1

ACCOUNTING STANDARD-1 AND ITS LEGAL

IMPLICATIONS IN THE CORPORATE WORLD

PRSENTED BY-
DHRUV GUPTA 14
NIKITA NIJHAWAN 25
PRASANJEET TEWARI 73
RIDDHI VORA 35
SHIVIKA GUPTA 48
 2

PUJA CHANDARAN 61

Acknowledgement

We take this opportunity with much pleasure to thank our accounts

professor Mr.GA Waingankar for providing us with such a challenging
topic which gave us valuable insight in the field of accounting standard
and really broadened our horizon to great level. Sir’s help has been
very helpful to us,our doubts difficulty and problems which we faced
was completely tackled by our professor Waingankar sir.
It is with this support we went ahead with our project and made it
successful and presented it on 30-08-2010.
 3

CONTENT
1 Accounting standard –definition
2 Importance of accounting standard and different
Accounting Standard bodies regulating accounting standards in the
world
3 Procedure of issuing accounting standards in India till compliance of
Accounting
Standards
Exposure draft
4 As-1-defination
5) As-1- legal framework as set by ASB (ICAI)
a) Introduction
b) Explanation
c) Nature of accounting policies
d) Areas in which differing accounting policies are encountered
e) Consideration in selection of accounting policies
f) Disclosure of accounting policies
d) Main principles
 4

e) Example violations of as-1 and its equivalent IAS–i and apb-22 in

the corporate
world
6) The equivalent standards as set up by IAS1 (IFRS) and APB22 (us
GAAP)
7) Comparison of ASI (ICAI) and IAS1 (IFRS)
8) Why it is necessary for accounting standards (ICAI) to global with IFRS
(the need to
harmonize accounting standards of different bodies)
9) Convergence of IAS (IFRS) with AS(ICAI) and its effects
*recommendation and our view and Bibliography
AS-1 –DEFINATION

AS 1-Disclosure of Accounting Policies- deals with the disclosure of

significant accounting policies followed in the preparation and
presentation of financial statements. The purpose of this standard is to
promote better understanding of financial statements by establishing the
disclosure of significant accounting policies in the financial statements
and the manner of doing so. Compliance with this standard should go a
long way in facilitating a more meaningful comparison between
financial statements of different enterprises.
The views presented in the statements of an enterprise of its state of
affairs and of the profit or loss account can be significantly affected as
the accounting policies followed vary from enterprise to enterprise. The
disclosure of some of the accounting policies followed in the
preparation and presentation of the financial statements is required by
law in some cases. The Institute of Chartered Accountants of India has,
in Standard issued by it, recommended the disclosure of certain
 5

accounting policies, e.g., translation policies in respect of foreign

currency items. In recent years, a few enterprises in India have adopted
the practice of including in their annual reports to shareholders a
separate statement of accounting policies followed in preparing and
presenting the financial statements.
All significant accounting policies adopted in the preparation and
presentation of financial statements should be disclosed. The disclosure
of the significant accounting policies as such should form part of the
financial statements and the significant accounting policies should
normally be disclosed in one place. Any change in the accounting
policies which has a material effect in the current period or which is
reasonably expected to have a material effect in later periods should be
disclosed. In the case of a change in accounting policies which has a
material effect in the current period, the amount by which any item in
the financial statements is affected by such change should also be
disclosed to the extent ascertainable. Where such amount is not
ascertainable, wholly or in part, the fat should be indicated. If the
fundamental accounting assumptions, that is, going concern,
consistency and accrual are followed in financial statements, specific
disclosure is not required. If a fundamental accounting assumption is
not followed, the fact should be disclosed.
The primary consideration is that the financial statements should give a
true and fair view of the firm’s income and financial position.
The following terms are used in this Standard with the meanings
specified:

1.General purpose financial statements (referred to as ‘financial

statements’) are those intended to meet the needs of users who are not in
a position to
 6

require an entity to prepare reports tailored to their particular

information needs
2.Impracticable Applying a requirement is impracticable when the
entity
cannot apply it after making every reasonable effort to do so.

3.Material Omissions or misstatements of items are material if they

could,
individually or collectively, influence the economic decisions that users
make on the basis of the financial statements. Materiality depends on the
size and nature of the omission or misstatement judged in the
surrounding
circumstances. The size or nature of the item, or a combination of both,
could be the determining factor.

