Accounting Standards

Chapter 2
By : CA Mona Vora

Index

Need
Meaning : GAAP AS IFRS

ASB & Formulation of AS

IFRS

AS 1 Disclosure of Accounting policies

AS 2 Valuation of Inventories

AS 17 Segment Reporting

1. Meaning of GAAP
Refers to Generally accepted Accounting Principles
GAAP is a set of uniform accounting principles for entities to recognize,
measure, present and disclose business transactions in the financial
statements.

It is rules of action or conduct which are derived from experience and

practices and when they become accepted as principles of accounting.

Indian GAAP (IGAAP): IGAAP comprises of:

Accounting Standards (AS)
Guidance Notes (GNs)
Expert Advisory Committee Opinions (EAC Opinions)
Accounting Standard Interpretations (ASIs)
Framework for the preparation and presentation of Financial Statements

Meaning and Objective - AS

Accounting Standards (AS) establish rules relating to recognition,
measurement and disclosures, thereby harmonizing different
accounting policies and practices in use
The objective of AS is:
1. Reduce the accounting alternatives
2. Comparability

3. Informed economic decisions

4. Accounting principles and the methods of applying these principles

Status of AS under IGAAP

In India, 32 AS on the following subjects have been issued:
AS No.

Name of the Standard

AS 1

Disclosure of Accounting Policies

AS 2

Valuation of Inventories

AS 3

Cash Flow Statements

AS 4

Contingencies and Events Occurring after the Balance Sheet Date

AS 5

Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies

AS 6

Depreciation Accounting

AS 7

Construction

AS 8

Accounting for Research and Development (Withdrawn covered under AS 26)

AS 9

Revenue Recognition

AS 10

Accounting for Fixed Assets

AS 11

The Effects of Changes in Foreign Exchange Rates

AS 12

Accounting for Government Grants

AS 13

Accounting for Investments

Status of AS under IGAAP

AS No.

Name of the Standard

AS 14

Accounting for Amalgamations

AS 15

Employee Benefits

AS 16

Borrowing Costs

AS 17

Segment Reporting

AS 18

Related Party Disclosures

AS 19

Leases

AS 20

Earnings Per Share

AS 21

Consolidated Financial Statements

AS 22

Accounting for Taxes on Income

AS 23

AS 23 Accounting for Investments in Associates in Consolidated Financial Statements

AS 24

Discontinuing Operations

AS 25

Interim Financial Reporting

AS 26

Intangible Assets

AS 27

Financial Reporting of Interests in Joint Ventures

AS 28

Impairment of Assets

AS 29

Provisions, Contingent Liabilities and Contingent Assets

Status of AS under IGAAP

AS No.

Name of the Standard

AS 30

Financial Instruments: Recognition and Measurement

AS 31

Financial Instruments: Presentation

AS 32

Financial Instruments: Disclosures

AS 30, 31 and 32 dealing with financial instruments are not mandatory as on date as they are not
prescribed by Ministry of Corporate Affairs. However, they are recommendatory in nature and Companies
can adopt the same by giving required disclosures in its Financial Statements.

ASB
Accounting Standards Board (ASB):
To harmonies the diverse accounting policies and practices in use in India.
The objectives of ASB are:
1. To conceive of and suggest areas in which AS need to be developed
2. To formulate AS to assist ICAI in evolving & establishing AS in India
3. To examine how far the relevant International Accounting
Standard/International Financial Reporting Standard (IAS/IFRS) can be
adapted while formulating the AS.
4. To review the AS issued for acceptance/changed conditions, and revise,
if necessary
5. To provide interpretations and guidance on AS
6. To carry out such other functions relating to AS, as required

Overview of IGAAP
Standard setting process

Identification of the
broad areas for
formulating the AS

Consideration of
public comments and
preparation of draft
AS for submission to
ICAI

Consideration of draft
AS by ICAI Council &
revisions made in
consultation with
ASB, if required

