FREQUENTLY ASKED QUESTIONS (FAQs)
Who are the authorities involved in formulation of Accounting Standards in India?
The accounting standard setting needs to be such which involves reaching an optimal balance of the requirements of financial information for various interest-groups having a stake in financial reporting. With a view to reach consensus, to the extent possible, with these requirements of the relevant interest-groups and thereby bringing about general acceptance of the Accounting Standards among such groups, considerable research, consultations and discussions with the representatives of the relevant interest-groups at different stages of standard formulation becomes necessary. Hence, the standard setting process is designed in a manner to ensure the above inherent nature and objective of the whole procedure. The standard-setting procedure of the ASB, as briefly outlined below, is designed in such a way so as to ensure such consultation and discussions.
The Institute of Chartered Accountants of India (ICAI) being a member body of the then IASC, constituted the Accounting Standards Board (ASB) on 21st April,1977, with a view to harmonize the diverse accounting policies and practices in use in India.
While formulating accounting standards, the ASB takes into consideration the applicable laws, customs, usages and business environment prevailing in the country. The ASB also gives due consideration to International Financial Reporting Standards/ International Accounting Standards issued by IASB and tries to integrate them, to the extent possible, in the light of conditions and practices prevailing in India.
The composition of the ASB is broad-based with a view to ensuring participation of all interest-groups in the standard-setting process. These interest-groups include industry, representatives of various departments of government and regulatory authorities, financial institutions and academic and professional bodies. Industry is represented on the ASB by their apex level associations, viz., Associated Chambers of Commerce (ASSOCHAM), Federation of Indian Chambers of Commerce and Industry (FICCI) and Confederation of Indian Industries (CII). As regards government departments and regulatory authorities, Reserve Bank of India, Ministry of Company Affairs, Central Board of Direct Taxes, Comptroller & Auditor General of India, Controller General of Accounts, Securities and Exchange Board of India and Central Board of Excise and Customs are represented on the ASB. Besides these interest-groups, representatives of academic and professional institutions such as Universities, Indian Institutes of Management, Institute of Cost and Works Accountants of India and Institute of Company Secretaries of India are also represented on the ASB. Apart from these interest-groups, members of the Central Council of ICAI are also on the ASB.
What are General Purpose Financial Statements?
Statement prepared to meet the needs of all financial statement users as opposed to meeting the needs of only a particular group such as investors, creditors, management, or regulatory bodies. This is the purpose of financial statements based on GAAP.
Accounting Standards are designed to apply to the general purpose financial statements and other financial reporting, which are subject to the attest function of the members of the ICAI. Accounting Standards apply in respect of any enterprise (whether organised in corporate, co-operative or other forms) engaged in commercial, industrial or business activities, irrespective of whether it is profit oriented or it is established for charitable or religious purposes. Accounting Standards will not, however, apply to enterprises only carrying on the activities which are not of commercial, industrial or business nature, (e.g., an activity of collecting donations and giving them to flood affected people). Exclusion of an enterprise from the applicability of the Accounting Standards would be permissible only if no part of the activity of such enterprise is commercial, industrial or business in nature. Even if a very small proportion of the activities of an enterprise is considered to be commercial, industrial or business in nature, the Accounting Standards would apply to all its activities including those which are not commercial, industrial or business in nature.
The term 'General Purpose Financial Statements' includes balance sheet, statement of profit and loss, a cash flow statement (wherever applicable) and statements and explanatory notes which form part thereof, issued for the use of various stakeholders, Governments and their agencies and the public. References to financial statements in this Preface and in the standards issued from time to time will be construed to refer to General Purpose Financial Statements.
What is the scope of Accounting Standard?
Efforts will be made to issue Accounting Standards which are in conformity with the provisions of the applicable laws, customs, usages and business environment in India. However, if a particular Accounting Standard is found to be not in conformity with law, the provisions of the said law will prevail and the financial statements should be prepared in conformity with such law.
The Accounting Standards by their very nature cannot and do not override the local regulations which govern the preparation and presentation of financial statements in the country. However, the ICAI will determine the extent of disclosure to be made in financial statements and the auditor's report thereon. Such disclosure may be by way of appropriate notes explaining the treatment of particular items. Such explanatory notes will be only in the nature of clarification and therefore need not be treated as adverse comments on the related financial statements.
The Accounting Standards are intended to apply only to items which are material. Any limitations with regard to the applicability of a specific Accounting Standard will be made clear by the ICAI from time to time. The date from which a particular Standard will come into effect, as well as the class of enterprises to which it will apply, will also be specified by the ICAI. However, no standard will have retroactive application, unless otherwise stated.
The Institute will use its best endeavors to persuade the Government, appropriate authorities, industrial and business community to adopt the Accounting Standards in order to achieve uniformity in preparation and presentation of financial statements.