To conceive of and suggest areas in which Accounting Standards need

to be developed.

To formulate Accounting Standards with a view to assisting the

Council of the ICAI in evolving and establishing Accounting
Standards in India.
To examine how far the relevant International Accounting
Standard/International Financial Reporting Standard can be adapted
while formulating the Accounting Standard and to adapt the same.
To review, at regular intervals, the Accounting Standards from the
point of view of acceptance or changed conditions, and, if necessary,
revise the same.
To provide, from time to time, interpretations and guidance on
Accounting Standards.
 7

To carry out such other functions relating to Accounting Standards

Example-ASB UNDER ICAI
IAS-IFRS
US GAAP-FASB

WHAT IS THE IMPORTANCE OF ACCOUNTING

STANDARDS IN THE CORPORATE WORLD AND ITS
EFFECT IN THE GLOBALIZED WORLD
Accounting Standards are used as one of the main compulsory
regulatory mechanisms for preparation of general-purpose financial
reports and subsequent audit of the same, in almost all countries of the
world. Accounting standards are concerned with the system of
measurement and disclosure rules for preparation and presentation of
financials statements. They appear with a set of authoritative statements
of how particular types of transactions, events and other costs should be
recognized and reported in the financial statements. Accounting
standards are devised to furnish useful information to different users of
the financial statements, to such as shareholders, creditors, lenders,
management, investors, suppliers, competitors, researchers, regulatory
bodies and society at large and so on. In fact, such statements are
 8

designed and prescribed so as to improve & benchmark the quality of

financial reporting.

Accounting Standards are the policy documents (authoritative

statements of best accounting practice) issued by recognized expert
accountancy bodies relating to various aspects of measurement,
treatment and disclosure of accounting transactions and events. As
relate to the codification of Generally Accepted Accounting Principles
(GAAP). These are stated to be norms of accounting policies and
practices by way of codes or guidelines to direct as to how the items,
which go to make up the financial statements should be dealt with in
accounts and presented in the annual accounts. The aim of setting
standards is to bring about uniformity in financial reporting and to
ensure consistency and comparability in the data published by
enterprises
INTERNATIONAL ACCOUNTING STANDARD REGULATORY
BODIES
FASB(US-GAAP)- Since 1973, the Financial Accounting Standards
Board (FASB) has been the designated organization in the private
sector for establishing standards of financial accounting that govern the
preparation of financial reports by nongovernmental entities. Those
standards are officially recognized as authoritative by the Securities and
Exchange Commission (SEC) (Financial Reporting Release No. 1,
Section 101, and reaffirmed in its April 2003 Policy Statement) and the
American Institute of Certified Public Accountants (Rule 203, Rules of
Professional Conduct, as amended May 1973 and May 1979). Such
standards are important to the efficient functioning of the economy
because decisions about the allocation of resources rely heavily on
credible, concise, and understandable financial information.
 9

IAS (IFRS)-IASB- The IASB is the independent standard-setting body

of the IFRS Foundation. Its members (currently 15 full-time members)
are responsible for the development and publication of IFRSs, including
the IFRS for SMEs and for approving Interpretations of IFRSs as
developed by the IFRS Interpretations Committee (formerly called the
IFRIC). All meeting of the IASB are held in public and webcast. In
fulfilling its standard-setting duties the IASB follows a thorough, open
and transparent due process of which the publication of consultative
documents, such as discussion papers and exposure drafts, for public
comment is an important component. The IASB engages closely with
stakeholders around the world, including investors, analysts, regulators,
business leaders, accounting standard-setters and the accountancy
profession.

 to develop a single set of high quality, understandable,

enforceable and globally accepted international financial
reporting standards (IFRSs) through its standard-setting body, the
IASB;

 to promote the use and rigorous application of those standards;

 to take account of the financial reporting needs of emerging
economies and small and medium-sized entities (SMEs); and

 to bring about convergence of national accounting standards and

IFRSs to high quality solutions.

 ASB (FRC) UK- The role of the Accounting Standards Board

(ASB) is to issue accounting standards. It is recognized for that
purpose under the Companies Act 1985. It took over the task of
 10

setting accounting standards from the Accounting Standards

Committee (ASC) in 1990.

