Accounting Standards Overview

Accounting Standards are necessary for several reasons. They ensure consistency and comparability of financial statements across different entities and over different periods, making them more meaningful for users. They enhance the reliability and credibility of financial information, fostering public confidence. By prescribing disclosure requirements, they promote transparency. Furthermore, they help in reducing accounting frauds and manipulations by setting clear rules and guidelines for various accounting treatments.

In India, Accounting Standards (AS) are issued by the Institute of Chartered Accountants of India (ICAI) through the Accounting Standards Board (ASB). For companies, these standards are notified by the Central Government under the Companies Act, 2013 through the National Financial Reporting Authority (NFRA).

AS-1 (Disclosure of Accounting Policies) requires that all significant accounting policies adopted in the preparation of financial statements should be disclosed. It prescribes three fundamental accounting assumptions: Going Concern, Consistency, and Accrual. If these are not followed, the fact should be disclosed along with the reasons.

In India, the Institute of Chartered Accountants of India (ICAI) plays a pivotal role in formulating Accounting Standards through its Accounting Standards Board (ASB). These standards, once formulated by ICAI, are then recommended to the Ministry of Corporate Affairs (MCA). The MCA, after due consideration and consultation with the National Financial Reporting Authority (NFRA), notifies these standards under Section 133 of the Companies Act, 2013, making them legally binding for companies.

No, Accounting Standards are not mandatory for all entities in India. Their applicability depends on the nature, size, and type of entity. The ICAI classifies non-corporate entities into different levels (Level I, Level II, Level III, Level IV) based on criteria like turnover, borrowings, and listing status, with varying degrees of applicability and exemptions. For companies, the Companies (Accounting Standards) Rules, 2021, notified by the MCA, specify the applicability of AS. Generally, larger entities have to comply with more standards and fewer exemptions.

Accounting Standards are written policy documents issued by expert accounting bodies or government authorities that cover aspects of recognition, measurement, presentation, and disclosure of accounting transactions and events in financial statements. They are crucial for ensuring uniformity, comparability, reliability, and transparency in financial reporting. By providing a common framework, these standards help users of financial statements, such as investors, creditors, and regulators, make informed economic decisions by presenting a true and fair view of an entity's financial position and performance.

The key difference lies in their origin and approach. Accounting Standards (AS) are primarily based on the Indian environment and are mandatory for certain classes of companies and other entities. Indian Accounting Standards (Ind AS) are converged with International Financial Reporting Standards (IFRS), meaning they are largely aligned with global standards but with certain 'carve-outs' (deviations) and 'carve-ins' (additions) to suit the Indian economic environment. Ind AS are applicable to a larger set of companies, especially listed and large unlisted companies, to facilitate global comparability.

In India, the Institute of Chartered Accountants of India (ICAI), through its Accounting Standards Board (ASB), formulates the Accounting Standards. These standards are then recommended to the Ministry of Corporate Affairs (MCA). The Central Government, after consultation with and examination of the recommendations made by the National Financial Reporting Authority (NFRA), notifies these standards under Section 133 of the Companies Act, 2013, making them mandatory for specified classes of companies.

The National Financial Reporting Authority (NFRA) is an independent regulatory body established under the Companies Act, 2013. Its primary role concerning Accounting Standards includes recommending accounting standards to the Central Government, monitoring and enforcing compliance with accounting standards, and overseeing the quality of services of the accounting profession. NFRA ensures that companies adhere to the notified accounting standards and takes disciplinary action against non-compliant entities or professionals.

Compliance with Accounting Standards significantly enhances the reliability and comparability of financial statements. Reliability is improved because standards prescribe specific, consistent methods for recognizing, measuring, and disclosing financial information, reducing the scope for subjective judgments and potential manipulation. Comparability is achieved as all entities following the same standards present their financial data in a similar format and using similar principles, allowing stakeholders to easily compare the financial performance and position of different companies or the same company over different periods.

The key difference lies in their origin, approach, and applicability. Accounting Standards (AS) are generally based on the historical cost convention and are largely rule-based, developed to suit the Indian economic environment. Indian Accounting Standards (Ind AS), on the other hand, are converged with International Financial Reporting Standards (IFRS), meaning they are largely principle-based and adopt a fair value approach. Ind AS are applicable to larger, listed, and high net-worth companies, while AS apply to other entities, primarily Small and Medium-Sized Companies (SMCs) and non-corporate entities.

The ICAI's Accounting Standards Board (ASB) follows a comprehensive due process for formulating Accounting Standards to ensure robustness and inclusivity. This process typically involves: identifying areas for new standards, constituting study groups, preparing a preliminary draft, circulating it internally, issuing an Exposure Draft for public comments from various stakeholders (including industry, regulators, and professionals), reviewing and incorporating feedback, finalizing the draft by the ASB, obtaining approval from the ICAI Council, and finally, recommending it to the Ministry of Corporate Affairs (MCA) for notification (for companies).

Accounting Standards are written policy documents issued by expert accounting bodies or by government or other regulatory authorities covering aspects of recognition, measurement, presentation, and disclosure of accounting transactions and events in the financial statements. Their primary objective is to bring uniformity in accounting policies and practices, thereby ensuring comparability, reliability, and transparency in financial reporting. They aim to eliminate non-comparability of financial statements and improve the quality of financial reporting.

Accounting Standards are mandatory for specified entities based on their size, turnover, and listing status. The ICAI classifies entities into different levels (e.g., Level I, II, III, IV for non-company entities and SMCs/Non-SMCs for companies) for applicability, with certain exemptions or relaxations for smaller entities. For companies, compliance is mandatory under the Companies Act, 2013. Non-compliance can lead to penalties under the Companies Act, 2013, and disciplinary action by the ICAI against its members who are found to be non-compliant or have failed to ensure compliance in their professional capacity.

The ICAI's Accounting Standards Board (ASB) follows a comprehensive due process for formulating Accounting Standards. This process typically involves: (1) Identification of areas for standardisation; (2) Constitution of study groups to prepare preliminary drafts; (3) Circulation of draft to various bodies for comments; (4) Consideration of comments and finalisation of the Exposure Draft; (5) Issuance of Exposure Draft for public comments; (6) Consideration of public comments and revision of the draft; (7) Finalisation of the standard by ASB; and (8) Recommendation to the Council of ICAI and then to the MCA for notification.