entities for accounting periods commencing on or after April 1, 2020. Levels of Non-Company Entities: Level I Entities: Large entities, must comply with all AS in full. Level II Entities: Medium entities, certain exemptions/relaxations apply. Level III Entities: Small entities, certain exemptions/relaxations apply. Level IV Entities: Micro entities, certain exemptions/relaxations apply. Criteria for Classification of Non-company Entities (Annexure 1): Level I Entities (Any one or more of the following): Securities listed or in process of listing (India or outside). Banks (including co-operative banks), financial institutions, or insurance businesses. Turnover (excluding other income) > ₹250 crore in preceding year. Borrowings (including public deposits) > ₹50 crore at any time in preceding year. Holding and subsidiary entities of any Level I entity. Level II Entities (Not Level I, but any one or more of the following): Turnover (excluding other income) > ₹50 crore but $\le$ ₹250 crore in preceding year. Borrowings (including public deposits) > ₹10 crore but $\le$ ₹50 crore at any time in preceding year. Holding and subsidiary entities of any Level II entity. Level III Entities (Not Level I or II, but any one or more of the following): Turnover (excluding other income) > ₹10 crore but $\le$ ₹50 crore in preceding year. Borrowings (including public deposits) > ₹2 crore but $\le$ ₹10 crore at any time in preceding year. Holding and subsidiary entities of any Level III entity. Level IV Entities: Not covered under Level I, Level II, or Level III. Additional Requirements for Non-Company Entities: An MSME availing exemptions/relaxations must disclose: Fact that it is an MSME. Level of MSME. Compliance with applicable AS for its level. If an entity (Level II, III, or IV) no longer qualifies for a previous exemption/relaxation, relevant standards apply from the current period. Previous period figures need not be revised. Disclosure of prior-period status and availed exemptions is required. If an entity moves from Level I to a lower level, it won't qualify for lower-level exemptions until it ceases to be Level I for two consecutive years. Similar rule applies for Level II/III moving to a lower level. If an entity opts not to avail all exemptions/relaxations for its level, it must disclose the specific AS for which it availed exemption/relaxation. If an entity opts not to avail any exemptions/relaxations, it must comply with all relevant AS requirements. Partial exemption/relaxation and disclosure should not mislead any person. Specific exemptions/relaxations for AS 15 (Employee Benefits) apply to Level II and III entities based on employee count ($\ge 50$ or $ Applicability of Accounting Standards to Non-company Entities (Annexure 2): The following table summarizes the applicability of Accounting Standards (AS) to different levels of Non-company entities, including specific exemptions or relaxations: AS Level II Entities Level III Entities Level IV Entities AS 1 Applicable Applicable Applicable AS 2 Applicable Applicable Applicable AS 3 Not Applicable Not Applicable Not Applicable AS 4 Applicable Applicable Applicable AS 5 Applicable Applicable Applicable AS 7 Applicable Applicable Applicable AS 9 Applicable Applicable Applicable AS 10 Applicable Applicable with disclosures exemption Applicable with disclosures exemption AS 11 Applicable Applicable with disclosures exemption Applicable with disclosures exemption AS 12 Applicable Applicable Applicable AS 13 Applicable Applicable Applicable with disclosures exemption AS 14 Applicable Applicable Not Applicable (Refer note 2(C)) AS 15 Applicable with exemptions Applicable with exemptions Applicable with exemptions AS 16 Applicable Applicable Applicable AS 17 Not Applicable Not Applicable Not Applicable AS 18 Applicable Not Applicable Not Applicable AS 19 Applicable with disclosures exemption Applicable with disclosures exemption Applicable with disclosures exemption AS 20 Not Applicable Not Applicable Not Applicable AS 21 Not Applicable (Refer note 2(D)) Not Applicable (Refer note 2(D)) Not Applicable (Refer note 2(D)) AS 22 Applicable Applicable Applicable only for current tax related provisions (Refer note 2(B)(vi)) AS 23 Not Applicable (Refer note 2(D)) Not Applicable (Refer note 2(D)) Not Applicable (Refer note 2(D)) AS 24 Applicable Not Applicable Not Applicable AS 25 Not Applicable (Refer note 2(D)) Not Applicable (Refer note 2(D)) Not Applicable (Refer note 2(D)) AS 26 Applicable Applicable Applicable with disclosures exemption AS 27 Not Applicable (Refer notes 2(C) and 2(D)) Not Applicable (Refer notes 2(C) and 2(D)) Not Applicable (Refer notes 2(C) and 2(D)) AS 28 Applicable with disclosures exemption Applicable with disclosures exemption Not Applicable AS 29 Applicable with disclosures exemption Applicable with disclosures exemption Applicable with disclosures exemption Relaxations/Exemptions for Level II, III, IV Non-company Entities: AS 10, Property, Plant and Equipments: Paragraph 87 (encouraged disclosures) not applicable to Level III and Level IV. AS 11, The Effects of Changes in Foreign Exchange Rates: Paragraph 44 (encouraged disclosures) not applicable to Level III and Level IV. AS 13, Accounting for Investments: Paragraph 35(f) (disclosures) not applicable to Level IV. AS 15, Employee Benefits (revised 2005): Level II and III entities (avg. employees $\ge 50$) are exempt from paragraphs 11-16 (short-term accumulating compensated absences, non-vesting), 46 and 139 (discounting amounts >12 months), 50-116 and 117-123 (defined benefit plans - they may use other rational methods for accrued liability, actuarial assumptions must be disclosed), and 129-131 (other long-term employee benefits - they may use other rational methods for accrued liability). Level II and III entities (avg. employees $ AS 19, Leases: Specific paragraphs relating to disclosures are not applicable to Level II, Level III, and Level IV Non-company entities. AS 