 The ASB also collaborates with accounting standard-setters from

other countries and the International Accounting Standards Board
(IASB) both in order to influence the development of international
standards and in order to ensure that its standards are developed
with due regard to international developments.

 The ASB has up to ten Board members, of whom two (the

Chairman and the Technical Director) are full-time, and the
remainders, who represent a variety of interests, are part-time (see
membership of Board). ASB meetings are also attended by three
observers. Under the ASB's constitution, votes of seven Board
members (six when there are fewer than ten members) are
required for any decision to adopt, revise or withdraw an
accounting standard. Board members are appointed by a
Nominations Committee comprising the chairman and fellow
directors of the Financial Reporting Council (FRC).

 The Accounting Standards Board is autonomous in its role in

issuing standards. It is, however, the practice of the Board to
consult widely on all its proposals.

 Further details of the ASB's role as an operating body of the FRC

are given in the Regulatory Strategy.

 Accounting standards developed by the ASB are contained in

'Financial Reporting Standards' (FRSs). Soon after it started its
activities, the ASB adopted the standards issued by the ASC, so
that they also fall within the legal definition of accounting
standards. These are designated 'Statements of Standard
 11

Accounting Practice' (SSAPs). Whilst some of the SSAPs have

been superseded by FRSs, some remain in force.

THE ACCOUNTING STANDARD SETTING PROCESS

Broadly, the following procedure is adopted for formulating Accounting

Standards -
1)Accounting Standard Board (ASB) determines the broad areas in
which Accounting Standards need to be formulated.
2) In the preparation of AS, ASB is assisted by Study Groups.
3) ASB also holds discussions with representative of Government,
Public Sector Undertakings, Industry and other organizations
(ICSI/ICWAI) for ascertaining their views.
4) An exposure draft of the proposed standard is prepared and issued
for comments by members of ICAI and the public at large.
5) After taking into consideration the comments received, the draft of the
proposed standard will be finalized by ASB and submitted to the council
of the Institute.
6) The council of the Institute will consider the final draft of the
proposed Standard and If found necessary, modify the same in
consultation with ASB. The AS on the relevant subject will then be
issued under the authority of the council.

AS-1- LEGAL FRAMEWORK  AS SET BY ASB (ICAI)

INTRODUCTION
Recognizing the need to harmonize the diverse accounting policies and
practices at present in use in India and keeping in view the International
developments in the field of accounting, the Council of the Institute of
Chartered Accountants of India constituted the Accounting Standards
Board (ASB) in April, 1977.
 12

Scope
1. An entity shall apply this Standard in preparing and presenting
general purpose financial statements in accordance with
Accounting Standards (ASs).
2. Other ASs set out the recognition, measurement and disclosure
requirements for specific transactions and other events.
3. This Standard does not apply to the structure and content of
condensed interim financial statements prepared in accordance
with AS 25 (Revised 20XX) Interim Financial Reporting. However,
paragraphs 15–35 apply to such financial statements. This
Standard applies equally to all entities, including those that
present consolidated financial statements and those that present
separate financial statements as defined in AS 21 (Revised 20XX)
Consolidated and Separate Financial Statements.
4. This Standard uses terminology that is suitable for profit-oriented
entities,
including public sector business entities. If entities with not-for-
profit activities in the private sector or the public sector apply this
Standard, they may need to amend the descriptions used for
particular line items in the financial statements and for the
financial statements themselves.
5. Similarly, entities that do not have equity as defined in AS 31
(Revised 20XX) Financial Instruments: Presentation (eg some
mutual funds) and entities whose share capital is not equity (eg
some co-operative entities) may need to adapt the financial
statement presentation of members’ or unitholders’ interests.

EXPLANATION
Financial statements (e.g., annual accounts) are internationally
recognised as a “composite whole” with, Balance Sheet, Statement of
Profit and Loss, Notes on accounts, and cash flow picture, as its
constituent elements. Entities governed by the provisions of Companies
 13

