Accounting Standards – Concepts, Objectives, Benefits – CA Foundation, CPT notes, PDF
This article is about the Accounting Standards – Concepts, Objectives, Benefits for CA foundation CPT students. we also provide pdf file at the end.
♦ An Accounting Standard is a selected set of accounting policies or broad guidelines regarding the principle and methods to be chosen out of several alternatives on a particular issue.
♦ Standards conform to applicable laws, customs, usages and business environments.
♦ Hence, there is no universally accepted set of standards. Even standing on the same issue allows more than one accounting policy to be followed.
♦ Therefore, to reduce the alternatives to acceptable few and to recommend the principles and procedures to be followed and disclosures to be made in the financial statements, the Institute of Chartered Accountants of India (ICAI) issues Accounting Standards each one of which covers a particular point or area of accounting.
6.1 MEANING OF ACCOUNTING STANDARD (AS):
♦ It is an authoritative statement issued by ICAI (The Institute of Chartered Accountants of India) a premier body of Accounting in our country.
♦ It deals with the accounting issues related to a particular area which that standard wants to address.
6.2 COVERAGE OF AS:
♦ AS generally covers one or more of the following three things related to the subject-matter of AS:
- Recognition: How and when to account/recognize the relevant item. It can provide more them one alternative also. Whether to treat an item as an asset or as an expense.
- Measurement: How to measure the particular item, what to include, what not to include in the valuation.
- Disclosure: The information to be disclosed in the annual financial statement regarding that area.
6.3 NEED OF AS:
♦ Accounts give information to various groups.
♦ The financial statement can serve the interest of different interest groups only if there is uniformity and full disclosure of relevant information.
♦ There are various alternatives regarding accounting treatment and valuation norms which may be used by an entity.
♦ Hence AS tries to reduce this alternative by allowing only those alternatives which fulfils the basic qualitative characteristics of true and fair financial statements and lays down the minimum information to be disclosed and manner of disclosure.
6.4 IF AS IS NOT THERE ON A PARTICULAR ACCOUNTING ISSUE:
♦ ICAI has issued AS only on some important areas.
♦ For any other issues, the basic accounting concept and principles should be applied to decide the accounting treatment (refer to earlier Chapters).
6.5 ASB AND ITS FUNCTIONS:
6.5.1 Formation of ASB :
♦ 1 he Institute of Chartered Accountants of India, recognizing the need to harmonize the diverse accounting policies and practices at present In use in India, constituted an Accounting Standards Board (ASB) on 21st April. 1977.
6.5.2 Functions of ASB :
♦ The main function of ASB is to formulate accounting standards so that such standards may be established by the Council of the Institute in India.
♦ While formulating the accounting standards, ASB will take into consideration the applicable law, customs, usages and business environment.
♦ ASB will 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.
♦ ASB will clarify the phrases commonly used in such financial statements and suggest improvements in the terminology wherever necessary.
♦ ASB will examine the various current alternative practices in vogue and identify such alternatives which should be preferred.
6.5.3 Brief Procedure for Issuing AS :
♦ ASB shall determine the broad areas in which Accounting Standards need to be formulated and the priority in regard to the selection thereof.
♦ In the preparation of Accounting Standards, ASB will be assisted by Study Groups, & provision will be made for wide participation by the members of the Institute and others.
♦ ASB will also hold a dialogue with the representatives of the Government, Public sector undertakings, industry and other organizations for ascertaining their views.
♦ On the basis of the work of the Study Groups and the dialogue with the organizations referred to above, 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 taking into consideration the comments received, the draft of the proposed Standard will be finalized by ASB and submitted to the Council of the Institute.
♦ The Council of the Institute will consider the final draft of the proposed Standard, and if found necessary modify the same in consultation with ASB. The Accounting Standard on the relevant subject will then be issued under the authority of the Council.
6.6 SCOPE OF AS:
♦ Responsibility for the preparation of financial statements and for adequate disclosure is that of the management of the enterprise.
♦ The Auditor’s responsibility is to form his opinion and report on such financial statements.
♦ Ef forts will be made to issue Accounting Standards which are in conformity with the provisions of the applicable laws, customs, usages and business environment of our country.
♦ However, if due to subsequent amendments in the law, a particular Accounting Standard is found to be not in conformity with such law, the provision of the said law will prevail and the financial statements should be prepared in conformity with such law.
♦ The Accounting Standards are intended to apply only to items which are material.
