Dear Nitin,
Read flwg artcl :-
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Subject :
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Accountancy & Financial Management
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Month-Year :
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Aug 2007
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Author/s :
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A. S. Alva
Chartered Accountant
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Topic :
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Accounting Standards : After-effects of Notification of ‘Companies (Accounting Standards) Rules, 2006’
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The laying down of well-defined Accounting Standards covering all areas of accounting is only a recent development. The speedy implementation of Accounting Standards in India was mainly at the initiative of The Institute of Chartered Accountants of India (ICAI) which took an active interest in mandating the standards as applicable to various entities over a period of time. Now we find that most of the Standards that are significant are applicable in India as well, and to almost all the entities, whether they are corporate or otherwise.
ICAI announced Accounting Standards :
Accounting Standards issued by the ICAI were initially made applicable as per announcement of the ICAI starting from 1990 when Accounting Standards 1, 7, 8, 9 and 10 were made mandatory to certain entities — in respect of accounts for periods commencing on or after 1-4-1991 — for the first time. Various Accounting Standards were issued from time to time since then. Some were optional in the initial years of issue and made mandatory later, some were mandatory at the time of issue itself, and some were modified/changed later. The mandatory nature of the Accounting Standards, however, was only to the extent of non-compliance reporting by members of ICAI. The ‘Preface to the Statements of Accounting Standards’ issued by the Institute in 1979 states (paragraph 6.1) :
"While discharging their attest function, it will be the duty of the members of the Institute to ensure that the Accounting Standards are implemented in the presentation of financial statements covered by their audit reports. In the event of any deviation from the Standards, it will be also their duty to make adequate disclosures in their reports, so that the users of such statements may be aware of such deviations."
In the absence of any statutory requirement, it was only as per the announcement of the Institute mentioned above that members were called upon to report on the compliance or otherwise of the Accounting Standards as issued by the ICAI from time to time. There were also changes from time to time in the announcements of the ICAI as to their applicability to different entities, period from which the Standards were made applicable, segregation within the entities according to levels I, II, III and so on. Enterprises were classified into three categories by the ICAI, viz., Level I, Level II, and Level III with effect from accounting periods commencing on or after 1-4-2004 for the purpose of applicability of Accounting Standards. Level II and Level III categories of enterprises are considered as SMEs as per the criteria specified by the ICAI and are exempted fully or partly from application of some ASs.
Statutory status of Accounting Standards :
Application of Accounting Standards to companies and to other entities was not mandatory in a true sense until 1999. The Companies (Amendment) Act, 1999 by way of amendment dated 31-10-1998 to S. 211 of the Companies Act, 1956 made it mandatory in application to companies incorporated under the said Act to the extent ‘specified’ by ICAI. The ‘specified’ status of the Accounting Standards under the Companies Act, 1956 enumerated in the announcement of the Institute (published in October 2002 issue of ‘The Chartered Accountant’, page 457) is as reproduced below :
"4. Accordingly, in view of the announcements published in the Institute’s Journal from time to time, in respect of ‘specified’ status of Account-ing Standards, read with this announcement, the extant position is that all the Accounting Standards, issued by the Institute which have been made mandatory by the Institute as indicated in the respective Standards or mandatory by way of a separate an-nouncement are ‘specified’ for the purpose of the proviso to S. 211(3C) and S. 227(3)(d) of the Act."
A National Advisory Committee on Accounting Standards was also established U/ss.(1) of S. 210A of the said Act to advise the Central Government about development of Accounting Standards and making them applicable to companies in India. Before the amendment, the Accounting Standards were only recommendatory in nature and their application was also at the option of the potential users. It was, however, true that non-compliance of Accounting Standards by various entities, both companies incorporated under the Companies Act, 1956 and others, led to qualification in audit report by auditors more in line with the announcements of the ICAI than as a result of any statutory compliance. Even after amendment in 1999 to the Companies Act, 1956, until now the Standards as issued by the ICAI were made applicable under the said Act only as an interim arrangement, pending prescripttion of separate Accounting Standards by the Central Government u/s.211 (3C) of the Act, as per the advice of National Advisory Committee on Accounting Standards formed for the purpose.
Govt.-notified Accounting Standards :
In exercise of the powers conferred by clause (a) of Ss.(1) of S. 642 of the Companies Act, 1956, read with Ss.(3C) of S. 211 and Ss.(1) of S. 210A of the said Act, the Ministry of Company Affairs under the advice of National Advisory Committee on Accounting Standards has now notified Companies (Accounting Standards) Rules, 2006 vide Notification No. GSR 739E, dated 7-12-2006.
After-effects :
The effect of the Notification will be as under :
1. Accounting Standards shall come into effect in respect of accounting periods commencing on or after the publication of Accounting Standards in the official Gazette i.e., 7-12-2006.
2. In line with the provisions of the Companies Act, 1956 these accounting standards prescribed by the Central Govt. will now substitute the ICAI-pronounced Accounting Standards insofar as their application to companies is concerned.