Act, or other Statutes while complying with the detailed provisions in

the relevant statues, should also ensure that the accounts do give a true
and fair view of the financial position and performance. A remote
possibility of a conflict between compliance with detailed provisions in
the Statues and the achievement of truth and fairness cannot perhaps be
taken as entirely non-existing. In such a situation, there is an overriding
obligation to provide a “true and fair view” to users of financial
statements.
It is this overriding obligation that constitutes the “major
consideration” in the determination and selection of accounting policies
that are appropriate to an entity, event or transaction. Rightly,
therefore, AS-1 lays emphasis on true and fair view being kept in
primary focus for adoption of any accounting policy.
Consider an entity using projector lights, the useful life of which is
governed by the number of hours it is in use. The basis for an
appropriate accounting policy for depreciating such an asset would be
the actual number of hours such an asset is put to use. Selection of a
straight-line method, allowing for a five-year life would apparently be
inappropriate. Consider another case of usage of a machinery wear and
tear of which is higher in initial years, relative to later years. Selection
of written down value method of depreciation would be appropriate in
this case, as opposed to a straight-line method. Viewed in this backdrop,
true and fair principle would get vitiated if the accounting policy
selected is inappropriate.
An enterprise has, therefore, to exercise scrupulous care in the selection
and application of accounting principles and methods. Such a selection
is guided by “three major considerations”.
 14

(a) Prudence
Prudence is the inclusion of a degree of caution in the exercise of
judgments needed in making estimates required under conditions of
uncertainty.
By exercising prudence, an enterprise does not recognize profits on the
basis of anticipation. These are recognized only when realized though
not necessarily in cash. However, all known losses are anticipated and
provided for.
For example, in determining the carrying amount of inventory, the profit
margins are ignored and yet, the realizable value if less than cost is
taken cognizance of. First Lessons in Accounting Standards 4
(b) Substance over form
If information is to represent faithfully the transactions or events, it is
essential that they are accounted for and presented in accordance with
their substance and economic reality and not merely their legal form.
For example, where rights and interests in a property stands transferred
while legal documentation for the transfer is yet to be completed, the
transaction should be recorded as a sale in the books of transferor and
acquisition in the books of transferee. While distinguishing an
amalgamation in the nature of merger, from one that of purchase, we do
look at the substance of the transaction (i.e. whether the shareholders
come together in a substantially equal partnership to share risks and
benefits), over its form. Under AS-7(R) Construction Contracts, this
concept of substance over form has been fittingly adopted in the
determination of “what constitutes a single contract” for recognition of
costs and revenues.
(c) Materiality
 15

The relevance of information is affected by its materiality. Information

is material if its misstatement, i.e. omission or erroneous statement,
could influence the economic decisions taken by the user, based on such
financial statements. Accordingly, financial statements should disclose
all material items, i.e., knowledge of which might influence the decision
of the user of financial statements.
Three major considerations in selecting accounting policies are
highlighted in the Standard. Other qualitative characteristics of
accounting information, such as (I) relevance, (ii) neutrality, (iii)
completeness, and (IV) reliability are equally critical to users in order
that financial statements are meaningful. In the selection and adoption
of accounting policies these aspects should also be kept in view.
All significant policies adopted in the preparation and presentation of
financial statements should be disclosed at one place and should form
part of the financial statements.
It is customary to furnish a summary of the accounting policies in
respect of the following areas:
• Accounting Convention
• Basis of Accounting
• Fixed Assets
• Depreciation
• Revaluation of Assets
• Investments
• Inventories
• Revenue Recognition
 16

• Investment Income
• Borrowing Cost
• Proposed Dividend
• Retirement Benefits
• Lease Rentals (Lease Income)
• Research and Development Costs
• Taxes on income
• Foreign currency translation
• Claims
• Segment Reporting
• Financial and Management
Information Systems
Nature of Accounting Policies
The accounting policies refer to the specific accounting principles and
the methods of applying those principles adopted by the enterprise in the
preparation and presentation of financial statements. There is no single
list of accounting policies which are applicable to all circumstances.
The differing circumstances in which enterprises operate in a situation
of diverse and complex economic activity make alternative accounting
principles and methods of applying those principles acceptable. The
choice of the appropriate accounting principles and the methods of
applying those principles in the specific circumstances of each
enterprise calls for considerable judgment by the management of the
enterprise. The various Standards of the Institute of Chartered
Accountants of India combined with the efforts of government and other
regulatory agencies and progressive managements have reduced in
recent years the number of acceptable alternatives particularly in the
case of corporate enterprises. While continuing efforts in this regard in
 17

future are likely to reduce the number still further, the availability of
alternative accounting principles and methods of applying those
principles is not likely to be eliminated altogether in view of the
differing circumstances faced by the enterprises.
EXPLANATION

Fundamental Accounting Assumptions

Certain fundamental accounting assumptions underlie the preparation
and presentation of financial statements. They are usually not
specifically stated because their acceptance and use are assumed.
Disclosure is necessary if they are not followed.

