Indian Accounting Standards

 Unit 1: 

Introduction to Indian Accounting Standards 

Overview of Accounting Standards – Objectives of Accounting Standards – Benefits and Limitations of Accounting Standards – Process of Formulation of Accounting Standards in India – List of Indian Accounting Standards (Ind AS) – Need for Convergence Towards Global Standards– International Financial Reporting Standards as Global Standards – Benefits of Convergence with IFRS – Applicability of Ind AS in India. 

Accounting Standards

• Accounting standards are written statements of standardised accounting rules and procedures used in practice to ensure that financial statements are prepared in a uniform and consistent manner

• An accounting standard is a set of practices and policies used to systematise bookkeeping and other accounting functions across firms and over time.
• Banks, investors, and regulatory agencies count on accounting standards to ensure information about a given entity is relevant and accurate.They are the framework of rules and regulations for accounting and reporting in a country. 
  
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Objectives of Accounting Standards

The main objectives of forming these standards. 

1. The main aim is to improve the reliability of financial statements. Now because the financial statements have to be made following the standards the users can rely on them.

 2. comparability.-Following these standards will allow for inter-firm and intra-firm comparisons. This allows us to check the progress of the firm and its position in the market. 

3. It also looks to provide one set of accounting policies that include the necessary disclosure requirements and the valuation methods of various financial transactions. 

Benefits of Accounting Standards 

1] Attains Uniformity in Accounting Accounting Standards provides rules for standard treatment and recording of transactions. They even have a standard format for financial statements. These are steps in achieving uniformity in accounting methods. 

2] Improves Reliability of Financial Statements --stakeholders of a company  rely on the financial statements for their information and base their decisions on the data provided by these financial statements. Also potential investors make their investment decisions based on such financial statements. So it is essential these statements present a true and fair picture of the financial situation of the company. The Accounting Standards (AS) ensure that the statements are reliable and trustworthy. 

3] Prevents Frauds and Accounting Manipulations Accounting Standards (AS) lay down the accounting principles and methodologies that all entities must follow. One outcome of this is that the management of an entity cannot manipulate with financial data. So these standards stops management to misrepresent any financial information. 

4] Assists Auditors Now the accounting standards lay down all the accounting policies, rules, regulations, etc in a written format.So if an auditor checks that the policies have been correctly followed he can be assured that the financial statements are true and fair. 

5] Comparability  Since all entities of the country follow the same set of standards their financial accounts become comparable to some extent. The users of the financial statements can analyze and compare the financial performances of various companies before taking any decisions. 

 6] Determining Managerial Accountability The accounting standards help measure the performance of the management of an entity. It can help measure the management’s ability to increase profitability, maintain the solvency of the firm, and other such important financial duties of the management. 

 Limitations of Accounting Standards 

There are a few limitations of Accounting Standards as well. The regulatory bodies keep updating the standards to restrict these limitations. 

1] Difficulty between Choosing Alternatives -There are alternatives for certain accounting treatments or valuations. Like for example, stocks can be valued by LIFO, FIFO, weighted average method, etc. So choosing between these alternatives is a tough decision for the management. The AS does not provide guidelines for the appropriate choice. 

2] Restricted Scope -Accounting Standards cannot override the laws or the statutes. They have to be framed within the confines of the laws prevailing at the time. That can limit their scope to provide the best policies for the situation.

Procedure for Formulation of Accounting Standards

Let us take a brief look at the procedure setting process that the ASB follows

• First, the ASB will identify areas where the formulation of accounting standards may be needed
• Then the ASB will constitute study groups and panels to discuss and study the topic at hand. Such panels will prepare a draft of the standards. The draft normally includes the definition of important terms, the objective of the standard, its scope, measurement principles and the representation of said data in the financial statements.
• The ASB then carries out deliberations of the said draft of the standard. If necessary changes and revisions are made.
• Then this preliminary draft is circulated to all concerned authorities. This include the members of the ICAI, and the Department of Company Affairs (DCA), the SEBI, Comptroller and Auditor General of India etc. These members and departments are invited to give their comments.
• Then the ASB arranges meetings with these representatives to discuss their views and concerns about the draft and its provisions
• The exposure draft is then finalized and presented to the public for their review and comments
• The comments by the public on the exposure draft will be reviewed. Then a final draft will be prepared for the review and consideration of the ICAI
• The Council of the ICAI will then review and consider the final draft of the standard. If necessary they may suggest a few modifications.
• Finally, the Accounting Standard is issued. In the case of standard for non-corporate entities, the ICAI will issue the standard. And if the relevant subject relates to a corporate entity the Central Government will issue the standard.

