What is Accounting Standards?
Accounting is a comprehensive process of recording transactions. It portrays financial data that help readers draw conclusions and make business decisions. Accounting procedures are incorporated with standardized guidelines for disciplined execution. These guidelines are usually known as accounting policies.
Standardized accounting policies allow companies to make alterations according to their substantial needs. However, the freedom to alter makes it impossible to compare in any means. Thus, the government sets specific standards to create an ideal system in place, and this concept is known as the accounting standard.
The accounting standards in India are formulated by ICAI – Institute of Chartered Accountants of India. In this article, we have coupled everything you ought to know about accounting standards.
Indian Accounting Standards – Definition
Indian accounting standard (Ind-AS) is the accounting standard incorporated by business entities in India. These standards are supervised by the Accounting Standards Board (ASB) since the year 1977. ASB is a committee that comes under ICAI. It is represented by the government department, academicians, namely ICAI, CII, FICCI, ASSOCHAM, and other professional bodies.
Accounting standards in India strive to combat major financial issues. It includes:
- Recognize the financial events
- Measure the financial transactions
- Fair presentation of financial statements
- Company disclosure requirement to ensure that stakeholders are not misled
Ind-As features the naming and numbering of International Financial Reporting Standards (IFRS). Income Computation and Disclosure Standards (ICDS) is the standardized tax computation in India, implemented in 2015. In India, the Ministry of Corporate Affairs (MCA) lays out detailed standards for corporate companies concerning the recommendations of the National Financial Reporting Authority (NFRA).
Objectives of Accounting Standards
Accounting is one of the mainstream functions of business operations – it is the language art of businesses. The standards help individuals understand the financial position of the company. In the case of accounting, the standardized rules are similar to the literature rules.
The framework and regulations of accounting differ from one country to another. Here are some of the vital objectives of Accounting standards in India.
Objective – 1
The Ind-AS mainly aims to enhance the definitive financial statements. The objective is to ensure that financial statements are formulated as per the accounting standards. It enables easy understanding and helps individuals rely on them. Doing so rids of the dire consequences for businesses.
Objective – 2
The second main objective is comparability. Adhering to the criteria allows a streamlined comparison between companies. It helps verify the progress and positioning of the company in the market.
Objective – 3
Accounting standard executes a one set of accounting policies. It is a combination of necessary disclosure requirements and valuation methods of numerous financial transactions.
Benefits of Accounting Standards – Why Ind-AS?
Ind-As provides a wide range of benefits to corporate entities. Here are some of the critical benefits of accounting standards in India.
Uniformed Accounting
The set of rules under the accounting standard ensures standardized treatment of transaction records. It provides standard format produce for financial statements. It helps carry out unified accounting.
Acceptability
Ind-AS is widely accepted as it intersects with IFRS. It enables the user to access the financial statements confidently. It also helps MNC’s save costs as they can use the same set of rules globally.
Readability
Most stakeholders and investors rely on financial statements for information. It is what enables them to make smarter business decisions. Thus, it is crucial to provide a clear and precise financial statement. The set of rules under AS ensure that these statements are accurate and factual.
Comparability
The accounting standard provides comparability. Every business firm functions under the same standardized rules in India. It enables business owners to compare their financial positions before competitors and make comprehensive decisions.
Changes in AS Concerning the Economic Situations
Economic situations in a developing country are more likely to fluctuate. Under any inflated economic circumstances, the Ind-AS principles provide room for modifications. “Financial Reporting in Hyper-inflammatory Economies” under Ind AS -29 helps deal with any escalated economic situation.
Foreign Investments
Adopting Ind-AS helps attract foreign investors. It provides them the opportunity to compare before investing.
Rids of Fraudulent Accounting and Manipulations
The accounting standard specifies uniformed rules that are mandatory for all corporate companies. Management cannot misrepresent financial data as the methodologies and principles are streamlined. It rids of any fraudulent outcome for businesses.
Compliance Under Accounting Standards – ICAI
Under the Companies Act, 1956, subsection 3(A) to 211 demands each P/L (Profit and Loss) account and balance sheet to be complied as per the accounting standards. The Compliance specified under accounting standards is recommended by ICAI, which is prescribed by the Central Government and consulted with NAC (National advisory committee) under section 210(1) of the companies Act 1956.
