UNIT: 5

Meaning of Accounting Standards:

Accounting Standards (AS) are basic policy documents. Their main aim is to ensure
transparency, reliability, consistency, and comparability of the financial statements. They do so
by standardizing accounting policies and principles of a nation/economy. So the transactions of
all companies will be recorded in a similar manner if they follow these accounting standards.

In Other words, Accounting standards are the written statements consisting of rules and
guidelines, issued by the accounting institutions, for the preparation of uniform and consistent
financial statements and also for other disclosures affecting the different users of accounting
information. Accounting standards lay down the terms and conditions of accounting policies
and practices by way of codes, guidelines and adjustments for making the interpretation of the
items appearing in the financial statements easy and even their treatment in the books of
account.

These Accounting Standards (AS) are issued by an accounting body or a regulatory board or
sometimes by the government directly. In India, the Indian Accounting Standards are issued by
the Institute of Chartered Accountants of India (ICAI).

Accounting Standards mainly deal with four major issues of accounting, namely
• Recognition of financial events
• Measurement of financial transactions
• Presentation of financial statements in a fair manner
• Disclosure requirement of companies to ensure stakeholders are not misinformed

Objectives of Accounting Standards:

In earlier days, accounting was just used for recording business transactions of financial nature.
Its main emphasis now lies on providing accounting information in the process of decision
making.

(i) For bringing uniformity in accounting methods:

Accounting standards are required to bring uniformity in accounting methods by proposing
standard treatments to the accounting issue. For example, AS-6(Revised) states the methods
for depreciation accounting.

(ii) For improving the reliability of the financial statements:

Accounting is a language of business. There are many users of the information provided by
accountants who take various decisions relating to their field just on the basis of information
contained in financial statements. In this connection, it is necessary that the financial statements
should show true and fair view of the business concern. Accounting standards when used give
a sense of faith and reliability to various users.
They also help the potential users of the information contained in the financial statements by
disclosure norms which make it easy even for a layman to interpret the data. Accounting
standards provide a concrete theory base to the process of accounting. They provide uniformity
in accounting which makes the financial statements of different business units, for different
years comparable and again facilitate decision making.

(iii) Simplify the accounting information:

Accounting standards prevent the users from reaching any misleading conclusions and make
the financial data simpler for everyone. For example, AS-3 (Revised) clearly classifies the
flows of cash in terms of ‘operating activities’, ‘investing activities’ and ‘financing activities’.

(iv) Prevents frauds and manipulations:

Accounting standards prevent manipulation of data by the management and others. By
codifying the accounting methods, frauds and manipulations can be minimized.

(v) Helps auditors:

Accounting standards lay down the terms and conditions for accounting policies and practices
by way of codes, guidelines and adjustments for making and interpreting the items appearing
in the financial statements. Thus, these terms, policies and guidelines etc. become the basis for
auditing the books of accounts.

Nature of Accounting Standards:

(i) Serve as a guide to the accountants:

Accounting standards serve the accountants as a guide in the accounting process. They provide
basis on which accounts are prepared. For example, they provide the method of valuation of
inventories.

(ii) Act as a dictator:

Accounting standards act as a dictator in the field of accounting. Like a dictator, in some areas
accountants have no choice of their own but to opt for practices other than those stated in the
accounting standards. For example, Cash Flow Statement should be prepared in the format
prescribed by accounting standard.

(iii) Serve as a service provider:

Accounting standards comprise the scope of accounting by defining certain terms, presenting
the accounting issues, specifying standards, explaining numerous disclosures and
implementation date. Thus, accounting standards are descriptive in nature and serve as a service
provider.

(iv) Act as a harmonizer:

Accounting standards are not biased and bring uniformity in accounting methods. They remove
the effect of diverse accounting practices and policies. On many occasions, accounting
standards develop and provide solutions to specific accounting issues. It is thus clear that
whenever there is any conflict on accounting issues, accounting standards act as harmonizer
and facilitate solutions for accountants.

Limitations of Accounting Standards:

There are a few limitations of Accounting Standards as well. The regulatory bodies keep updating
the standards to restrict these limitations.

1] Difficulty between Choosing Alternatives: There are alternatives for certain accounting
treatments or valuations. Like for example, stocks can be valued by LIFO, FIFO, weighted
average method, etc. So choosing between these alternatives is a tough decision for the
management. The AS does not provide guidelines for the appropriate choice.

2] Restricted Scope: Accounting Standards cannot override the laws or the statutes. They have
to be framed within the confines of the laws prevailing at the time. That can limit their scope to
provide the best policies for the situation.