In formulation of Accounting Standards, the emphasis would be on laying down accounting principles and not detailed rules for application and implementation thereof.
The Standards formulated by the ASB include paragraphs in bold italic type and plain type, which have equal authority. Paragraphs in bold italic type indicate the main principles. An individual standard should be read in the context of the objective stated in that standard and this Preface.
The ASB may consider any issue requiring interpretation on any Accounting Standard. Interpretations will be issued under the authority of the Council. The authority of Interpretation is the same as that of Accounting Standard to which it relates
What are Level I, Level II and Level III entities?
Level I Company:
Enterprises, which fall in any one or more of the following categories, at any time during the accounting period, are classified as Level I enterprises:
i) Enterprises whose equity or debt securities are listed whether in India or outside India.
ii) Enterprises, which are in the process of listing their equity or debt securities as evidenced by the board of directors resolution in this regard.
iii) Banks including co-operative banks.
iv) Financial Institutions
v) Enterprises carrying on insurance business.
vi) All commercial, industrial and business reporting enterprises, whose turnover for the immediately preceding accounting period on the basis of audited financial statements exceeds Rs. 500 million. Turnover does not include "other income"
vii) All commercial, industrial and business reporting enterprises having borrowings, including public deposits, in excess of Rs. 100 million at any time during the accounting period.
viii) Holding and subsidiary enterprises of any one of the above at any time during the accounting period.
Level II Company:
Enterprises, which are, not Level I enterprises but fall in any one or more of the following categories are classified as Level II enterprises;
i) All commercial, industrial and business reporting enterprises, whose turnover for the immediately preceding accounting period on the basis of audited financial statements exceeds Rs. 4 million, but does not exceed Rs. 500 million[Turnover does not include "other income"]
All commercial, industrial and business reporting enterprises having borrowing,
including public deposits, in excess of Rs. 10 million but not in excess of Rs.
100 million at any time during the accounting period.
iii) Holding and subsidiary enterprises of any one of the above at any time during the accounting period.
Level III Company:
Enterprises, which are not covered under Level I and Level II are considered as Level III enterprises.
Level II and Level III enterprises are considered as SMEs
Level I enterprises are required to comply fully with all the accounting standards.
What are ASIs and how are they used?
A ASI(Accounting Standard Interpretation) is a statement clarifying how accounting standards should be applied. Accounting interpretations are issued by accounting standards bodies.
As financial transactions continue to evolve, new situations develop that may not have been foreseen by the existing accounting standards. In this case, accounting boards may choose to issue an interpretation outlining the recommended practices for accounting as questions arise. If new changes are particularly significant, the standards themselves may be adjusted so that compliance is required.
What are Guidance Notes and how are they used w.r.t. Accounting Standard?
Guidance Notes are primarily designed to provide guidance to members of ICAI on matters which may arise in the course of their professional work and on which they may desire assistance in resolving issues which may pose difficulty.
Guidance Notes are recommendatory in nature. In a situation where certain matters are covered both by an Accounting Standard and a Guidance Note issued by the Institute of Chartered Accountants of India, the Guidance Note or the relevant portion thereof will be considered as superseded from the date of the relevant Accounting Standard coming into effect, unless otherwise specified in the Accounting Standard.
What are Ind AS, IFRS, Indian GAAP and Accounting Standard? What is the difference between Ind AS, IFRS and AS?
IAS, or better known as the International Accounting Standards, was a set of standards that dictate how a particular transaction or event should be reflected in the financial statements. The International Accounting Standards Committee (IASC) has been issuing these standards from 1973 until 2001. In 2001, the IASB took over IASC's responsibility in setting the standards. From 1973 to 2001 there were 41 IAS issued.
When the International Accounting Standards Board (IASB) took over IASC's responsibilities in 2001, they decided to adopt the current standards, though there were some those needed revisions, and for future standards, they were going to call them the International Financial Reporting Standards (IFRS). This change was precipitated by the need to update and refine the current concepts and standards to reflect the changes in the markets, common business practices and the economic environment.
Indian GAAP comprises a set or pronouncements issued by various regulatory authorities, but is predominantly controlled by the Institute of Chartered Accountants of India (ICAI).
Besides the Accounting Standards, the ICAI also issues Guidance Notes on areas not specially covered by Accounting Standards. The ICAI also makes several announcements and issues clarifications on accounting related matters. Most of the Accounting Standard Interpretations (ASI's) issued by the ICAI from time to time, have now been incorporated within the standards notified by the Ministry Of Corporate Affairs (MCA).
