Accounting Standards: Meaning and Scope, Importance
Accounting Standards: Meaning and Scope,
Importance
In order to ensure transparency consistency, comparability, adequacy and reliability of financial reporting, it is essential to
standardize the accounting principles and policies, Accounting Standards provide framework and standard accounting polices so
that the financial statements of different enterprises become comparable.
Accounting Standards are selected set of accounting policies or broad guidelines regarding the principles and methods to be
chosen out of several alternatives. The Accounting Standards Board (ASB) of the Institute of Chartered Accountants of
India (ICAI) formulas Accounting Standards to be established by the Council of the ICAI.
Objective of Accounting Standards:
Objective of Accounting Standards is to standarize the diverse accounting policies and
practices with a view to eliminate to the extent possible the non-comparability of financial statements and the reliability to the
financial statements.
The institute of Chartered Accountants of India, recognizing the need to harmonize the diverse accounting policies and practices,
constituted at Accounting Standard Board (ASB) on 21st April, 1977.
Scope and Procedure of Accounting Standards (AS)
- Conformity: Accounting Standards align with local laws and business environments; if laws change, legal provisions take precedence.
- Disclosure: Requires explanatory notes for deviations, ensuring transparency without implying adverse remarks.
- Applicability: Focuses on material items, specifies effective dates, and does not retroactively apply unless stated.
- Uniformity: Promotes uniformity, simplicity, and nationwide applicability. Standards will evolve for sophistication over time.
Procedure for Issuing AS
- Identification: ASB identifies priority areas and forms Study Groups for assistance.
- Consultation: Engages with government, industries, and stakeholders for input.
- Exposure Draft: Prepares drafts including principles, definitions, applications, and disclosure norms, inviting public feedback.
- Finalization: ASB finalizes drafts after incorporating feedback, submits them to the Institute’s Council for approval.
- Issuance: Standards are issued under the Council’s authority.
Importance of AS
- Reliability: Ensures financial statements are trustworthy for stakeholders.
- Uniformity: Provides consistent treatment of transactions and formats.
- Fraud Prevention: Reduces scope for data manipulation or fraud.
- Comparability: Enables analysis across companies and over time.
- Audit Assurance: Guides auditors in verifying accurate financial reporting.
- Managerial Accountability: Measures management’s financial performance and adherence to policies.
List of Mandatory Accounting Standards (ICAI)
- AS 1: Disclosure of Accounting Policies – Guidelines for disclosing significant accounting policies in financial statements.
- AS 2: Valuation of Inventories – Covers inventory valuation, cost determination, and adjustments to net realizable value.
- AS 3: Cash Flow Statements – Provides a format to classify cash flows into operating, investing, and financing activities.
- AS 4: Contingencies and Events After Balance Sheet Date – Explains how to account for contingencies and post-balance sheet events.
- AS 5: Net Profit or Loss and Changes in Policies – Covers profit/loss presentation, prior period items, and changes in accounting policies.
- AS 7: Construction Contracts – Prescribes accounting for construction projects by contractors.
- AS 9: Revenue Recognition – Details how to recognize revenue from sales, services, interest, royalties, and dividends.
- AS 10: Property, Plant, and Equipment (PPE) – Defines accounting treatment for fixed assets.
- AS 11: Foreign Exchange Rates – Principles for handling transactions and effects of currency rate changes.
- AS 12: Government Grants – Accounting for subsidies, incentives, and duty drawbacks.
- AS 13: Investments – Guidelines for accounting and disclosure of investments.
- AS 14: Amalgamations – Rules for accounting in mergers and goodwill/reserves.
- AS 15: Employee Benefits – Covers pensions, gratuity, and other employee benefits.
- AS 16: Borrowing Costs – Treatment of borrowing costs incurred for asset creation.
- AS 17: Segment Reporting – Reporting by business segments or geographical areas.
- AS 18: Related Party Disclosures – Reporting related party relationships and transactions.
- AS 19: Leases – Accounting standards for finance and operating leases.
- AS 20: Earnings Per Share – Calculation and presentation of EPS for comparability.
- AS 21: Consolidated Financial Statements – Preparing statements for parent and subsidiaries as one entity.
- AS 22: Taxes on Income – Accounting treatment for tax differences between accounting and taxable income.
- AS 23: Investments in Associates – Guidelines for consolidated financial statements involving associates.
- AS 24: Discontinuing Operations – Segregates financial information for discontinued business operations.
- AS 25: Interim Financial Reporting – Minimum requirements for interim financial reports.
- AS 26: Intangible Assets – Treatment for intangible assets like patents and copyrights.
- AS 27: Joint Ventures – Accounting for joint ventures in financial reports.
- AS 28: Impairment of Assets – Ensures assets are not carried above recoverable value.
- AS 29: Provisions and Contingent Liabilities – Recognition and measurement of provisions, liabilities, and contingent assets.
What Are International Financial Reporting Standards (IFRS)?
International Financial Reporting Standards (IFRS) are a set of accounting rules for the financial statements of public companies that are intended to make them consistent, transparent, and easily comparable around the world.