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Applicability of Indian Accounting Standards
Indian standards on auditing apply to specific categories of companies as set out below:
Mandatory Requirement
Companies must follow the Ind-AS for the 2015-2016 fiscal year. For the financial year 2018-19, below is the maximum limit for companies that must follow the Ind-AS:
- Companies whose shares or debt securities are listed or under listing on any stock exchange in India or elsewhere.
- Unlisted companies with a net worth above Rs. 250 crores
- They are holding companies, subsidiaries, joint ventures, or associates of companies included in the pointers mentioned above.
Non-Bank Financial Companies (NBFC)
Accounting standards apply to NBFC’s with a net worth above Rs 500 million. It can be holding companies, subsidiaries, joint ventures, or associates of companies under NBFC’s.
Accounting standards apply to shares, or debt securities listed or in the process of listing on any stock exchange in India/outside India. It applies to companies with a net worth of less than Rs. 500 crores.
And for NBFC’s, that are unlisted companies, with a net worth between Rs. 250 crores – Rs. 500 crores. It can either be the holding companies, subsidiaries, joint ventures, or associates of companies under NBFC’s.
Voluntary Applicability
According to this applicability rule, the companies can voluntarily apply Indian Accounting Standards (Ind AS).
The requirement to Follow AS
Corporate entities are required to follow the Accounting Standard (Ind-AS as applicable). They can formulate the notified rules while preparing their financial statements under section 129 of the Companies Act 2013.
In a Conflict Between the Companies Act and Indian Accounting Standards
The provision of the act prevails in case of any inconsistency or conflict between Companies Act and Ind-AS.
List of Accounting Standards – Mandatory
ICAI and corporate standard rules,2006 issue the accounting standards in India, notified by the Ministry of Corporate Affairs (MCA). The standardized rules are followed by businesses and auditors while preparing and reviewing financial statements along with the stakeholders. Here’s a comprehensive summary of the accounting standards list.
Policies Related to Accounting Disclosure (AS 1)
AS-1 deals with the disclosure of the vital accounting policies used in the composition and execution of the financial statements.
Stock Valuation (AS 2)
AS-2 determines the values of the inventories included in the financial statements. It also determines the ascertain inventory costs and write-offs of the same on the net realizable value.
Cash Flow Statements (AS 3)
AS-3 deals with historical changes in the entity’s cash and its cash equivalents. It is carried out with the help of a Cash Flow Statement. The statement classifies the cash flow of operations, inventories, and other financial activities.
Uncertainties and Events That Occur After the Balance Sheet Date (AS 4)
AS-4 addresses the treatment of uncertainties and events that occur after the balance sheet date.
Net Profit/Loss for the Period, Previous Period Items and Changes in Accounting Policies (AS 5)
AS-5 is applied by the companies while executing P/L results from activities in the ordinary course of business, extraordinary items, and previous period items. It includes the changes in accounting estimates and policies.
Construction Contracts (AS 7)
AS-7 describes the standardized rules for construction contracts in the financial statements of contractors.
Revenue Recognition (AS 9)
AS-9 deals with revenue recognition in the P/L account of the company. Generally, it is concerned with the revenue generated from the business operations such as selling goods, providing services, interest, royalties, and dividends of the company.
The property, Plant, and Equipment (AS 10)
The objective of AS-10 is to describe PPE’s (property, plant, and equipment) accounting treatment.
Effects of Changes in Foreign Exchange Rates (AS 11)
AS-11 sets out the accounting principles for foreign exchange transactions and overseas operations. It determines the exchange rates be used and helps recognize the financial impact of exchange rate fluctuations.
Government Scholarships (AS 12)
AS-12 deals with accounting concerning government grants. These are sometimes referred to as subsidies, cash incentives, rate defects, etc.
Investment Accounting (AS 13)
AS-13 addresses the standardized rules for investments in corporate financial statements and disclosure requirements related to it.
Merger Accounting (AS 14)
AS-14 deals with the accounting for mergers and the treatment of any resulting goodwill or reserves.
Employee Benefits (AS 15)
AS-15 describes the accounting treatment and disclosure of employee benefits in the business owner’s books, excluding payments based on employee shares. It does not deal with accounting and reporting through employee benefit plans.