In India, it is the statements issued by Institute of Chartered Accountants of India (ICAI) that form the standards when it comes to Indian GAAP, these standards have to be followed by companies when they come out with their financial statements. Since 1973, the International Accounting Standards Committee (IASC) has suggested 32 accounting standards and it has been observed that India is lagging behind in accepting these standards as norms in accounting. To bring about a harmony in Indian GAAP and the accounting standards in the rest of the world is a challenging task and there has been significant progress in the last few years in this regard.
"Provide for all losses and anticipate no profits" is the basic underlying assumption in Indian accounting.
Indian Accounting Standards (abbreviated as Ind AS) are a set of accounting standards notified by the Ministry of Corporate Affairs which are converged with the International Reporting Financial Standards(IFRS).These Accounting Standards are formulated by Accounting Standards Board of Institute Of Chartered Accountants of India.
With India deciding to converge with IFRS and not Adopt IRFS, Ind-AS is certainly the way forward for Indian Companies.
In simple terms, Convergence with IFRS means that India would not be applying the IFRS as issued by the International Financial Reporting Standards and these synced Indian Accounting Standard are popularly referred to as "Ind-AS".
On 25th February 2011, the Ministry Of Corporate Affairs has notified 35 Accounting Standards that have been synced with IFRS which are now available from the MCA Website.
General differences between Ind-AS and IFRS
(i) Ind-AS uses some of the terms that are different from IFRS. For example, the term "balance sheet" has been used instead of "statement of financial position" and "statement of profit and loss" instead of "statement of comprehensive income."
(ii) In accordance with IFRS 1, transitional provisions in other IFRS do not apply to a first-time adopter's transition to IFRS, unless otherwise permitted in IFRS 1. Since all Indian entities will be applying Ind-AS for the first time, Ind-AS standards do not contain transitional provisions of corresponding IFRS/ IAS standards.
(iii) Notification/ applicability of certain standards/appendices of standards such as IFRIC 12 (Appendix A to Ind-AS 11), SIC 29 (Appendix B to Ind-AS 11), IFRIC 4 (Appendix C of Ind-AS 17), IFRS 4 (Ind-AS 104) and IFRS 6 (Ind-AS 106) has been deferred to a future date, with or without modification. However, Ind-AS 8 states that an entity may consider the most recent pronouncements of the IASB in deciding accounting treatment for transaction, other event or condition not covered by an Ind-AS. Therefore, entities may evaluate whether they can follow the guidance of corresponding IFRS standards/ interpretations on these matters.
(iv) Unlike IFRS, the Framework for Preparation and Presentation of Financial Statements has not been notified under Ind-AS. However, certain Ind-AS, e.g., Ind-AS 1 and Ind-AS 8, refer to the Framework.
(v) Further differences may arise, depending on the manner in which the Companies Amendment Bill is passed, particularly provisions relating to section 100, section 78, schedule VI, schedule XIV, consolidation requirements, etc. In addition, differences may arise in the way in which future changes in IASB IFRS standards are updated under Ind-AS. Also, local interpretations of Ind-AS by standard setters and regulators may differ from the global practices.
What are the statutory provisions that make AS mandatory?
Accounting Standards issued by the ICAI had got legal recognition through insertion of sections 211(3A), (3B) and (3C) in the Companies Act, 1956, which maybe prescribed by the Central Government in consultation with the National Advisory Committee on Accounting Standards. Recent development in this regard is Accounting Standards 1to 7 and 9 to 29 as recommended by the ICAI, have been prescribed by Ministry of Company Affairs, Government of India vide its notification dated December, 7, 2006, in the Gazette of India. This notification provides that every company and its auditor(s) shall comply with the notified Accounting Standards.
The Securities and Exchange Board of India (SEBI) through the listing agreement requires that listed companies shall mandatorily comply with all the Accounting Standards issued by ICAI from time to time.
Also, the Insurance Regulatory and Development Authority (IRDA) require insurance companies to follow the Accounting Standards issued by the ICAI.
Apart from the corporate bodies, the Council of the Institute of Chartered Accountants of India has made various accounting standards mandatory in respect of certain non-corporate entities such as partnership firms, sole-Proprietary concerns/individuals, societies registered under the Societies Registration Act, trusts, associations of persons, and Hindu Undivided Families, where financial statements of such entities are statutorily required to be audited, for example, under Section 44ABof the Income-tax, 1961. The Council has cast a duty on its members to examine compliance with the Accounting Standards in the financial statements covered by their audit in the event of any deviations there from, to make adequate disclosures in their audit reports so that the users of the financial statements may be aware of such deviations.
What are Accounting Standards for local bodies? How are they used?
The term "Local Body" may be defined as a local self government at the third tier of governance in an administrative and geographical vicinity, e.g., a municipal corporation, a municipality or a panchayat. In many cases, the Local Bodies delegate their functions such as building of schools, city roads, parks, running transport services, providing water supply etc., to some other bodies that may or may not be controlled by the Local Bodies, e.g. development authorities, boards, parastatals. Such bodies may be constituted, in partnership with private sector or otherwise, directly or indirectly by or on behalf of a Local Body to promote or carry out some specific objective(s) or function(s) of the Local Bodies. Such bodies may be constituted under a statute. The term "Local Body" would also encompass such bodies.