List of ICAI’s Mandatory Accounting Standards (AS 1~29)

List of Mandatory Accounting Standards of ICAI (as on 1 July 2017 and onwards), is as under:

1. AS 1 Disclosure of Accounting Policies: This Standard deals with the disclosure of

significant accounting policies which are followed in preparing and presenting financial
statements.
2. AS 2 Valuation of Inventories: This Standard deals with the determination of value at
which inventories are carried in the financial statements, including the ascertainment of cost of
inventories and any write-down thereof to net realisable value.
3. AS 3 Cash Flow Statements: This Standard deals with the provision of information about
the historical changes in cash and cash equivalents of an enterprise by means of a Cash Flow
Statement which classifies cash flows during the period from operating, investing and financing
activities.
4. AS 4 Contingencies and Events Occurring After Balance Sheet Date: This Standard
deals with the treatment of contingencies and events occurring after the balance sheet date.
5. AS 5 Net profit or Loss for the period, Prior Period Items and Changes in Accounting
Policies: This Standard should be applied by an enterprise in presenting profit or loss from
ordinary activities, extraordinary items and prior period items in the Statement of Profit and
Loss, in accounting for changes in accounting estimates, and in disclosure of changes in
accounting policies.
6. AS 7 Construction Contracts: This Standard prescribes the accounting for construction
contracts in the financial statements of contractors.
7. AS 9 Revenue Recognition: This Standard deals with the bases for recognition of revenue
in the Statement of Profit and Loss of an enterprise. The Standard is concerned with the
recognition of revenue arising in the course of the ordinary activities of the enterprise from: a)
Sale of goods; b) Rendering of services; and c) Interest, royalties and dividends.
8. AS 10 Property, Plant and Equipment: The objective of this Standard is to prescribe the
accounting treatment for property, plant and equipment (PPE).
9. AS 11 The Effects of Changes in Foreign Exchange Rates: AS 11 lays down principles
of accounting for foreign currency transactions and foreign operations, i.e., which exchange
rate to use and how to recognise in the financial statements the financial effect of changes in
exchange rates.
10. AS 12 Government Grants: This Standard deals with accounting for government grants.
Government grants are sometimes called by other names such as subsidies, cash incentives,
duty drawbacks, etc.
11. AS 13 Accounting for Investments: This Standard deals with accounting for investments
in the financial statements of enterprises and related disclosure requirements.
12. AS 14 Accounting for Amalgamations: This Standard deals with accounting for
amalgamations and the treatment of any resultant goodwill or reserves.
13. AS 15 Employee Benefits: The objective of this Standard is to prescribe the accounting
treatment and disclosure for employee benefits in the books of employer except employee
share-based payments. It does not deal with accounting and reporting by employee benefit
plans.
14. AS 16 Borrowing Costs: This Standard should be applied in accounting for borrowing
costs. This Standard does not deal with the actual or imputed cost of owners’ equity, including
preference share capital not classified as a liability.
15. AS 17 Segment Reporting: The objective of this Standard is to establish principles for
reporting financial information, about the different types of segments/ products and services an
enterprise produces and the different geographical areas in which it operates.
16. AS 18 Related Party Disclosures: This Standard should be applied in reporting related
party relationships and transactions between a reporting enterprise and its related parties. The
requirements of this Standard apply to the financial statements of each reporting enterprise and
also to consolidated financial statements presented by a holding company.
17. AS 19 Leases: The objective of this Standard is to prescribe, for lessees and lessors, the
appropriate accounting policies and disclosures in relation to finance leases and operating
leases.
18. AS 20 Earnings Per Share: AS 20 prescribes principles for the determination and
presentation of earnings per share which will improve comparison of performance among
different enterprises for the same period and among different accounting periods for the same
enterprise.
19. AS 21 Consolidated Financial Statements: The objective of this Standard is to lay down
principles and procedures for preparation and presentation of consolidated financial statements.
These statements are intended to present financial information about a parent and its
subsidiary(ies) as a single economic entity to show the economic resources controlled by the
group, obligations of the group and results the group achieves with its resources.
20. AS 22 Accounting for Taxes on Income: The objective of this Standard is to prescribe
accounting treatment of taxes on income since the taxable income may be significantly
different from the accounting income due to many reasons, posing problems in matching of
taxes against revenue for a period.
21. AS 23 Accounting for Investments in Associates: This Standard should be applied in
accounting for investments in associates in the preparation and presentation of consolidated
Financial Statements (CFS) by an investor.
22. AS 24 Discontinuing Operations: The objective of AS 24 is to establish principles for
reporting information about discontinuing operations, thereby enhancing the ability of users of
financial statements to make projections of an enterprise’s cash flows, earnings generating
capacity, and financial position by segregating information about discontinuing operations
from information about continuing operations. AS 24 applies to all discontinuing operations of
an enterprise.
23. AS 25 Interim Financial Reporting: This Standard applies if an entity is required or elects
to publish an interim financial report. The objective of AS 25 is to prescribe the minimum
content of an interim financial report and to prescribe the principles for recognition and
measurement in complete or condensed financial statements for an interim period.
24. AS 26 Intangible Assets: AS 26 prescribes the accounting treatment for intangible assets
(i.e. identifiable non-monetary asset, without physical substance, held for use in the production
or supply of goods or services, for rental to others, or for administrative purposes).
25. AS 27 Financial Reporting of Interests in Joint Ventures: The objective of AS 27 is to
set out principles and procedures for accounting for interests in joint ventures and reporting of
joint venture assets, liabilities, income and expenses in the financial statements of venturers
and investors.
26. AS 28 Impairment of Assets: The objective of AS 28 is to prescribe the procedures that
an enterprise applies to ensure that its assets are carried at no more than their recoverable
amount. The asset is described as impaired if its carrying amount exceeds the amount to be
recovered through use or sale of the asset and AS 28 requires the enterprise to recognise an
impairment loss in such cases. It should be noted that AS 28 deals with impairment of all assets
unless specifically excluded from the scope of the Standard.
27. AS 29 Provisions, Contingent Liabilities and Contingent Assets: The objective of AS
29 is to ensure that appropriate recognition criteria and measurement bases are applied to
provisions and contingent liabilities and that sufficient information is disclosed in the notes to
the financial statements to enable users to understand their nature, timing and amount. The
objective of this Standard is also to lay down appropriate accounting for contingent assets.
International Financial Reporting Standards (IFRS)
International Financial Reporting Standards (IFRS) set common rules so that financial
statements can be consistent, transparent and comparable around the world. IFRS are issued by
the International Accounting Standards Board (IASB). They specify how companies must
maintain and report their accounts, defining types of transactions and other events with
financial impact. IFRS were established to create a common accounting language, so that
businesses and their financial statements can be consistent and reliable from company to
company and country to country.