Borrowing Costs (AS 16)
AS-16 should be applied in accounting for borrowing costs. It does not address the actual or assumed cost of capital, including the preferred capital stock that is not classified as a liability.
Reporting on Financial Sectors (AS 17)
The objective of AS 17 is to establish principles to report financial information for different sectors, products, services, and projects that it produces and the various geographic regions in which it operates.
Disclosure of Transactions with Related Parties (AS 18)
AS-18 is applied while reporting related party transactions between the reporting organizations. The standardized rules apply to each reporting entity’s financial statements and the integrated financial statements executed by a holding company.
Accounting Policies and Disclosure of Lease Transactions (AS 19)
The objective of AS-19 is to define accounting policies and appropriate disclosures related to financial and operating leases.
Earnings Per Share/ Per Share Earnings (AS 20)
AS-20 defines accounting principles that help determine and execute earnings per share. It ensures the improvement of the performance comparison between different organizations. It identifies the per-share earnings for the same accounting period and between different accounting periods for the same organization.
Preparation and Presentation of Consolidated Financial Statements (AS 21)
The objective of AS-21 is to establish accounting principles and procedures that help compose and present consolidates financial statements. It aims at executing economic resources controlled by the organization along with the group’s commitments and the results they achieve with its support.
Income Tax Accounting (AS 22)
The taxable income significantly varies from the income shown in the financial statements. It arises due to various problems in tax reconciliation with income for a specified period. AS-22 aims are to describe the accounting treatment for income taxes.
Accounting for Investments in Associates (AS 23)
AS-23 deals with the standardized rules for investments in associates while investors prepare and present the CFS (Consolidates Financial Statement).
Operations Stops (AS 24)
AS-24 strives to establish accounting principles concerning the reports on discontinued operations. It enables users to estimate cash flow, potential earnings, and enterprise financial position through financial statements. It bifurcates the data on discontinued operations from that of on-going activities. The standardized rules apply solely to the discontinued operations of the company.
Interim Financial Information (AS 25)
AS-25 applies when an entity is obligated or elects to establish an interim financial report. This standard’s primary agenda is to define the content of a temporary financial report in a minimalist manner. The standardized rules of AS-25 also describe the principles of recognition and measurement of the financial statements of the interim period.
Intangible Assets (AS 26)
AS-26 describes the accounting treatment for intangible assets. These assets are also known as nonmonetary assets. They are identified and held to produce or supply goods and services.
Joint Ventures that Announce Their Interest in the Financial Statements (AS 27)
AS-27 aims to establish accounting principles and procedures for joint ventures that report their interests in financial statement expenses, risk assets, revenues, and liabilities of corporate entities and investors.
Impairment of Assets (AS 28)
AS-28 strives to specify procedures that a company may use to ensure that the recoverable value does not exceed its assets. Any asset carrying value that exceeds the recoverable amount is reported as impairment.
Contingent Liabilities, Assets and Contingent Provisions (AS 29)
AS-29 recognizes the standardized rules and measurement bases applied to provisional and contingent liabilities. The principal objective is to ensure the disclosure of sufficient financial data in financial statements. It enables the users better to understand its nature, costs, and timings. AS-29 strives to create suitable accounting standards for all potential assets.
List of accounting standards – Non-mandatory
ICAI announced the withdrawal of the following accounting standards:
- AS 30 – Recognition and Measurement of Financial Instruments
- AS 31 – Presentation of Financial Instruments
- AS 32 – Financial Instruments Disclosure
Conclusion
In a nutshell, Indian Accounting Standards (IAS) is developed by ICAI and notified by Companies Rules 2006. Before the formation of Ind AS, IAS governed the corporate entities in India. Globalization has led to a widespread of MNC’s in the markets worldwide.
In such a case, companies in India need to have an aligned financial reporting system in line with global standards to be easily understood by foreign investors. Alongside, ICAI (Institute of Chartered Accountants) has notified 29 – new accounting standards, namely, “Ind-AS.” These standards are executed under the Companies Rules, 2015 of Companies Act, 2013. Ind-AS entirely complies with IFRS, unlike IAS.
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