Going concern
1. An entity shall prepare financial statements on a going concern
basis unless management either intends to liquidate the entity or to
cease trading, or has no realistic alternative but to do so.
2. When management is aware, in making its assessment, of material
uncertainties related to events or conditions that may cast
significant doubt upon the entity’s ability to continue as a going
concern, the entity shall disclose those uncertainties.
3. When an entity does not prepare financial statements on a going
concern basis, it shall disclose that fact, together with the basis on
which it prepared the financial statements and the reason why the
entity is not regarded as a going concern.
4. In assessing whether the going concern assumption is appropriate,
5. management takes into account all available information about the
future, which is at least, but is not limited to, 12months from the
end of the reporting period.
6. When an entity has a history of profitable operations and ready
access to financial resources, the entity may reach a conclusion
that the going concern basis of accounting is appropriate without
detailed analysis.
7. In other cases, management may need to consider a wide range of
factors relating to current and expected profitability, debt
repayment schedules and potential sources of replacement
 18

financing before it can satisfy itself that the going concern basis is
appropriate.
Accrual basis of accounting
An entity shall prepare its financial statements, except for cash flow
information, using the accrual basis of accounting.
When the accrual basis of accounting is used, an entity recognizes items
as assets, liabilities, equity, income and expenses (the elements of
financial statements).
Consistency
It is assumed that accounting policies are consistent from one period to
another.

Areas in which differing Accounting Policies are Encountered

There is no single list of accounting policies which are applicable to all
circumstances. The differing circumstances in which enterprises operate
in
a situation of diverse and complex economic activity make alternative
accounting principles and methods of applying those principles
acceptable.
The choice of the appropriate accounting principles and the methods of
applying those principles in the specific circumstances of each
enterprise
calls for considerable judgement by the management of the enterprise.
The following are examples of the areas in which different
accounting
policies may be adopted by different enterprises.
• 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
 19

• Treatment of retirement benefits

• Recognition of profit on long-term contracts
• Valuation of fixed assets
• Treatment of contingent liabilities.
The above list of examples is not intended to be exhaustive.

Considerations in the Selection of Accounting Policies

The primary consideration in the selection of accounting policies by an
enterprise is that the financial statements prepared and presented on the
basis of such accounting policies should represent a true and fair view
of the
state of affairs of the enterprise as at the balance sheet date and of the
profit
or loss for the period ended on that date.
For this purpose, the major considerations governing the selection and
application of accounting policies are:—
a. Prudence
In view of the uncertainty attached to future events, profits are not
anticipated but recognized only when realized though not necessarily in
cash. Provision
is made for all known liabilities and losses even though the amount
cannot be
determined with certainty and represents only a best estimate in the
light of
available information.
b. Substance over Form
The accounting treatment and presentation in financial statements of
transactions and events should be governed by their substance and not
merely by the legal form.

c. Materiality
Financial statements should disclose all “material” items, i.e. items the
knowledge of which might influence the decisions of the user of the
financial
statements.
 20

Disclosure of Accounting Policies

Following are certain disclosures which are supposed to be disclosed
according to AS-1
1.Materiality and aggregation
An entity shall present separately each material class of similar items.
An entity shall present separately items of a dissimilar nature or
function unless they are immaterial.
2.Offsetting
An entity shall not offset assets and liabilities or income and
expenses,unless required or permitted by an AS.
3. Frequency of reporting
An entity shall present a complete set of financial statements (including
comparative information) at least annually. When an entity changes the
end of its reporting period and presents financial statements for a
period longer or shorter than one year, an entity shall disclose, in
addition to the period covered by the financial statements:
(a) the reason for using a longer or shorter period, and
(b) the fact that amounts presented in the financial statements are not
entirely comparable.
4.Comparative information
Except when ASs permit or require otherwise, an entity shall disclose
comparative information in respect of the previous period for all
amounts reported in the current period’s financial statements. An entity
shall include comparative information for narrative and descriptive
information when it is relevant to an understanding of the current
period’s financial statements.
5.When the entity changes the presentation or classification of items in
its financial statements, the entity shall reclassify comparative amounts
unless reclassification is impracticable. When the entity reclassifies
comparative amounts, the entity shall disclose:
(a) the nature of the reclassification;
(b) the amount of each item or class of items that is reclassified; and
(c) the reason for the reclassification.
 21