Key points:

• IFRS were established to create a common accounting language, so business and

accounts can be understood from company to company and country to country.
• Both companies and investors benefit from IFRS because people are more confident
investing in a company if its business practices are transparent and reliable.
• The IFRS are set by the International Accounting Standards Board, an independent
body of the IFRS Foundation, which provide updates, insights and guidance on the
standards.

Objective of the Preface to IFRS

The objective of the Preface to International Financial Reporting Standards is to set out the
International Accounting Standards Board's (IASB's) mission and objectives, the scope of
International Financial Reporting Standards (IFRSs), due process for developing IFRSs and
Interpretations, and policies on effective dates, format, and language for IFRSs.

IASB's objectives
Under the IFRS Foundation Constitution, the objectives of the IASB are:
a. to develop, in the public interest, a single set of high quality, understandable,
enforceable and globally accepted financial reporting standards based upon clearly
articulated principles. These standards should require high quality, transparent and
comparable information in financial statements and other financial reporting to help
investors, other participants in the world’s capital markets and other users of financial
information make economic decisions;
b. to promote the use and rigorous application of those standards;
c. in fulfilling the objectives associated with (a) and (b), to take account of, as appropriate,
the needs of a range of sizes and types of entities in diverse economic settings; and
d. to promote and facilitate adoption of IFRSs, being the standards and interpretations
issued by the IASB, through the convergence of national accounting standards and
IFRSs.
 Scope of IFRSs
• IASB Standards are known as International Financial Reporting Standards.
• All International Accounting Standards (IASs) and Interpretations issued by the former IASC
and SIC continue to be applicable unless and until they are amended or withdrawn.
• IFRSs apply to the general purpose financial statements and other financial reporting by profit-
oriented entities – those engaged in commercial, industrial, financial, and similar activities,
regardless of their legal form.
• Entities other than profit-oriented business entities may also find IFRSs appropriate.
• General purpose financial statements are intended to meet the common needs of shareholders,
creditors, employees, and the public at large for information about an entity's financial position,
performance, and cash flows.
• Other financial reporting includes information provided outside financial statements that assists
in the interpretation of a complete set of financial statements or improves users' ability to make
efficient economic decisions.
• IFRS apply to individual company and consolidated financial statements.
• A complete set of financial statements includes a statement of financial position, a statement
of comprehensive income, a statement of cash flows, a statement of changes in equity, a
summary of accounting policies, and explanatory notes. When a separate income statement is
presented in accordance with IAS 1(2007), it is part of that complete set.
• In developing Standards, IASB intends not to permit choices in accounting treatment. Further,
IASB intends to reconsider the choices in existing IASs with a view to reducing the number of
those choices.
• IFRS will present fundamental principles in bold face type and other guidance in non-bold type
(the 'black-letter'/'grey-letter' distinction). Paragraphs of both types have equal authority.
• The provision of IAS 1 Presentation of Financial Statements that conformity with IAS requires
compliance with every applicable IAS and Interpretation requires compliance with all IFRSs
as well.