♦ The date from which a particular Standard will come into effect, as well as the class of enterprises to which it will apply, will also be specified by the Institute.
6.7 DUTY OF STATUTORY AUDITOR FOR COMPLIANCES WITH AS:
♦ While discharging their attest functions, it will be the duty of the members of the Institute to ensure that the Accounting Standards are implemented in the presentation of financial statements covered by their audit reports.
♦ In the event of any deviation from the Standards, it will also be their duty to make adequate disclosures in their reports so that the users of such statements may be aware of such deviations.
6.8 MANDATORYNESS OF AS TO AUDITOR AND TO MANAGEMENT:
♦ When the institute declares an AS as mandatory w.e.f. from a particular date then it applies to all the accounting periods commencing on or after that date.
♦ These AS are in true sense mandatory to the members of ICAI who are acting as Statutory Auditors and not to the management of that organization.
♦ ICAI as such cannot make these standards mandatory to the management unless the law governing them requires to follow it.
♦ However, the choice of accounting policies as suggested in the Accounting Standards is always preferred as these contain the judicious opinion of the professional accountancy body of the country & also it is mandatory for the statutory auditors to report deviations from the accounting policies suggested in the mandatory Accounting Standard.
6.9 RECOGNITION OF LAW TO AS:
♦ As per section 211(3C) of the Companies Act, 1956 Central Govt. has formulated the Companies (Accounting Standards) Rules, 2006. It has notified AS-1 to AS-29 applicable to the accounting period commencing on or after 7.12.2006.
♦ The Income-tax Act vide section 145 specifies that assessees should comply with such accounting standards as may be notified by the Government. So far only two accounting standards NAS-1 & NAS-2 which are broadly based on AS-1 & AS-5 have been notified to be followed by assessee’s following mercantile system of accounting.
6.10 COMPOSITION OF ACCOUNTING STANDARDS AND CONSEQUENTLY READING OF IT:
♦ The accounting standard generally comprises of introduction and the background of the areas in which standard is issued.
♦ It also contains meaning and definition of various terms used in the standard and the various accounting practices related to the subject-matter of standard which is presently being followed by different organizations & its pros & cons.
♦ Then finally it contains the Accounting Standards detailing the policies to be followed and these standards are to be read in the context of the above background and preface.
♦ Thus standard has explanatory clauses and clauses containing standard. But all the clauses have equal importance.
6.11 TYPE OF ORGANIZATIONS TO WHOM AS IS APPLICABLE:
♦ AS is applicable to:
- Sole Proprietary Concerns/Individuals.
- Partnership Firms
- Hindu Undivided Families
- Association of Persons
- Co-operative Societies
It is not applicable to purely charitable organizations if it does not have any commercial, industrial and business activity.
6.12 OBJECTIVES AND ADVANTAGES OF AS:
♦ An Accounting Standard is a selected set of accounting policies or broad guidelines regarding the principles and methods chosen out of several alternatives.
♦ The main objective of Accounting Standards is to establish standards that have to be complied with to ensure that financial statements are prepared in accordance with generally accepted accounting principles.
♦ Accounting standard seeks to suggest rules and criteria of recognition, measurement & disclosure.
♦ These standards harmonize the diverse accounting policies anti practices at present in use in India.
♦ The main advantage of setting accounting standards is that the adoption and application of Accounting Standards ensure uniformity, comparability and qualitative improvement in the preparation and presentation of financial statements.
6.13 INTRODUCTION OF INDIAN ACCOUNTING STANDARDS (IND ASs)
India is one of the emerging economies in the world. For economic development, foreign direct investment (FDI) is needed, to facilitate the investment climate. There is a need to integrate its financial reporting with the rest of the economies of the globe so that investors from outside will appreciate the financial results and financial positions of the companies. This will provide uniformity and comparability of financial statements with the financial statements prepared in other countries. The Idea of global harmonization of Accounting Standards stems from a lack of comparability of financial statements across the world. The need to communicate across the borders has increased with the increase in global trade and globalization of capital markets.
That is first? – IFRSs are International Financial Reporting Standards, which are issued by the International Accounting Standards Board (IASB) based in London. To date there are 25 International Accounting Standards (IASs) from IAS 1 to IAS 41 and 17 International Financial Reporting Standards (IFRSs) from IFRS 1 to IFRS 17, both are referred to as IFRS. Previously these Standards were known as IAS later on the name was changed to IFRS.