List of Indian Accounting Standards (Ind AS)

ICAI’s AS-1: Disclosure of Accounting Policies

AS-2 of ICAI deals with the disclosure of significant accounting policies followed in preparing and presenting financial statements, to facilitate meaningful comparison of financial statements of different enterprises/ periods.

ICAI’s AS-2: Valuation of Inventories

AS-2 of ICAI deals with the determination of value at which inventories are carried in the financial statements, including the ascertainment of cost of inventories and any write-down thereof to net realisable value.

ICAI’s AS-3: Cash Flow Statements

AS-3 of ICAI deals with the provision of information about the historical changes in cash and cash equivalents of an enterprise by means of a Cash Flow Statement which classifies cash flows during the period from operating, investing and financing activities.

ICAI’s AS-4: Contingencies and Events Occurring After Balance Sheet Date 

AS-4 of ICAI deals with the treatment of contingencies and events occurring after the balance sheet date.

ICAI’s AS-5: Net profit or Loss for the period, Prior Period Items and Changes in Accounting Policies

AS-5 of ICAI should be applied by an enterprise in presenting profit or loss from ordinary activities, extraordinary items and prior period items in the Statement of Profit and Loss, in accounting for changes in accounting estimates, and in disclosure of changes in accounting policies.

ICAI’s AS-7: Construction Contracts 

AS-7 of ICAI prescribes the accounting for construction contracts in the financial statements of contractors.

ICAI’s AS-9: Revenue Recognition 

AS-9 of ICAI deals with the bases for recognition of revenue in the Statement of Profit and Loss of an enterprise. The Standard is concerned with the recognition of revenue arising in the course of the ordinary activities of the enterprise from: a) Sale of goods; b) Rendering of services; and c) Interest, royalties and dividends.

ICAI’s AS-10: Property, Plant and Equipment 

The objective of AS-10 of ICAI is to prescribe the accounting treatment for property, plant and equipment (PPE).

ICAI’s AS-11: The Effects of Changes in Foreign Exchange Rates 

AS-11 of ICAI lays down principles of accounting for foreign currency transactions and foreign operations, i.e., which exchange rate to use and how to recognise in the financial statements the financial effect of changes in exchange rates.

ICAI’s AS-12: Government Grants 

AS-12 of ICAI deals with accounting for government grants. Government grants are sometimes called by other names such as subsidies, cash incentives, duty drawbacks, etc.

ICAI’s AS-13: Accounting for Investments

AS-13 of ICAI deals with accounting for investments in the financial statements of enterprises and related disclosure requirements.

ICAI’s AS-14: Accounting for Amalgamations

AS-14 of ICAI deals with accounting for amalgamations and the treatment of any resultant goodwill or reserves.

ICAI’s AS-15: Employee Benefits

The objective of AS-15 of ICAI is to prescribe the accounting treatment and disclosure for employee benefits in the books of employer except employee share-based payments. It does not deal with accounting and reporting by employee benefit plans.

ICAI’s AS-16: Borrowing Costs

AS-16 of ICAI should be applied in accounting for borrowing costs. This Standard does not deal with the actual or imputed cost of owners’ equity, including preference share capital not classified as a liability.

ICAI’s AS-17: Segment Reporting

The objective of AS-17 of ICAI is to establish principles for reporting financial information, about the different types of segments/ products and services an enterprise produces and the different geographical areas in which it operates.

ICAI’s AS-18: Related Party Disclosures

AS-18 of ICAI should be applied in reporting related party relationships and transactions between a reporting enterprise and its related parties. The requirements of this Standard apply to the financial statements of each reporting enterprise and also to consolidated financial statements presented by a holding company.

ICAI’s AS-19: Leases

The objective of AS-19 of ICAI is to prescribe, for lessees and lessors, the appropriate accounting policies and disclosures in relation to finance leases and operating leases.

ICAI’s AS-20: Earnings Per Share

AS-20 of ICAI prescribes principles for the determination and presentation of earnings per share which will improve comparison of performance among different enterprises for the same period and among different accounting periods for the same enterprise.

ICAI’s AS-21: Consolidated Financial Statements

The objective of AS-21 of ICAI is to lay down principles and procedures for preparation and presentation of consolidated financial statements. These statements are intended to present financial information about a parent and its subsidiary(ies) as a single economic entity to show the economic resources controlled by the group, obligations of the group and results the group achieves with its resources.

ICAI’s AS-28: Accounting for Taxes on Income

The objective of AS-22 of ICAI is to prescribe accounting treatment of taxes on income since the taxable income may be significantly different from the accounting income due to many reasons, posing problems in matching of taxes against revenue for a period.

ICAI’sAS-23: Accounting for Investments in Associates

AS-23 of ICAI should be applied in accounting for investments in associates in the preparation and presentation of consolidated Financial Statements (CFS) by an investor.

