IFRS, Ind AS, and AS Explained (Accounting Standards) Indepth

An Introduction to Accounting Standards (IFRS, Ind AS, and AS)

For any business, it is essential that its financial statements are transparent, consistent, and reliable. This builds trust with investors, creditors, and customers. To achieve this, a set of rules and guidelines, known as Accounting Standards, are followed.

As an accounting or management student, you will hear three different terms: IFRS, Ind AS, and AS. Understanding the difference is the first step to mastering Indian accounting.

1. What are IFRS? (The Global Standard)

• IFRS stands for International Financial Reporting Standards.

• These are a single set of high-quality, global accounting standards issued by the International Accounting Standards Board (IASB) based in London.

• The Goal: To create a common “accounting language” that companies around the world can use. This makes it easier to compare the financial statements of a company in India with a company in Germany or the USA.

2. What are Ind AS? (The New Indian Standard)

• Ind AS stands for Indian Accounting Standards.

• These are India’s own set of standards that are “converged with” IFRS. This means they are almost identical to IFRS, but with a few minor changes (called “carve-outs” and “carve-ins”) to make them more suitable for the Indian economy.

• Who uses them? The Ministry of Corporate Affairs (MCA) has made Ind AS mandatory for large, listed companies in India (based on their net worth and turnover) in a phased manner.

3. What are Accounting Standards (AS)? (The Legacy Indian Standard)

• AS stands for Accounting Standards.

• These are the traditional accounting standards issued by the Accounting Standards Board (ASB) of the Institute of Chartered Accountants of India (ICAI).

• Who uses them? Companies that are not required to adopt Ind AS (e.g., smaller, unlisted companies) continue to follow these Accounting Standards (AS).

In short: IFRS is the global standard. Ind AS is the new Indian version of IFRS for large companies. AS is the older, traditional Indian standard for smaller companies.

Understanding Accounting Standards (AS) in Detail

The text you provided is a detailed explanation of the older Accounting Standards (AS), which are still very relevant for all BBA and MBA students.

The Need for Accounting Standards (AS)

The main goal of AS is to remove variations in accounting treatment and bring uniformity. Without standards, two companies could record the same event differently, making their financial statements impossible to compare.

• Example 1 (Inventory): If one company uses the LIFO (Last-In, First-Out) method for valuing its stock and another uses FIFO (First-In, First-Out), their profits will be different, even if their sales are the same. AS 2 (Valuation of Inventories) provides rules for this.

• Example 2 (Depreciation): If one company uses the Diminishing Balance Method for depreciation and another uses the Fixed Installment Method, their reported profits and asset values will differ.

How Accounting Standards (AS) are Formulated in India

In India, the Accounting Standards are formulated by the Accounting Standard Board (ASB), which was set up by the ICAI in 1977.

The process is as follows:

1. Identify Area: The ASB identifies a broad area (e.g., “Accounting for Fixed Assets”) that needs a standard.

2. Form Study Group: A study group is formed with members from ICAI, government, and public sector units.

3. Create a Draft: The group holds discussions and prepares an Exposure Draft (ED) of the proposed standard.

4. Public Comment: The ED is circulated to outside bodies (like ICWAI, ICSI, CBDT) and the public for comments.

5. Finalize: After considering all comments, the ASB finalizes the standard and submits it to the ICAI council.

6. Issue Standard: The ICAI council approves and issues the final Accounting Standard.

List of Indian Accounting Standards (AS)

The ICAI has issued the following standards. (Note: Some standards like AS 8 and AS 6 have been withdrawn or merged, but this is the comprehensive list).

Deep Dive: AS 1 (Disclosure of Accounting Policies)

AS 1 is the most fundamental standard as it deals with the policies a company follows when preparing its financial statements.

1. Fundamental Accounting Assumptions

AS 1 states that all financial statements are assumed to be prepared based on three key concepts. If they are not followed, a company must disclose it.

• Going Concern: The business is assumed to be continuing its operations for the foreseeable future. It has no intention to liquidate or shut down.

• Consistency: It is assumed that the accounting policies are consistent from one period to another. (e.g., if you use a depreciation method, you should use it consistently every year).

• Accrual: Revenues and costs are recognized as they are earned or incurred, not when cash is received or paid. (e.g., You record a sale when it’s made, even if the customer will pay you next month).

2. Considerations in Selecting Accounting Policies

The goal is to present a true and fair view. To achieve this, management must consider three major principles when selecting a policy:

• Prudence: Be cautious. This means you should not anticipate profits, but you should provide for all known liabilities and losses, even if the amount is just an estimate.

• Substance over Form: The accounting treatment should be governed by the financial reality (the substance) of a transaction, not just its legal form.

• Materiality: Financial statements must disclose all “material” items. An item is material if its knowledge might influence the decisions of the user (e.g., a loss of ₹100 is not material for a large company, but a loss of ₹10 Crore is).

3. Disclosure of Accounting Policies

• Rule 1: All significant accounting policies adopted (e.g., “Depreciation is charged using the Straight-Line Method”) must be disclosed in one place.

• Rule 2: Any change in an accounting policy that has a material effect must be disclosed. The company must also state the amount by which the change has affected the profit or loss.

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