Of late, many Local Bodies in the country are shifting to accrual basis of accounting, particularly, after the issuance of the National Municipal Accounts Manual (NMAM) by the Ministry of Urban Development, Government of India, supported by the Comptroller & Auditor General of India, National Institute of Urban Affairs and Indo-USAID FIRE-D Project and the inputs provided by the Institute of Chartered Accountants of India. The NMAM provides guidance to ULBs in preparation of their accounts on accrual basis. Another reason for ULBs adopting accrual basis is that these bodies are also approaching capital markets for raising funds. However, these bodies are following diverse accounting policies and practices in preparation of their financial statements. Hence, a need is felt for formulation of a single set of high quality financial reporting standards for Local Bodies which will set out recognition, measurement, presentation and disclosure requirements dealing with transactions and events in general purpose financial statements of Local Bodies. As a first step in this direction, Accounting Standards Board of the ICAI constituted a Sub Committee for issuing accounting standards for government including urban local bodies in 1999, which issued a Technical Guide on Accounting and Financial Reporting by Urban Local Bodies. The Guide contains recommendations relating to application of accounting standards issued by the Institute of Chartered Accountants of India, to ULBs. Insofar as PRIs are concerned, a robust accounting system is also a need of the hour. Recognizing the need to harmonize and improve accounting and financial reporting among Local Bodies, the Institute of Chartered Accountants of India (ICAI), constituted a full fledged Committee on Accounting Standards for Local Bodies (CASLB) in March 2005.
What are "The Companies (Accounting Standards) Rules, 2006"
The Central Government constituted a committee called National Advisory Committee on Accounting Standards (NACAS). Based on the recommendations of the NACAS the Central Government, in exercise of its powers under section 211(3C) of the Companies Act, 1956 read with sections 210 A(1) and 642(1)(a) of the Companies Act 1956, notified the Companies (Accounting Standards) Rules, 2006 in the official gazette of India on 7th December 2006.
The rules provide that Accounting Standards so notified shall apply to accounting periods commencing on or after the date of publication in the official Gazette i.e. 07-12-2006.
The notified Accounting Standards are applicable for "General Purpose Financial Statements". General purpose financial statements would include balance sheet, statement of profit and loss, cash flow statements (wherever applicable), and other statements and explanatory notes which form part thereof.
The rules further state that every company and its auditors' shall comply with the Accounting Standards in the manner specified in Annexure to these rules. Thus, for accounting periods commencing on or after 07-12-2006, all companies and its auditor(s) shall have to follow the notified Accounting Standards in preparation of the Financial Statements.
Can Accounting Standards override local regulations?
Paragraph 4.2 of the 'Preface to the Statements of Accounting Standards' (revised 2004) provides as under: 4.2 The Accounting Standards by their very nature cannot and do not override the local regulations which govern the preparation and presentation of financial statements in the country.
However, the ICAI will determine the extent of disclosure to be made in financial statements and the auditor's report thereon. Such disclosures may be by way of appropriate notes explaining the treatment of particular items. Such explanatory notes will be only in the nature of clarification and therefore need not be treated as adverse comments on the related financial statements.?
The Accounting Standards by their very nature cannot and do not override the local regulations which govern the preparation and presentation of financial statements in the country. However, the ICAI will determine the extent of disclosure to be made in financial statements and the auditor's report thereon.
ICAI has made an announcement in respect of disclosures where a Court/Tribunal sanctions an accounting treatment different from what is required by an Accounting Standard. If an item in the financial statements of a Company is treated differently pursuant to an Order made by the Court/Tribunal, as compared to the treatment required by an Accounting Standard, following disclosures should be made in the financial statements of the year in which different treatment has been given:
· a description of the accounting treatment made along with the reason that the same has been adopted because of the Court/Tribunal Order
· description of the difference between the accounting treatment prescribed in the Accounting Standard and that followed by the Company
· the financial impact, if any, arising due to such a difference
It is recommended that the above disclosures should be made by enterprise other than companies also in similar situations.
What is the duty of Auditors in relation to Mandatory AS?
The mandatory status of an Accounting Standard implies that while discharging their attest functions members of ICAI should ensure that mandatory accounting standards are implemented in the financial statements covered by their audit reports. In the event of any materi9al deviation from the Standards, it will be the duty of auditors to qualify such accounts so that users of financial statements are aware of such deviations. Under the Companies Act also, auditors are required to report if mandatory standards have been complied with in the preparation of financial statements.