ICAI’s AS-24: Discontinuing Operations

The objective of AS-24 of ICAI is to establish principles for reporting information about discontinuing operations, thereby enhancing the ability of users of financial statements to make projections of an enterprise’s cash flows, earnings generating capacity, and financial position by segregating information about discontinuing operations from information about continuing operations. AS 24 applies to all discontinuing operations of an enterprise.

ICAI’s AS-25: Interim Financial Reporting

AS-25 of ICAI applies if an entity is required or elects to publish an interim financial report. The objective of this standard is to prescribe the minimum content of an interim financial report and to prescribe the principles for recognition and measurement in complete or condensed financial statements for an interim period.

ICAI’s AS-26: Intangible Assets

AS-26 of ICAI prescribes the accounting treatment for intangible assets (i.e. identifiable non-monetary asset, without physical substance, held for use in the production or supply of goods or services, for rental to others, or for administrative purposes).

ICAI’s AS-27: Financial Reporting of Interests in Joint Ventures

The objective of AS-27 of ICAI is to set out principles and procedures for accounting for interests in joint ventures and reporting of joint venture assets, liabilities, income and expenses in the financial statements of venturers and investors.

ICAI’s  AS-28: Impairment of Assets

The objective of AS-28 of ICAI is to prescribe the procedures that an enterprise applies to ensure that its assets are carried at no more than their recoverable amount. The asset is described as impaired if its carrying amount exceeds the amount to be recovered through use or sale of the asset and AS 28 requires the enterprise to recognise an impairment loss in such cases. It should be noted that AS 28 deals with impairment of all assets unless specifically excluded from the scope of the Standard.

ICAI’s AS-29: Provisions, Contingent Liabilities and Contingent Assets

The objective of AS-29 of ICAI is to ensure that appropriate recognition criteria and measurement bases are applied to provisions and contingent liabilities and that sufficient information is disclosed in the notes to the financial statements to enable users to understand their nature, timing and amount. The objective of this Standard is also to lay down appropriate accounting for contingent assets.

List of ICAI’s Non-Mandatory Accounting Standards (AS 30~32)

ICAI has announced on 15 Nov. 2016 that ‘AS 30- Financial Instruments: Recognition and Measurement’, ‘AS 31- Financial Instruments: Presentation’, ‘AS 32- Financial Instruments: Disclosures’ stands withdrawn.

Need for Convergence Towards Global Standards–

Convergence of IFRS and Indian AS Indian Accounting Standards are formulated by the Accounting Standard Board (ASB) of the ICAI as notified by the Ministry of Corporate Affair. These standards are framed keeping in mind the economic environment and practices of India. They are made to suit the Indian companies and the disclosure requirements of the Indian government. The IFRS, on the other hand, are made keeping global standards and environment in mind. 

Convergence would mean bridging the gap between the two, i.e the IFRS and the India AS. Convergence will involve alignment of the two sets of standards. The compromise is done by adopting the policies of the IFRS either fully or at least partially. Following are the few benefits of Convergence. 

Benefits of Convergence

1]Beneficial to the Economy If the accounting standards are converged it will promote international business and increase the influx of capital into the country. This will help India’s economy grow and expand. International investing will also mean more capital for domestic companies as well. 

2] Beneficial to Investors Convergence is a boon for investors who wish to invest in foreign markets or economies. It makes it much easier for them to study and compare the financial statements of foreign companies. Since the financial statements are made using the same set of standards it is also easier for the investors to understand and analyze them. 

3] Beneficial to the Industry With globally accepted standards the industry can also surge ahead. So convergence is important for the industry as well. It will allow the industry to lower the cost of foreign capital. If companies are not burned by adopting two different sets of standards it will allow them easier entry into the market. 

4] More Transparency Convergence will benefit the users of the financial statements as well. It will make it easier for them to understand the financial statements. And this will generate better transparency and raise the confidence of the investors to invest funds. 

5] Cost Saving Firstly it will exempt companies from maintaining separate accounting books according to separate standards. This will save a lot of work hours and money for the finance department. And also planning and executing auditing will also become easier. It will be especially helpful for those companies that have subsidiaries in many countries. And the cost of capital will also reduce since capital would be more accessible and easily available.

International Financial Reporting Standards as Global Standards 

The rapid expansion of international trade and internationalization of firms, the development of new communication technologies, and the emergence of international competitive forces has made it extremely necessary to have uniform and internationally acceptable accounting standards. 

A single set of accounting standards would enable internationally to standardize training and assure better quality on a global screen, it would also permit international capital to flow more freely, enabling companies to develop consistent global practices on accounting problems. It would be beneficial to regulators too, as a complexity associated with needing to understand various reporting regimes would be reduced.