IFRS CONVERGENCE
India has chosen a path of IFRS convergence rather than adoption. So, the Indian Accounting
Standards (IND AS) are almost similar to IFRS, however there are certain carve outs to make
them suitable for Indian environment. IND AS is the statement containing the recognition,
presentation and measurement principles on various accounting issues drawn or prepared in
parity with IFRS. Globalization has made this economy as one market, different accounting
standards can be a barrier for the flow of funds from one country to another. India being a
developing nation needs foreign funds for infrastructure hence, it is important that other
countries interpret our financial statements. This convergence of IFRS with IND AS would
have an impact on the Indian companies and it would be hard for the companies to adapt and
cope up with this revamp. The introduction of IND AS is a way to buy some time to analyze
the situation or the change with a view to take necessary action by MCA. This implementation
will mark an important milestone in the field of accounting. In a nutshell, IND AS can be
referred as- A Desi version of IFRS.
Impact of IND AS :

• The impact of IND AS is not only on the financial reporting but also on the overall
business, especially in the areas of tax training, IT systems, internal control and also on
accessing the adequacy of the organization structure.
• An improperly designed process of conversion would expose the company to
potentially significant risk areas.
• IND AS is based on the principle of fair valuation and substance over form, which will
present a more contemporary picture of the state of affairs compared to Indian GAAP.
• Due to the stringent laws laid down by the new standards, it will enhance the
transparency and detailed disclosure.
• IND AS addresses various areas where the current Indian GAAP does not offer any
specific guidance. Therefore, corporates follow different policies which make their
financials incomparable.
• Though the IND AS is not the same as IFRS, it will bring the accounting standard in
India much closer to the international standards, that the investors are aware of and have
confidence in. This will in return improve the appeal of Indian companies to the foreign
investors.

Applicability of IND AS:

Types of Threshold Applicable Present Remarks

Companies/entities Limit of from Status as on
Net worth 01/04/19

Listed Co/ Co in >/= 500 Cr 01/04/2016 Applicable Applicable for all

process of Listing listed companies and
companies in process
of listing

< 500 Cr 01/04/2017 Applicable

Unlisted Co => 500 Cr 01/04/2016 Applicable Applicable for all

whose networth >
250 cr

250 and 500 01/04/2017 Applicable

Cr

< 250 Cr Not

Applicable

Co listed in SME Not Not to apply IND AS

Applicable
 Banks. No Limit 01/04/2019 Applicable Applicable for all

Insurance co No Limit 01/04/2020 Applicable Applicable for all

Urban Cooperative Not Not to apply IND AS

Bank Applicable

Rural Regional Not Not to apply IND AS

Bank Applicable

NBFC – Listed >/= 500 Cr 01/04/2018 Applicable Applicable for all

listed NBFC

< 500 Cr 01/04/2019 Applicable

NBFC – Unlisted >/= 500 Cr 01/04/2018 Applicable Applicable for all

whose net worth >
250 cr

250 and 500 01/04/2019 Applicable

Cr

< 250 Cr Not

Applicable

The following is the list of IFRS and IAS that issued by International Accounting Standard
Board (IASB) in 2019. In 2019, there are 16 IFRS and 29 IAS. IAS will be replace IFRS once
it is finalize and issue by IASB.