22, Accounting for Taxes on Income: Level IV entities apply only for Current tax (recognition, measurement, presentation, disclosure as per specific paragraphs). Transitional requirements: On first classification as Level IV, accumulated deferred tax asset/liability adjusted against opening revenue reserves. AS 26, Intangible Assets: Specific paragraphs 90(d)(iii), 90(d)(iv), and 98 (disclosures) not applicable to Level IV. AS 28, Impairment of Assets: Level II and III entities can measure 'value in use' by reasonable estimate instead of present value technique. If so, related provisions (e.g., discount rate) and paragraph 121(g) disclosure are not applicable. Specific paragraphs 121(c)(ii), 121(d)(i), 121(d)(ii), and 123 (disclosures) not applicable to Level III. AS 29, Provisions, Contingent Liabilities and Contingent Assets: Paragraphs 66 and 67 (disclosures) not applicable to Level II, Level III, and Level IV. AS 14, AS 27: Generally not applicable to Level IV entities unless such transactions exist, then relevant standard applies. AS 21, AS 23, AS 25, AS 27 (related to consolidated financial statements/interim reporting): Do not require non-company entities to present consolidated financial statements or interim reports. Applicable only if required or elected. Applicability of Accounting Standards to Companies (Companies Act, 2013) Small and Medium Sized Company (SMC) Definition (Companies (AS) Rules, 2021): A company that meets all of the following conditions at the end of the relevant accounting period: Equity or debt securities are NOT listed or in process of listing (India or outside). Is NOT a bank, financial institution, or insurance company. Turnover (excluding other income) does NOT exceed ₹250 crore in the immediately preceding accounting year. Borrowings (including public deposits) do NOT exceed ₹50 crore at any time in the immediately preceding accounting year. Is NOT a holding or subsidiary company of a company which is NOT a small and medium-sized company. Non-SMCs: Companies not falling within the definition of SMC. General Instructions for SMCs: Disclosure of SMC status: An SMC not disclosing certain information due to exemptions/relaxations must disclose in notes to financial statements: That it is an SMC as defined by Companies (AS) Rules, 2021. That it has complied with AS applicable to an SMC. Change in SMC status: If an SMC ceases to qualify for a previous exemption/relaxation, relevant standards apply from the current period. Previous period figures need not be revised. Disclosure of prior SMC status and availed exemptions is required. Partial availing of exemptions: If an SMC opts not to avail all exemptions/relaxations, it must disclose the standard(s) for which it availed exemption/relaxation. Voluntary disclosure: If an SMC desires to disclose information not required due to exemptions, it must do so in compliance with the relevant AS. Partial exemption/relaxation: SMCs may opt for certain exemptions/relaxations, provided such partial exemption/relaxation and disclosure do not mislead. Note on Change in SMC Status: An existing company, previously not an SMC, which subsequently becomes an SMC, will not qualify for exemptions/relaxations until it remains an SMC for two consecutive accounting periods. Applicability of Accounting Standards to Companies (other than Ind AS): AS applicable in their entirety to companies: AS 1: Disclosure of Accounting Policies AS 2: Valuation of Inventories (revised 2016) AS 3: Cash Flow Statements AS 4: Contingencies and Events Occurring After the Balance Sheet Date (revised 2016) AS 5: Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies AS 7: Construction Contracts (revised 2002) AS 9: Revenue Recognition AS 10: Property, Plant and Equipment AS 11: The Effects of Changes in Foreign Exchange Rates (revised 2003) AS 12: Accounting for Government Grants AS 13: Accounting for Investments (revised 2016) AS 14: Accounting for Amalgamations (revised 2016) AS 16: Borrowing Costs AS 18: Related Party Disclosures AS 21: Consolidated Financial Statements (revised 2016) AS 22: Accounting for Taxes on Income AS 23: Accounting for Investments in Associates in Consolidated Financial Statements AS 24: Discontinuing Operations AS 26: Intangible Assets AS 27: Financial Reporting of Interest in Joint Ventures Exemptions or Relaxations for Small and Medium Sized Companies (SMCs): AS not applicable to SMCs in their entirety: AS 17: Segment Reporting AS with relaxations from certain requirements for SMCs: AS 15, Employee Benefits (revised 2005): SMCs are exempt from specific paragraphs related to: Recognition and measurement of short-term accumulating compensated absences (non-vesting). Discounting of amounts due more than 12 months after balance sheet date. Recognition and measurement principles for defined benefit plans (SMCs may use other rational methods for accrued liability, actuarial assumptions must be disclosed). Recognition and measurement principles for other long-term employee benefits (SMCs may use other rational methods for accrued liability). AS 19, Leases: Specific paragraphs relating to disclosures are not applicable to SMCs. AS 20, Earnings Per Share: Disclosure of diluted earnings per share (including and excluding extraordinary items) is exempted for SMCs. AS 28, Impairment of Assets: SMCs can measure 'value in use' by reasonable estimate instead of present value technique. If so, related provisions (e.g., discount rate) and paragraph 121(g) disclosure are not applicable. AS 29, Provisions, Contingent Liabilities and Contingent Assets (revised): Paragraphs 66 and 67 (disclosures) are not applicable to SMCs. AS 25, Interim Financial Reporting: Does not require a company to present interim financial reports. Applicable only if a company is required or elects to prepare and present an interim financial report. Recognition and measurement requirements apply to Non-SMCs for interim financial results if required by regulators.