Benefits of convergence of IAS with IFRS

Following are some of the benefits of convergence of IAS with IFRS:

1. Access to global financial capital markets: Convergence will help the Indian companies gain access to the global financial capital markets where they can easily attract investments from abroad on cheaper rates which helps in their overall growth and expansion.
2. Attract investment and boost cross border trade: Indian companies following IFRS will be able to list themselves on the foreign stock markets and this would facilitate cross border trade and investment especially in unrepresented geographies.
3. Reduce and eliminate duplicity of efforts: Convergence will further reduce the dual reporting as the Indian companies would no longer need to prepare separate financial statements thus eliminating duplicity of efforts in financial reporting and unnecessary accounting.
4. Increases reliability and comparability: Since the global tax and accounting jurisdictions accept IFRS, convergence of the same with IAS will increase reliability and comparability of the accounts of Indian companies. This will instil confidence of the foreign investors in the Indian companies and encourage them to invest more in the Indian companies.
5. Increase acceptability of Indian professionals in foreign markets: Such convergence will open the doors for global opportunities for the Indian accounting professionals and highlight their expertise and talents abroad thus becoming a forex generating machine for India.

Challenges associated with convergence  of IAS with IFRS

1. Increases training costs: Since most of the professionals have not been trained in IFRS, it becomes a huge cost burden on the companies on training and awareness of such employees. This makes it difficult in the implementation of the IFRS in their companies.
2. Amendments in Indian regulations: Since IFRS are different from the existing regulations, therefore, a complete overhaul of the existing regulations would be required for the implementation of IFRS standards. Amendments have to be made in Companies Act, 2013, SEBI Act, 1992, Income Tax Act, 1961 etc. to bring them in consonance with the IFRS. These are the legal hurdles in the implementation of IFRS in India.
3. Differences in the systems of measurement: The IFRS follows the fair value system of asset measurement whereas Indian GAAP recognises the historical system. Such differences create subjectivity and volatility in the financial statements and lead to different results of performance and earnings of the company.
4. Changes in the IT systems: convergence with IFRS would require new financial accounting softwares for reporting and the existing reporting infrastructure needs to be changed which require substantial investment by the company and the companies in India are reluctant to make investments which involve a lot of time, money and efforts.
5. For SME industry: The cost of such convergence far outweighs the benefits that will accrue from implementing it. The small and medium enterprises (SME) do not have adequate resources and skills in financial knowledge which further contributes to the non-convergence of IAS with IFRS. But, such a sector cannot be ignored since it plays a major role in the Indian economy.  

Convergence of IAS with IFRS is certainly an uphill task. It requires that all the stakeholders form the consensus that such convergence will increase the credibility of the Indian companies in the International financial markets and bring gains to them. Indian companies cannot afford to be complacent in the convergence or these companies will lag behind. The process of convergence of IAS with IFRS has been very slow and it requires proactive efforts from the government and also from the industry itself to initiate the process of convergence. The government can set up a task force for recommending changes in the existing legal framework for the smooth assimilation of IFRS. If possible, help can also be sought from those nations who have successfully implemented these standards.  

Applicability of IND AS in INDIA

IND AS is also known as Indian Accounting Standards or Indian version of IFRS. Indian AS or IND AS is used in the context of Indian companies.

In 2015, the Ministry of Corporate Affairs (MCA) issued notice to companies regarding the adoption of IND AS by Indian Accounting Standards Rules 2015.

The applicability of the IND AS started in a phased manner starting from the accounting period 2016-17. The MCA has issued three amendments to the rules with each amendment passed in 2016, 2017 and 2018.

IND AS are a set of accounting standards that are a modified form of IFRS in order to make reports prepared by Indian Companies more accessible for the global market.

Most companies are now expanding overseas and along with that brings about the necessity of merging Indian accounting standards with the International standards. This led to the formation of IND AS.

Phases of Implementation

MCA has issued a notice to all the companies for phase wise implementation of the IND AS from the existing IND GAAP. This included directives for the classes of the company, which was based on the net worth and listing status.

Phase 1: In this phase, IND AS was made mandatory from 1st April 2016 for the following class of companies

1. Listed or Unlisted Company
2. Having a net worth which is greater than or equal to 500 crores.

Phase 2: This phase started from 1st April 2017 and included the following companies

1. Listed or in the process of getting listed (upto 31st March 2016)
2. Having a net worth which is greater than or equal to 250 crores but less than 500 crores for any of the accounting periods (2014-17)

Phase 3: The 3rd phase of implementation made it mandatory for certain classes of companies such as Banks, Insurance companies, NBFC (Non-Banking Financial Corporation) that have a net worth more than or equal to 500 Crores effective from 1st April 2018.

Phase 4: This phase which started on 1st April, 2019 made it mandatory for those NBFCs having net worth of 250 crores but less than 500 crores and to have the rule applicable from 1st May, 2019.

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