6. When it is impracticable to reclassify comparative amounts, an entity

shall disclose:
(a) the reason for not reclassifying the amounts, and
(b) the nature of the adjustments that would have been made if the
amounts had been reclassified.
7. Consistency of presentation
An entity shall retain the presentation and classification of items in the
financial statements from one period to the next unless:it is apparent,
following a significant change in the nature of the entity’s operations or
a review of its financial statements, that another presentation or
classification would be more appropriate

EXAMPLE OF A COMPANY VIOLATING AS1

Satyam Accounting scandal- Founder and chairman Ramalinga Raju

the head of Indian outsourcing firm Satyam Computer Services Ltd.
India’s fourth- largest software services provider resigned, disclosing
that profits had been falsely inflated for years and sending its shares
tumbling nearly 80 percent. Satyam's CEO, Ramalingam Raju, took
responsibility for broad accounting improprieties that overstated the
company's revenues and profits and reported a cash holding of
approximately $1.04 billion that simply did not exist.The mammoth
fraud at IT major Satyam, involving over Rs 14,000 crore as per
CBI,proved to be the most brazen swindling act, forcing the government
to re-write corporate governance rules during 2009 and tighten the
norms for chartered accountants. The government was forced to take
over management of a global player to safeguard the credibility of India
Inc, besides protecting the interest of investors and salvaging the
nation’s image across the globe

The disclosure of accounting fraud by Satyam founder Raju towards the

beginning 2009, then estimated at around Rs 7,800 crore, not only
 22

unnerved India Inc but also the market regulator Securities and
Exchange Board of India (SEBI). Following open admission of guilt by
Raju, the Corporate Affairs Ministry worked on three fronts to save the
IT company, bring the guilty to books and streamlining regulations to
prevent recurrence of such frauds in future.
LESSONS FROM SATYAM
These agencies SEBI, CII looked into specific aspects of the fraud,
especially the role of the company’s auditor Price Waterhouse. To check
recurrence of such
wrongdoings in future, the Ministry put in place early warning system
and initiated steps to modify the draft Companies Bill to give statutory
teeth to the its
investigating arm SFIO.The companies bill, reintroduced in parliament
in August, seeks, among other things, promotion of shareholders’
democracy with protection of rights of minority shareholders,
responsible self-regulation with adequate disclosure and accountability
and lesser government control over internal corporate processes. It also
proposes to make it mandatory for listed companies to have 33 per cent
independent directors, while defining clearly their roles and
responsibilities. The government is also planning to bring out a
voluntary corporate governance code based on the recommendations of
industry chambers like CII and FICCI. The recommendations of a CII
task force headed by Naresh Chandra, includes recommendations on a
variety of corporate governance issues like the roles and responsibilities
of independent directors, auditors, regulatory agencies, besides
institutional investors and the press. The report has also suggested
setting up of a recommendation committee for fixing the remuneration
of the company board, separation of the office of Chairman and CEO,
certificate of independence for independent directors, an institution of
 23

mechanism for whistle blowers and a cap at 10 per cent on the revenues
coming from a single client to an audit firm.
IAS1(IFRS) AND APB22(US GAAP)
IAS1- This Standard prescribes the basis for presentation of general
purpose financial statements to ensure
comparability both with the entity’s financial statements of previous
periods and with the financial statements
of other entities. It sets out overall requirements for the presentation of
financial statements, guidelines for their
structure and minimum requirements for their content.
A complete set of financial statements comprises:
(a) a statement of financial position as at the end of the period;
(b) a statement of comprehensive income for the period;
(c) a statement of changes in equity for the period;
(d) a statement of cash flows for the period;
(e) notes, comprising a summary of significant accounting policies and
other explanatory information; and
(f) a statement of financial position as at the beginning of the earliest
comparative period when an entity
applies an accounting policy retrospectively or makes a retrospective
restatement of items in its financial
statements, or when it reclassifies items in its financial statements.
APB22- Disclosure of accounting policies should identify and describe
the accounting principles followed by the reporting entity and the
methods of

