MODULE-5

INTRODUCTION

Accounting standards are different from Generally Accepted

Accounting Principles (GAAP) or Accounting concepts. GAAP or
Accounting Concepts are generally accepted accounting principles
to achieve comparability and uniformity of the financial statements.
They provide a number of alternative treatments for the same item.
But accounting standards provide solutions to specific issues.
Accounting standards narrow down the areas of differences in
accounting principles and provide standard accounting norms to be
followed by accountants.

ACCOUNTING STANDARDS – ICAIANDASB

The Institute of Chartered Accountants of India, fully recognizing the

need of harmonizing the diverse accounting policies and practices
established ‘Accounting Standards Board’ on 21st April 1977 so that
accounting as a language could develop along the right lines.
Accounting Standard Board’s (ASB) main function is to formulate
accounting standards to be issued under the authority of the council
of the institute. Accounting Standards provide rules and criteria of
accounting measurement. However the rules / criteria are intended
to be used in a social system and hence are never intended to be
rigid as in case of physical sciences. At the same time, they are
intended to remove irrational and diverse accounting practices.

Constitution of ASB: The Constitution of ASB gives adequate

representation to all interested parties. At present, it consists of
members of the council and representatives of industry, banks,
Company Law Board, Central Board of Direct Taxes and the
Comptroller of Auditor General of India, Security Exchange Board of
India etc.

FUNCTIONS OF ASB: The following are the functions performed by

ASB.
  To formulate accounting which the council of ICAI in India may
establish.

 To propagate the Accounting Standards and persuade the

parties concerned to adopt them in the preparation and
presentation of financial statements.

 To issue guidance notes on the Accounting Standards and give

clarifications on issues arising there from.

 To review the Accounting Standards at periodical intervals.

 To specify the date of effect of each standard and the class of

enterprises to which it will apply. Unless otherwise stated, no
standard will have retrospective application.

INDIAN ACCOUNTING STANDARDS

The following is the list of accounting standards issued by the

Institute of Chartered Accountants of India along with their status:

AS- Name of the Accounting Standards Status

Nos
AS-1 Disclosure of Accounting Policies Mandatory
AS-2 Valuation of Inventories Non-Mandatory
AS-3 Changes in Financial Position Mandatory
AS-4 Contingencies and Events Occurring Mandatory
After the Balance Sheet Date
AS-5 Prior Period and Extraordinary items and Mandatory
changes in Accountancy Policies
AS-6 Depreciation Accounting Mandatory
AS-7 Accounting for Construction Contracts Mandatory
AS-8 Accounting for Research and Mandatory
Development
AS-9 Revenue Recognition Mandatory
AS-10 Accounting for Fixed Assets Mandatory
AS-11 Accounting for the Effects of Changes in Mandatory
Foreign Exchange Rates
AS-12 Accounting for Government Grants Mandatory
AS-13 Account for Investments Mandatory
AS-14 Accounting for Amalgamations Mandatory
AS-15 Accounting for Retirement Benefits in the Mandatory
Financial Statements of Employees
AS-16 Borrowing Costs Mandatory
AS-17 Segment Reporting Mandatory
AS-18 Related Party Disclosures Mandatory
AS-19 Leases Mandatory
AS-20 Earnings Per Share Mandatory
AS-21 Consolidated Financial Statements Mandatory
AS-22 Accounting for Taxes on Incomes Mandatory
AS-23 Accounting for Investments in Associates Mandatory
in Consolidated Financial Statements
AS-24 Discontinuing Operations Non-Mandatory
AS-25 Interim Financial Reporting Mandatory
AS-26 Intangible Assets Mandatory
AS-27 Financial Reporting of Interests in Joint Mandatory
Ventures

A brief summary of the contents and purpose of the accounting

standards issued by the Institute of Charted Accountants of India are
as follows:

ACCOUNTING STANDARD – 1: It deals with the disclosure in the

financial statements of significant accounting policies followed in the
preparation and presentation of such statements. The purpose of
this Standard is to promote better understanding of financial
statements by such disclosure. Compliance of this Standards helps
in facilitating a more meaningful comparison between financial
statements of two different enterprises.