Constitution of study
group for preparing
preliminary draft of
proposed AS

Issuance of ED for
inviting public
comments

Issuance of the AS so
finalized, under the
authority of the ICAI
Council

Consideration of draft
prepared by study
group and suggesting
revisions

Circulation of the
revised draft to ICAI
Council members and
12 specified outside
bodies

Finalization of the
Exposure Draft (ED)
based on comments
received and
discussions

Meeting
representatives of
specified outside
bodies to ascertain
their views

Importance of AS
AS in India are now legislated by Companys Act & have weight of Law:
1)

B/S & P/L should be prepared as per AS, Recommended by ICAI

& Prescribed by CG in consultation with ASB

2)

Directors should mention during preparation of Annual Reports that

all applicable AS have been followed in Directors Responsibility
Statement

3)

Auditors will have to Report whether in their opinion the P/L A/c &
B/S were prepared as per AS

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Relevant extracts from annual reports Idea 2013-14

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IFRS
International Financial Reporting system

IASB : International Accounting Standard Board To harmonies different

Accounting Policies & Practices followed by different groups having
Committee of professional accounting bodies of more than 75 countries
India is under process of converging its AS with IFRS, Accordingly,
MCA has issued 35 Indian Accounting Standards (Ind AS) on 25 February
2011 which will replace the existing AS

While finalizing the Ind AS, the Indian standard setters have examined
individual IFRS and modified the requirements, wherever necessary, to
suit Indian requirements, resulting in differences between Ind AS and
equivalent requirements under IFRS (commonly, known as carve-outs)
In July 2014, the Finance Minister in his Budget speech proposed the
adoption of the new Ind AS by Indian companies voluntarily from FY
2015-16 and mandatory from FY 2016-17

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AS 1

Disclosure of Accounting Policies

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Overview of requirements of AS 1
Selection of appropriate
accounting policies based on
Prudence
Substance over form
Materiality
Already discussed in session 1
under qualitative
characteristics

Fundamental accounting
assumptions
Going concern
Consistency
Accrual
Already discussed in session 1

All the accounting policies

must be disclosed at one
place
Indicative list provided for
instances where alternative
policies are possible
Disclosure of the accounting
policy is not a recourse to
remedy incorrect accounting
treatment

Key
provisions of
AS 1

Instances where alternative accounting policies are

possible
Indicative list

Methods of depreciation, depletion and amortisation

Treatment of expenditure during construction
Conversion or translation of foreign currency items
Valuation of inventories
Treatment of goodwill
Valuation of investments

Treatment of retirement benefits

Recognition of profit on long-term contracts
Valuation of fixed assets

Treatment of contingent liabilities

Disclosure of Accounting Policies

Selection of Accounting Policies:
Prudence:In view of uncertainty associated with Future Events, Profits are not
anticipated but Losses are provided for as a matter of conservatism
Substance over Form:Transactions & other events should be accounted for & presented in
accordance with their Substance & financial reality and not merely with their
legal form
Materiality:Disclose all material(Significant) items. All items which may influence
decisions of the user are material

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Disclosure of Accounting Policies

According to AS 1
All significant accounting policies adopted in the preparation and
presentations of financial statement should be disclosed at one place

Any change in Accounting Policy, having material effect on FS of

Current year should be disclosed & amt ascertained.
If amt cant be ascertained then fact should be disclosed
If Fundamental Accounting Assumptions followed no specific
disclosure is required, but if not followed then fact should be disclosed

Change in Accounting Policy

a) Required by statue for compliance with accounting standards
b) Change would result in more appropriate presentation of financial
statement
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Example : 1
ABC foods Ltd prepares its accounts, in which depreciation is calculated as
per Schedule XIV of the companys act, 1956. The management of the
company is of the opinion that since Schedule XIV is followed for calculation
of depreciation, theres no need to disclose the fact. Comment on it.

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Example : 2

XYZ Ltd used to prepare books of accounts on accrual basis. But for the year
ended 31st march, 2015, it has decided to follow cash basis. Accordingly, it
discloses in the financial statements, that cash basis of accounting is one of
the significant ACCOUNTING POLICY. As an auditor of the company, do you
think disclosure to be appropriate?

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