What are Ind ASs? – Indian Accounting Standards (Ind ASs) are a set of IFRS converged accounting standards. These Ind ASs are converged with corresponding IFRS as India has taken the approach of convergence rather than adoption making some significant changes known as carve-outs while converging.
The Ministry of Corporate Affairs (MCA) has notified the following 41 Ind ASs as per the Companies Act, 2013:
6.14 FLOWCHART ON ESTABLISHMENT OF AN AS :
|The procedure of issuing an AS|
|ASB will formulate the issue or area on which AS is required|
|ASB will set up a study group comprising of members of the institute and others|
|The study group will prepare a preliminary draft of proposed AS|
|ASB will consider it and if necessary revise or refer back to study group for revision|
|The draft now will be circulated to Central Council Members of ICA1 and the specified bodies whose representatives are appointed in ASB|
|ASB will hold mooting with representatives of specified bodies to consider their views on the draft of proposed AS|
|ASB will finalize the exposure draft of the proposed AS and will be issued for the comments by the members of the Institute and the public. It will be specifically sent to the specified bodies, stock exchange, etc.|
|ASB will finalize the draft of the proposed AS after considering the comments received and submit it to the council of ICAI.|
|Council of ICAI will consider the final draft and if necessary modify in consultationwith ASB|
|Then the AS on the relevant subject will be issued by ICAI|
6.15 STATUS OF THE ACCOUNTING STANDARD (AS) :
Issued by the Institute of Chartered Accountants of India as on 1st January 2014
|Sr. No.||Number of the Accounting Standard||Title of the Accounting Standard||Date from which mandatory (accounting periods commencing on or after)||Enterprises to which applicable|
|1.||AS-1||Disclosure of Accounting Policies||1.4.1991: for Companies,|
|1.4.1993 for other enterprises||All|
|2.||AS-2 (Revised)||Valuation of Inventories||1A1999||All|
|3.||AS-3 (Revised)||Cash Flow Statements||1.4.2001||See note 2|
|4.||AS-4 (Revised)||Contingencies and Events Occur-||1.4.1995||All|
|ring after the Balance Sheet Date|
|5.||AS-5 (Revised)||Net Profit or Loss for the Period,||1.4.1996||All|
|Prior Period Items and Changes in Accounting Policies|
|6.||AS-6 (Revised)||Depreciation Accounting||1.4.1995||All|
|7-||AS-7 (Revised)||Accounting for Construction||Contracts entered on or after|
|Contracts (Rev 2002)||1.4.2003||All|
|8.||AS-8||Accounting for Research and||Now stands withdrawn (AS-26|
|Development||covers such expenditure now)|
|9.||AS-9||Revenue Recognition||As in the case of AS-1 above||All|
|10.||AS-10||Accounting for Fixed Assets||As in the case of AS-1 above||All|
|11.||AS-11 (Revised)||Accounting for the Effects of||1.4.2004||All|
|Changes in Foreign Exchange Rates (Revised 2003)|
|12.||AS-12||Accounting for Government Grants||1.4.1994||All|
|13.||AS-13||Accounting for Investment||1.4.1995||All|
|14.||AS-14||Accounting for Amalgamations||1.4.1995||All|
|15.||AS-15 (Revised)||Accounting for Employee||1.4.2006||All|
|17.||AS-17||Segment Reporting||1.4.2001||See note 2|
|18.||AS-18||Related Party Disclosures||1.4.2001||See note 2|
|19.||AS-19||Leases||In respect of all assets leased||All|
|during accounting periods commencing on or after 1.4.2001|
|20.||AS-20||Earnings Per Share||1.4.2001||See note 3|
|21.||AS-21||Consolidated Financial Statements||1.4.2001 (See also note 4)||See note 4|
|22.||AS-22||Accounting for Taxes on Income||1.4.2001 (See note 5)||See note 5|
|23.||AS-23||Accounting for Investment in||1.4.2002||See note 4|
|Associates in Consolidated Financial Statements|
|25.||AS-25||Interim Financial reporting||1.4.2002||See note 4|
|26.||AS-26||Intangible assets||1A2003/1.4.2004||See note 2/All|
|27.||AS-27||Financial Reporting of interest||1.4.2002||All|
|in a joint venture|
|28.||AS-28||Impairment of Asset||1.4.2004/1.4.2005||See note 2/All|
|29.||AS-29||Provisions, Contingent liabilities||1.4.2004||All|
|and contingent assets.|
Other details about applicability given in the notes referred above are not given here as the same is not relevant at the Foundation level.
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