They constitute a standardised way of describing the company’s financial performance so that company financial statements are understandable and comparable across international boundaries. They are particularly relevant for companies with shares or securities listed on a public stock exchange.
IFRS have replaced many different national accounting standards around the world.
IFRS specify in detail how companies must maintain their records and report their expenses and income. They were established to create a common accounting language that could be understood globally by investors, auditors, government regulators, and other interested parties.
Convergence of Indian accounting standards with International financial reporting standards (IFRS):
MEANING OF CONVERGENCE:
The convergence of accounting standards refers to the goal of establishing a single set of accounting standards that will be used internationally, and in particular, the effort to reduce the differences between the US Generally Accepted Accounting Principles (USGAAP) and the International Financial Reporting Standards (IFRS).
Convergence of Indian Accounting Standards with International Financial Reporting Standards (IFRS):
Meaning of convergence with IFRS:
Convergence means achieving harmony with IFRSs. In precise terms, convergence can be considered “to design and maintain national accounting standards in a way that financial statements prepared in accordance with national accounting standards draw an unreserved statement of compliance with IFRSs,” i.e., when the national accounting standards comply with all the requirements of IFRS.
However, convergence doesn’t mean that IFRS should be adopted word for word. For example, replacing the term ‘true & fair’ with ‘present fairly’ in IAS 1, Presentation of Financial Statements, is an acceptable modification that doesn’t lead to non-convergence with IFRS.
The Reason Behind Convergence:
The availability of essential financial information about a company to its shareholders and other stakeholders in accordance with internationally accepted financial norms is considered an integral and important part of good corporate governance. To ensure this and to implement the G-20 commitment to achieve a single set of high-quality global accounting standards, the government has decided to achieve convergence of Indian accounting standards with IFRS in a phased manner, in accordance with the roadmap suggested by the government.
Convergence in the Indian Scenario:
With regard to India, the Ministry of Corporate Affairs (MCA) has committed to converge the Indian Accounting Standards with IFRS effective 1st April 2011. The convergence process is gaining momentum thanks to the support and guidance of the Ministry of Corporate Affairs. The highest authorities of the Indian government have concluded that convergence of Indian Accounting Standards with IFRS is vital for the country to take a leading role globally.
Public Interest Entities:
To determine which entities should be considered public interest entities for the purpose of applying IFRSs, the following criteria, based on Level I enterprises as defined by the Institute of Chartered Accountants of India and the Companies (Accounting Standards) Rules, 2006, were considered:
- Entities whose equity or debt securities are listed or are in the process of listing on any stock exchange, whether in India or outside India.
- Banks (including cooperative banks), financial institutions, mutual funds, or insurance entities.
- Entities whose turnover (excluding other income) exceeds ₹100 crore in the immediately preceding accounting year.
- Entities with public deposits and/or borrowings from banks and financial institutions in excess of ₹25 crore at any time during the immediately preceding accounting year.
- Entities that are holding or subsidiary entities of entities covered under (1) to (4) above.
Challenges of IFRS Adoption in India [PYQ]
Adopting IFRS in India, though beneficial, presents several challenges that are pivotal to understand, for a smooth transition. Here’s a detailed look at these challenges:
1. Lack of Awareness
Many companies, particularly small and medium-sized enterprises (SMEs), are not fully aware of IFRS and its implications. This lack of understanding can hinder effective implementation.
2. High Costs of Transition
Transitioning to IFRS involves substantial costs. Companies need to invest in new accounting software, systems, and training programs to comply with IFRS standards.
3. Regulatory and Legal Hurdles
Adapting the existing legal and regulatory frameworks to accommodate IFRS standards can be time-consuming and complex. This involves modifying some of the existing laws and regulations governing financial reporting and disclosures.
4. Cultural Differences
The unique business practices and cultural aspects of Indian companies can pose challenges in adopting the standardized norms of IFRS, which may not consider local business practices.
5. Training and Skilled Personnel
There is a significant demand for professionals trained in IFRS. The current shortage of such skilled personnel makes it difficult for companies to comply with IFRS requirements effectively.
6. Complexity of Standards
The complexity of IFRS standards can be a barrier, especially for those who are accustomed to the Indian GAAP. The detailed disclosure requirements and fair value measurements are particularly challenging.
7. Integration with Existing Systems
Integrating IFRS with existing accounting systems without disrupting the financial reporting process is a major challenge. This often requires overhauling the existing systems, which is both costly and time-intensive.
8. Differences in Taxation
The alignment of tax reporting with IFRS-compliant financial reporting can create challenges due to differences in tax laws and accounting standards.
9. Reluctance to Change
There is often a natural resistance to change within organizations, which can slow down the adoption process. Convincing stakeholders of the long-term benefits of IFRS amidst short-term disruptions and costs is challenging.
10. Alignment with International Standards
While Ind AS closely aligns with IFRS to ensure consistency with international reporting standards, it includes certain modifications to fit the specific regulatory and economic conditions of India. These necessary adaptations aim to facilitate compliance while respecting local contexts but can sometimes lead to confusion and inconsistencies with the full application of IFRS standards.