applying those principles that materially affect the determination of

financial position, changes in financial position, or results of
operations. In general, the disclosure should encompass important
judgments as to appropriateness of principles relating to recognition of
 24

revenue and allocation of asset costs to current and future periods; in

particular, it should encompass those accounting principles and
methods that involve any of the following:
a. A selection from existing acceptable alternatives;
b. Principles and methods peculiar to the industry in which the
reporting entity operates, even if such principles and methods are
predominantly followed in that industry;
c. Unusual or innovative applications of generally accepted
accounting principles (and, as applicable, of principles and methods
peculiar to the industry in which the reporting entity operates).and
Examples of disclosures by a business entity commonly required with
respect to accounting policies would include, among others, those
relating to basis of consolidation, depreciation methods, amortization of
intangibles, inventory pricing, accounting for research and development
costs (including basis for amortization), translation of foreign
currencies, recognition of profit on long-term construction-type
contracts, and recognition of revenue from franchising leasing
operations.

COMPARISON OF IFRS(IAS1) AND

ICAI(AS1)

IFRS(IAS1) ASB(AS1) Major Differences

IAS1- AS1- AS 1 is based on the pre-revised IAS
Presentationof Disclosure 1. AS 1 is presently under revision to
Financial of bring it in line with the current IAS 1.
 25

Statements Accounting The Exposure Draft of the revised AS

Policies 1 is being finalised on the basis of the
comments received on its limited
exposure amongst the specified
outside bodies. The major differences
between IAS 1 and the draft revised
AS 1 are discussed hereinafter.

Differences due to removal of

alternatives

1) Unlike IAS 1, the draft of revised

AS 1 does not provide any option with
regard to the presentation of
‘Statement of Changes in Equity’.  It
requires statement showing all
changes in the equity to be presented.

The IASB has recently issued an

Exposure Draft of the proposed
Amendments to IAS 1. The Exposure
Draft proposes to remove the option
given in IAS 1 and to require the
presentation of statement showing all
changes in the equity which is in line
 26

with the decisions taken by the ASB of

the ICAI.

2) Unlike IAS 1, the draft of revised

AS 1 does not provide any option with
regard to additional disclosures
regarding share capital, e.g., number
of shares authorised, issued, fully
paid, etc. and regarding nature and
purpose of reserves, etc., to be made
on the face of the balance sheet or in
the notes.  Considering the
information overload, the draft of
revised AS 1 requires this information
to be presented only in the notes and
schedules and not on the face of the
balance sheet.

Differences due to legal and

regulatory environment

3) In India, the laws governing the

companies, banking enterprises and
insurance enterprises prescribe
detailed formats for the financial
 27

statements to be followed by
respective enterprises.   To make the
revised AS 1 acceptable to the law
makers/ regulators, the ASB has
decided to give detailed formats for
financial statements for companies in
an Appendix.  In the Appendix, mainly
additional disclosures as compared to
IAS 1 are proposed to be given.

4) IAS 1 uses the expression ‘present

fairly’ whereas draft of revised AS 1
uses the expression ‘true and fair’ in
view of the various laws requiring the
relevant entities and the auditors to
ensure that the financial statements
give a ‘true and fair view’.

Conceptual Differences

IAS 1 requires that if different

measurement bases are used for
different classes of assets, they should
be presented as separate line items on
the face of the balance sheet.  It is felt
 28

that requiring bifurcation of assets on

the basis of different measurement
bases on the face of the balance sheet
itself would result in information
overload.  Keeping this in view, the
draft of the proposed revised AS 1
does not require separate presentation
of such assets on the face of the
balance sheet; rather, it requires
separate presentation of such assets to
be made in the schedules and notes.

THE NEED FOR GOING GLOBAL WITH

IFRS
Different companies observe it from published annual accounts of
various Indian companies that there are divergent accounting practices
for the same transaction. This in effect is defeating the comparability of
financial statements.