ACCOUNTING STANDARD – 2: It deals with the principles of

valuing inventories. Presently, the standard is recommendatory in
nature. The standard intends that the methods of methods of
inventory valuation as far as possible should be practicable, logical
and consistently followed. The Standards lays down the various
methods of valuation in respect of different types of inventories. It
also described the elements of cost that are to be considered in the
valuation of the inventory. The standard also requires disclosure in
respect of policies of stock valuations and whether they have been
consistently followed. Whether such policies are fair and proper and
in accordance with the normally accepted accounting policies and
are consistently followed year after year. Any deviation in the
method of valuation of inventory as compared to the earlier year is
also required as a disclosure under this standard.

ACCOUNTING STANDARD – 3: It deals with the preparation of an

additional statement, which summarises for a given period, the
sources and application of funds of an enterprise. Such a statement
is desired by the standards to be attached with the Balance Sheet
and Profit and Loss Account of each year. This statement is either in
the form of fund flow statement or cash flow statement and is
helpful in providing information relating to movements of funds of
the enterprise during the period for which the financial statements
are prepared. This statement summarises the effect of funds and
their flow on the financial results of an enterprise. In India, though
there is no legal requirement to publish a statement of changes in
financial position along with balance sheet, yet there is a growing
practice to publish such a statement along with financial statements
in line with the standards.

ACCOUNTING STANDARD – 4: It deals with the treatment in

financial statements of contingencies and events occurring after the
balance sheet date. Contingencies are events whose outcome will
be known only on their occurrence. Let us say, a case in High Court,
Penalty proceedings under law etc are events whose outcome will
be known only on their occurrence. Events occurring after the
balance sheet date are events which confirm a particular.

Position existing on the balance sheet date. Let us say, insolvency of

a debtor, recovery from whom was considered as doubtful as on the
date of balance sheet. The Standard lays down that contingencies
must be provided if the loss due to it can be reasonably estimated.
The standard also states that assets and liabilities should be
adjusted for events occurring after the balance sheet date if they
establish the conditions existing on the balance sheet date.
ACCOUNTING STANDARD – 5: It deals with the treatment in the
financial statements of prior period and extraordinary items and
changes in accounting policies. Prior period items are debits or
credits which arise in the accounts of current year as a result of a
mistake or omission in the preparation of financial statement of one
or more earlier years. Extraordinary items are unusual items distinct
from the day to day activities of an entity. The standard also lays
down that any change in the accounting policy used in preparation
of financial statement should be reported and its impact on the
profit or loss of the entity should also be reported. Let us say, an
entity changes its method or accounting from cash system to
mercantile system. In such cases, the standard lays down that not
only the change should be stated in the financial statement but the
effect of such change on the profit / loss depicted by the profit and
loss account of that year must also be stated.

ACCOUNTING STANDARD – 6: It deals with the accounting for

depreciation and the disclosure requirements in connection
therewith. It suggests various methods of depreciation in respect of
various types of fixed assets. It states that the depreciation method
should be selected carefully, systematically and consistently applied
from year to year. It also lists the factors which affect depreciation
and the treatment to be given if a method of depreciation is
changed. The standard also lays down treatment in case of
revaluation of assets.

ACCOUNTING STANDARD – 7: It deals with the accounting for

Construction Contracts. Contract Accounting is complicated because
the contract period exceeds a single year in most cases. This poses
serious accounting problems relating to revenue, treatment of
advances received, work-in-progress etc. in the financial statements.
The standard recognizes two methods of accounting for construction
contract, namely, the percentage of completion method and the
completed contract method. The standard explains the relevance of
both the methods of accounting and the method which is more
appropriate under a given set of circumstances. It states the
essential ingredients of these two methods and also deals with the
disclosures to be made in this regard.

ACCOUNTING STANDARD – 8: It deals with the treatment of costs

incurred on research and development of a product or a service by
an entity in the financial statements of the year of such research
and development and the subsequent accounting years. The
Standards identifies items of cost which should form part of research
and development costs. It also lays down the conditions under which
research and development costs may be deferred i.e., written off in
accounts over a specified number of years. It also states that
specific disclosures should be made regarding research and
development costs that are incurred and their treatment in financial
statements.

