Accounting Stndards- Basic

Accounting Standards

By Achint Gupta

achint.gupta@gmail.com

What are Accounting Standards?  What are their objectives?  Who issue these standards in India?  What is the scope of these standards? These are only few of the questions that came in to my mind every time I heard about the Accounting Standards and I think many of us are also keen to search out the answers to these questions. In this write-up I want to share my knowledge on answers to these as well as numerous other questions to broaden our awareness on Accounting Standards.

Introduction

Financial statements are prepared to summarize the end-result of all the business activities by an enterprise during an accounting period in monetary terms. These business activities vary from one enterprise to other. It is very problematical to compare the financial statements of various reporting enterprises because of the divergence in the methods and principles adopted by these enterprises in preparing their financial statements. In order to make these methods and principles uniform and comparable to the extent possible – standards are evolved.

What are Accounting Standards?

Accounting Standards are the statements of code of practice of the regulatory accounting bodies which are to be observed in the preparation and presentation of financial statements. In layman terms, accounting standards are the written documents issued by the expert institutes or other regulatory bodies covering various aspects of measurement, treatment, presentation and disclosure of accounting transactions.

Accounting Standards are stated to be the norms of accounting policies and practices by way of guidelines, to direct as to how the items which go up to the finalization of financial statements should be dealt within accounts and presented in the annual accounts. They provide a structural framework within which such reliable financial statements can be produced.

There may be some areas where separate disclosures of important areas are not statutorily required but it is mandatory to disclose such information because of the applicability of the Accounting Standards. Therefore, Accounting Standards try to make sure that any important area is not missed from disclosure requirements.

What are the objectives of Accounting Standards

The basic objective of Accounting Standards is to eradicate baffling variations in the treatment of several accounting aspects and to bring about, to the extent possible, standardization in presentation. They intent to harmonize the diverse accounting policies followed in the preparation and presentation of financial statements by different reporting enterprises so as to facilitate intra-firm and inter-firm comparison. Refer following example where Inventory valuation method used by ABC Ltd. is FIFO whereas XYZ Ltd.follows LIFO method.

It can easily be interpreted from the example given above that the Gross Profit of ABC Ltd. is higher simply because of the inventory valuation method followed. The comparison of gross profit of these two companies is not feasible due to the fact that the accounting policy adopted by both of these for valuation of inventory is different Therefore, Accounting Standards seek to improve the comparability of the financial statements by standardizing the varied accounting policies and practices to the extent possible.

Accounting Standards ensure the consistency and comparability of the data published in the financial statements. It is only the purpose of accounting standards to create a general sense of confidence that user has in the fairness and reliability of the statements on which they rely.

Who issues Accounting Standards in India?

The Institute of Chartered Accountants of India (ICAI) recognizing the need to harmonize the diverse accounting policies and practices at present in use in India constituted Accounting Standards Board (ASB) on April 21, 1977. The main role of ASB is to formulate Accounting Standards from time to time.

A new sub-section which was added to section 211 of Companies Act, 1956 by Companies (Amendment) Act, 1999 w.r.e.f 31-10-1998, while on the one hand emphasized that every profit and loss account and balance sheet shall comply with the Accounting Standards (or else the variation there from, to be quantified and suitably disclosed), at the same time it laid down the groundwork for setting up of another standard setting body called ‘National Advisory Committee on Accounting Standards’.

Sub-section (3C) of section 211 of Companies Act, 1956 (38 of 1994) laid down that for the purpose of this section, the expression “accounting standards” means the standards of accounting recommended by The Institute of Chartered Accountants of India as may be prescribed by the Central Government in consultation with the National Advisory Committee. However, due to the fact that the establishment of National Advisory committee and issuance, by it, of Accounting Standards by it can take some time, it was also provided that the standards of accounting specified by the ICAI shall be deemed to be the Accounting Standards until the accounting standards are prescribed by the Central government under this sub-section.

The Accounting Standards as issued by the ICAI are in force as of now for the reason that no Accounting Standard has been formulated by the National Advisory Committee so far.

What is the scope of Accounting Standards?

The scope of Accounting Standards is defined by Para 4 of ‘Preface to the Statements of Accounting Standards’ issued by ICAI. In general, Para 4 provides that:

Ø      If a situation arises where particular Accounting Standard is not in conformity with the provisions of the some of the laws of land, than the provisions of said law will prevail and the financial statements should be prepared in conformity with such law. 

Ø      The Accounting Standards do not override the local regulations which govern the preparation and presentation of financial statements in our country.

Ø      The application of Accounting Standards is deliberately limited only to items which are material.

What is the duty of Statutory Auditor for Compliance with Accounting Standards?

Section 211(3A) of Companies Act, 1956 provides that every profit and loss account and balance sheet of the company shall comply with the accounting standards.

The statutory auditors are required to make qualification in their report in case any item is treated differently from the prescribed Accounting Standard. However, while qualifying, they should consider the materiality of the relevant item. In addition to this Section 227(3)(d) of Companies Act, 1956 requires an auditor to report whether, in his opinion, the profit and loss account and balance sheet are complied with the accounting standards referred to in Section 211(3C) of Companies Act, 1956.