1) Adoption of different accounting standards causes difficulties in

making relative evaluation of performance of companies. This
phenomenon hinders the valuation and consequently the decision
making process.
 29

2) To overcome these problems, harmonization of accounting

standards has already been started. Accounting harmonization is
not an end by itself, but it is a means to an end. The ultimate
objective of harmonizing accounting practices among countries is
to foster international comparability of accounts.
3) But still the harmonization process has a long way to go. Many
standard setting bodies and regulators of different nations are
ardent protectors of their local standards, they are in no mood to
allow their job being taken over by a foreign entity.
4) Thus winning the consent of these bodies is vital for international
accounting standards to don the mantle of common accounting
code, i.e. harmonization of common accounting standards, which
will make implementing countries more competitive
internationally.
5) Accounting standards vary from one country to another. There
are various factors that are responsible for this. Some of the
important factors are
- legal structure
- sources of corporate finance
- maturity of accounting profession
- degree of conformity of financial accounts
- government participation in accounting and
- Degree of exposure to international market
6) Diversity in accounting standards not only means additional cost
of financial reporting but can cause difficulties to multinational
groups in the manner in which they undertake transactions. It is
quite possible for a transaction to give rise to a profit under the
accounting standards of one country where as it may require a
deferral under the standards of another.
7) When a multinational company (MNC) has to report under the
standards of both the countries it might lead to some extremely
odd results. For instance, Daimler Benz, who was the first German
to secure stock market listing in the United States, reported a net
profit of DM 158 m for the six months to June 1998 based on
German GAAP. The U.S GAAP reconciliation statement revealed
 30

that the company had incurred a loss of DM. 949m.

- Similarly, British Telecom Inc. reported a net profit of £1767 for
the year ended 31-3-1994 under the UK GAAP but under the US
GAAP reconciliation- the net profit reduced to £1476.
- Although there are different solutions that have been suggested
to resolve the problems associated with filling financial statements
across national boundaries like reciprocity and reconciliation, but
they not free from limitations. International accounting standards
serves the purpose of reducing diversity in accounting practices
but invites qualitative differences of financial accounting and
reporting systems.
8) Again these qualitative differences may be removed if a single set
of internationally accepted standards can be used for all cross-
border listed financial statements. These differences may be
reduced if the recognized professional accounting bodies of the
world arrange a happy marriage between the national and
international accounting standards.
9) Issues in adopting global accounting standards: -There seems to
be a reluctance to adopt the International Accounting Standards
Committee (IASC) norms in the US?
This is definitely a problem. The US is the largest market and it is
important for IASC standards to be harmonized with those
prevailing there. The US lobby is strong, and they have formed the
G4 nations, with the UK, Canada, and Australia (with New
Zealand) as the other members. IASC merely enjoys observer status
in the meetings of the G4, and cannot vote. Even when the
standards are only slightly different, the US accounting body treats
them as a big difference, the idea being to show that their
standards are the best. We have to work towards bringing about
greater acceptance of the IASC standards.

CONVERGENCE OF IFRS WITH ASB-ICAI AND ITS

EFFECTS FROM 1-04-2011
 31

The ICAI has proposed two option for convergence

1- All at once
2- Stage wise Approach.
But since the stage wise approach leads to non compliance with either
of IFRS or AS,hence the “all at once approach” has been adopted.First
Time adoption
For first time adoption, two key terms needs to be understood:
Reporting date-It is the end of latest period covered by financial
statements. Transition date- It is beginning of earliest period for which
an entity presents first full IFRS compliant financial statements.For an
Indian Company, the first reporting date will be 31-03-2012 and
transition date will be 01-04-2010.Hence, first set of financials shall be
for 01-04-2011 to 31-03-2012 with IFRS comparables also to be
provided for 01-04-2010 to 31-03-2011.

Applicability

ICAI is of the view that IFRS to be adopted for public interest entities
such listed Co, Banking Companies, Insurance entities and large size
entities from the Accounting period beginning on or after April 2011.
The view is further strengthened by convergence process being initiated
by Ministry of Corporate Affairs.For this purpose, public interest
entities are the entities falling under the Categorylevel 1 as defined by
ICAI except that turnover should exceed Rs 100 Crs (Instead of Rs 50
Crs) and borrowing should exceed Rs 25 Crs (instead of Rs 10Crs)
Even if listed company does not fulfill the above criteria for level 1
enterprises, the application of IFRS is mandatory. Early adoption of
IFRS is encouraged but it should be the adoption of all IFRS and should
not be on selective basis. For other entities, IFRS are not mandatory but
recommendatory.
 32

Bibliography
www.icai.org
www.fasb.org
www.frc.org
www.ifrs.com
www.aicpa.org
www.rbi.org
www.icaew.com