ACCOUNTING STANDARD – 9: It deals with the basis for

recognition of revenue i.e. income and the time when income can be
said to have arisen. It also states the quantum of income to be
credited to profit and loss account. The statement also shows how
revenue is to be recognized from the various activities carried on by
the enterprise. Let us say, from sale of goods, rendering of services,
use by others of enterprise resources yielding interest, royalties, and
dividends etc.

ACCOUNTING STANDARD – 10: It deals with the accounting for

fixed assets and specifies the disclosures to be made in the financial
statement in relation thereto. It lays down the elements of cost that
should form a part of the book value in respect of a particular asset
purchased and used by an enterprise. It also states when the fixed
assets should be written off and treatment, if any, on revaluation of
fixed assets.

ACCOUNTING STANDARD – 11: It deals with accounting for

transaction in foreign currencies in the financial statements
prepared by an enterprise and with translation of the financial
statements of foreign branches prepared in foreign currency into
Indian Rupees for the purpose of including them in the financial
statements of the Head office in India. Rules with respect to foreign
currency translation (conversion) and difference arising, if any, from
conversion of foreign currency into Indian rupees is also dealt with
the standard.

ACCOUNTING STANDARD – 12: It deals with accounting for

Government grants received by an entity and how should such
grants be presented in the financial statement. Such grants may be
in the form of subsidies, cash incentives etc. The various approaches
to the grant as suggested by the Standard would depend upon the
purpose for which the grant is received and conditions that have to
be fulfilled to obtain and enjoy the grant. Treatment of withdrawal of
grants is also laid down in the standard.

ACCOUNTING STANDARD – 13: It deals with accounting for

investments made by entity and their presentation in the financial
statement. The standard defines current and long term investments
and their basis of classification. To the extent the standard relates to
current investments, it is also applicable to shares, debentures and
other securities held as stock-in-trade, with suitable modification as
specified in the standard itself. The standard lays down the criteria
for bifurcation between current and long term investments and how
they are to be classified as such.

ACCOUNTING STANDARD – 14: It deals with accounting for

amalgamation and the treatment of any resultant good will or
reserves in the books of account, arising out of such amalgamation
transaction. Amalgamation means formation of a new company to
take over the existing business of two or more companies. The
standard does not deal with cases of acquisitions, whereby the
acquired company is not dissolved and its separate entity continues
to exist. The standard lays down the methods of amalgamation and
the accounting adjustment under each method.
ACCOUNTING STANDARD – 15: It deals with accounting for
retirement benefits provided to employees in the financial
statements of employers. Retirement benefits would include
provident fund, superannuation/pension, and gratuity, leave
encashment, post retirement health and welfare schemes. This
statement does not apply to those retirement benefits for which the
employer’s obligations cannot be reasonably estimated.

ACCOUNTING STANDARD – 16: It deals with the accounting

treatment for borrowing costs. According to this standard the
financial statements should disclose:

 The Accounting Policy for Borrowing costs.

 The Amount of borrowing costs capitalized during the period.

ACCOUNTING STANDARD – 17: It deals with the accounting for

reporting financial information about the different types of products
and services an enterprise products and the different geographical
areas in which it operates.

ACCOUNTING STANDARD – 18: It deals with the accounting

requirements for disclosure of related party relationship and
transactions between a reporting enterprise and its related parties.
The statutes governing an enterprise often require disclosure in
financial statements of transactions with certain categories of
related parties like directors or key management personnel of an
enterprise especially their remuneration and borrowings due to their
fiduciary nature of the relationship with the enterprise.

ACCOUNTING STANDARD – 19: It deals with the accounting for

lessees and lessors, the appropriate accounting policies and
disclosures in relation to finance leases and operating leases.
ACCOUNTING STANDARD – 20: It deals with the accounting 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.

ACCOUNTING STANDARD – 21: It deals with the accounting for

preparation and presentation of consolidated financial statements.

ACCOUNTING STANDARD – 22: It deals with the accounting for

treatment of taxes on income.

ACCOUNTING STANDARD – 23: It deals with the accounting for

recognizing in the consolidated financial statements.

ACCOUNTING STANDARD – 24: It deals with the accounting 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 – generation
capacity, and financial position by segregating information about
discontinuing operations from information about continuing
operations. The standard is recommendatory in nature at present.