International Financial Reporting Standard:

IFRS

1. FRS 1 First-time adoption of International Financial Reporting Standards

2. IFRS 2 Share-based payment

3. IFRS 3 Business combinations

4. IFRS 4 Insurance contracts

 5. IFRS 5 Non-current assets held for sale and discontinued operations

6. IFRS 6 Exploration for and evaluation of mineral resources

7. IFRS 7 Financial instruments: disclosures

8. IFRS 8 Operating segments

9. IFRS 9 Financial instruments

10. IFRS 10 Consolidated financial statements

11. IFRS 11 Joint arrangements

12. IFRS 12 Disclosure of interests in other entities

13. IFRS 13 Fair value measurement

14. IFRS 14 Regulatory deferral accounts

15. IFRS 15 Revenues from contracts with customers

16. IFRS 16 Leases

International Accounting Standards

IAS

1. IAS 1 Presentation of financial statements

2. IAS 2 Inventories

3. IAS 7 Statement of cash flows

4. IAS 8 Accounting policies, changes in accounting estimates and errors

5. IAS 10 Events after the reporting period

6. IAS 11 Construction contracts

7. IAS 12 Income taxes

8. IAS 16 Property, plant and equipment

9. IAS 17 Leases

10. IAS 18 Revenue

11. IAS 19 Employee benefits

12. IAS 20 Accounting for government grants and disclosure of government assistance

13. IAS 21 The effects of changes in foreign exchange rates

14. IAS 23 Borrowing costs

15. IAS 24 Related party disclosures

16. IAS 26 Accounting and reporting by retirement benefit plans

17. IAS 27 Consolidated and separate financial statements

18. IAS 28 Investments in associates and joint ventures

19. IAS 29 Financial reporting in hyperinflationary economies

20. IAS 31 Interest in joint ventures

21. IAS 32 Financial instruments: presentation

22. IAS 33 Earnings per share

23. IAS 34 Interim financial reporting

24. IAS 36 Impairment of assets

25. IAS 37 Provisions, contingent liabilities and contingent assets

26. IAS 38 Intangible assets

 27. IAS 39 Financial instruments: recognition and measurement

28. IAS 40 Investment property

29. IAS 41 Agriculture

1. Framework for the Preparation and Presentation of Financial Statements in accordance with India
2. Ind AS 101 First-time Adoption of Indian Accounting Standards
3. Ind AS 102 Share based Payment
4. Ind AS 103 Business Combinations
5. Ind AS 104 Insurance Contracts
6. Ind AS 105 Non current Assets Held for Sale and Discontinued Operations
7. Ind AS 106 Exploration for and Evaluation of Mineral Resources
8. Ind AS 107 Financial Instruments: Disclosures
9. Ind AS 108 Operating Segments
10. Ind AS 1 Presentation of Financial Statements
11. Ind AS 2 Inventories
12. Ind AS 7 Statement of Cash Flows
13. Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors
14. Ind AS 10 Events after the Reporting Period
15. Ind AS 11 Construction Contracts
16. Ind AS 12 Income Taxes
17. Ind AS 16 Property, Plant and Equipment
18. Ind AS 17 Leases
19. Ind AS 18 Revenue
20. Ind AS 19 Employee Benefits
21. Ind AS 20 Accounting for Government Grants and Disclosure of Government Ass istance
22. Ind AS 21 The Effects of Changes in Foreign Exchange Rates
23. Ind AS 23 Borrowing Costs
24. Ind AS 24 Related Party Disclosures
25. Ind AS 27 Consolidated and Separate Financial Statements
26. Ind AS 28 Investments in Associates
27. Ind AS 29 Financial Reporting in Hyperinflationary Economies
28. Ind AS 31 Interests in Joint Ventures
29. Ind AS 32 Financial Instruments: Presentation
30. Ind AS 33 Earnings per Share
31. Ind AS 34 Interim Financial Reporting
32. Ind AS 36 Impairment of Assets
33. Ind AS 37 Provisions, Contingent Liabilities and Contingent Assets
34. Ind AS 38 Intangible Assets
35. Ind AS 39 Financial Instruments: Recognition and Measurement
36. Ind AS 40 Investment Property
A comparison of Standards

BASIS GAAP/AS IND AS IFRS/IAS

Presentation of AS 1 disclosure of IAS 1 presentation of Ind AS 1
Financial statements accounting policies. financial statements presentation of
AS 5 net profit / loss financial statements
for the period, prior
period items and
change in accounting
policies
Components of (a) Balance sheet,(a) Statement of (a) balance sheet at
financial statements (b) Statement of financial position . the end of the period
Profit & loss (c) Cash
(b) Statement of including changes in
flow statement income with profit / equity
(d) Explanatory
loss (b) Statement of
notes with significant
(c) Statement of cash profit / loss
accounting policies
flows (c) Cash flow
Comparative figures
(d) Statement of statement
for one year are also
changes in equity (d) Explanatory
to be presented. (e) Notes with notes with significant
summary of accounting policies
significant Comparative figures
accounting policies for one year are also
Comparative figures to be presented
for one year are also
to be presented
Formats of financial Under Schedule VI Only illustrative No format prescribed
statements of companies Act formats have been .
1956 have provided given.