ACCOUNTING STANDARD – 25: It deals with the accounting for

minimum content of an interim financial report and also the
principles for recognition and measurement in the financial
statements for an interim period. According to this standard an
interim period is a financial reporting period shorter than a full
financial year. Interim financial report means a financial report
containing either a complete set of financial statements (Balance
Sheet, Profit & Loss Account, Cash Flow Statement and required
notes) or a set of condensed financial statements (Condensed
Balance Sheet, Condensed Profit and Loss Account, Condensed Cash
Flow Statement and Selected explanatory notes). Condensed
statements should include, at a minimum, each of the headings and
sub-headings of the recent annual financial statements along with
necessary information.

ACCOUNTING STANDARD – 26: It deals with the accounting

treatment for intangible assets that are not dealt with especially in
another Accounting Standard. The standard requires an enterprise
to recognize an intangible asset subject to fulfillment of certain
conditions.

ACCOUNTING STANDARD – 27: It deals with the accounting for

interests in joint ventures and reporting of joint venture assets,
liabilities, income and expenses in the financial statements of
ventures and investors.

State whether the following statements are True or False

1. The Purpose of Accounting Standard-1 is to provide better

understanding of financial statements.

2. Accounting Standard-2 deals with the principles of inventory

valuation

3. Accounting Standard-6 deals with the accounting for

construction contracts.

4. Accounting Standard-10 deals with the accounting for fixed

assets.

5. Accounting Standard-14 deals with accounting for Government

grants.

6. Accounting Standard-15 deals with accounting for retirement

benefits of employees.

7. Accounting Standard-20 deals with accounting for consolidated

financial statements.

8. Accounting Standard-26 deals with accounting for intangible

assets.
INTERNATIONAL ACCOUNTING STANDARDS

International Accounting Standards Committee (IASC) came into

existence on 29th June, 1973 when 16 accounting bodies from nine
nations (called as founder members) signed the agreement and
constitution for its formation. The committee has it headquarters at
London.

The objective of the committee is “to formulate and publish in the

public interest standards to be observed in the presentation of
audited financial statements and to promote their world wide
acceptance and observance”. The formulation of such standards will
bring uniformity in terminology, approach and presentation of
results. This will not only help in a correct understanding and
exchange of economic and financial but also in facilitating a smooth
flow of international investment.

The committee has so far laid down standards regarding the

following matters:

IAS 1 Disclosure of accounting policies

IAS 2 Valuation and presentation of inventories

IAS 3 Consolidated financial statements

IAS 4 Depreciation accounting

IAS 5 Information to be disclosed in financial statements

IAS 6 Accounting responses to changing prices

IAS 7 Statement of changes in financial position.

IAS 8 Unusual and prior period items and changes in

accounting policies.

IAS 9 Accounting for research and development activities.

IAS 10 Contingencies and events occurring after balance sheet

date.

IAS 11 Accounting for construction contracts

IAS 12 Accounting for taxes on income

IAS 13 Presentation of current assets and current liabilities

IAS 14 Reporting of financial information by segments.

IAS 15 Information reflecting the effects of changing prices.

IAS 16 Accounting for property, plant and equipment.

IAS 17 Accounting for leases.

IAS 18 Revenue recognition.

IAS 19 Accounting for retirement benefits in the financial

statements of employers.
IAS 20 Accounting for government grants and disclosure of
government Assistance
IAS 21 Accounting for effects of changes in foreign exchange
rates.

IAS 22 Accounting for business combinations.

IAS 23 Accounting of borrowing costs.

IAS 24 Related party disclosures.

IAS 25 Accounting for investments.

IAS 26 Accounting and reporting of retirement benefit plans.

IAS 27 Consolidated financial statements and accounting for

investments in subsidiaries.
IAS 28 Accounting for investment in associates.

IAS 29 Financial reporting in hyper-inflationary economics.

IAS 30 Disclosure in the financial statements of banks and

similar financial institutions

IAS 31 Financial reporting of interests in joint ventures.

IAS 32 Financial instruments: Disclosure and Presentation.

IAS 33 Earnings per share.

IAS 34 Interim Financial Reporting.

IAS 35 Discontinuing Operations.

IAS 36 Impairment of Assets

IAS 37 Provisions, Contingent liabilities and Contingent Assets.

IAS 38 Intangible Assets.