3. It would also mean that Accounting Standards that may be issued by ICAI in future would no longer be applicable to companies unless they are notified by Central Govt. or ICAI makes fresh announcements to members regarding applicability of non-notified Accounting Standards. Now after the Notification of Accounting Standards under the Companies Act, 1956, an announcement may also be expected from ICAI clarifying the status of announcements so far made by it, regarding their applicability to companies as well as to other institutions. If ASs issued by ICAI are not withdrawn, the changes found in ICAI announcements and Government Notification could lead to confusion. It could mean that in addition to Notification requirement, a member will also have to comply with ICAI announcements for reporting in case of companies. Accounting Standards 2, 11, 21, 23, 26, 27, 28, and 29 are under limited revision (CA Journal, January 2007). Accounting Standard (AS) 12 is under revision (Refer CA Journal, June 2007). Applicability of Accounting Standard 15 (revised 2005) has been deferred (CA Journal, March 2007). The impact of Notification on such proposed revision/deferment also is a matter of debate.
4. The I, II, & III levels prescribed by the ICAI for application of accounting standards to companies will also become infructuous.
5. Earlier it was not mandatory for Levels II & III companies to comply with all accounting standards issued by ICAI, whereas with the Notification of rules, compliance becomes mandatory even for Small and Medium-sized Companies (SMCs) with some relaxation as discussed in detail below.
6. Accounting Standards in their form and content will continue to apply, for reporting of compliance or otherwise by auditors, to all other entities other than companies, as per the ICAI announcement already made.
Salient features of notified rules :
The Rules notified as above consist of Rules and Annexure forming part of the Rules. The salient features of the Notification are summarised below :
1. Entities to comply : Prescribed Accounting Standards are applicable to companies incorporated under the Companies Act, 1956.
2. Prescribed Standards : The Central Government has prescribed Accounting Standards 1 to 7 and 9 to 29 as recommended by the Institute Of Chartered Accountants of India. These Accounting Standards are specified in Annexure B forming part of the rules. Accounting Standards now notified by way of Annexure B to rules are similar to those recommended by ICAI and currently considered by auditors for reporting with some modifications as to their applicability to SMCs, etc. The significant differences between ICAI-recommended ASs and Govt.-notified ASs could be observed in AS 9 and AS 11. An Announcement by ICAI in 2005 titled ‘Treatment of Interdivisional Transfers’ clarified that the recognition of interdivisional transfers as sales is an inappropriate accounting treatment and is inconsistent with AS 9. This clarification, however, is missing in the Govt.-notified AS 9, which, perhaps, means that inter-divisional transfers can now be treated as sales. This appears to be an unintentional change, though. Further, the Govt.-notified AS 11 now being a part of the Companies Act, 1956, the Standard by way of a footnote, clarifies that the accounting treatment of exchange differences contained in the Standard is required to be followed, irrespective of the relevant provisions of Schedule VI to the Companies Act, 1956. Whereas, the ICAI-recommended AS 11 could not substitute the provisions of Schedule VI and therefore, the Institute had given a clarification to that effect.
3. Application : Accounting Standards are to be applied in the preparation of ‘General Purpose Financial Statements’ issued to the public by commercial, industrial or business enterprises and subject to the attest function of members of ICAI. General Purpose Financial Statements include balance sheet, statements of profit and loss, cash-flow statements (wherever applicable) and other statements and explanatory notes, which form part thereof, issued for use of shareholders/members, creditors, employees and public at large.
4. Responsibility : Every company and its auditor(s) (in italic for emphasis) shall comply with the Accounting Standards as specified.
5. Division of enterprises : Companies are divided into two categories viz. SMCs and others for the purposes of complying with Accounting Standards. SMC means a company :
(i) whose equity or debt securities are not listed or not in the process of listing on any stock exchange.
(ii) which is not a bank, financial institution or an insurance company.
(iii) whose turnover (excluding other income) does not exceed Rs.50 crores in the immediately preceding accounting year.
(iv) which does not have borrowings (including public deposits) in excess of Rs.10 crores at any time during the immediately preceding accounting year.
(v) which is not a holding or subsidiary company of a company, which is not a small and medium-sized company. In other words, Rules are applicable to an SMC if it is subsidiary or holding company of non-SMC (big) company.
All the conditions as above are to be satisfied as at the end of the relevant accounting period. An existing company which was not an SMC earlier and becomes SMC later, is not qualified for relaxation in respect of Accounting Standards available to an SMC, until the company stays an SMC for two consecutive accounting periods.
6. (a) SMC exemptions : Accounting standards which are not mandatory for compliance to SMCs are :
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Accounting Standard
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Particulars
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Remarks
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AS 3
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Cash-flow statements
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Not required, but SMCs are encouraged to comply with the standards voluntarily.
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AS 15
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Employee benefits
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AS is applicable to the extent specified and not in its entirety. An SMC, as defined in the Notification, may not apply the disclosure requirements laid down in paragraphs 119 to 123 of the Standard in respect of accounting for defined benefit plans. However, such a company should disclose actuarial assumptions as per paragraph 120(l) of the Standard.
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AS 17
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Segment reporting
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Not required, but encouraged to comply with the Standards voluntarily.
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AS 21
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Consolidated financial statements
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If the statement is prepared due to statutory requirement or voluntarily, it should be in accordance with the Standard.
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AS 23
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Accounting for investments in associates in consolidated financial statements
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If the statement is prepared due to statutory requirement or voluntarily, it should be in accordance with the Standard.
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AS 25
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Interim financial reporting
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1. This Standard does not prescribe which enterprises should be required to present interim financial reports. If an enterprise is required or elects to prepare and present an interim financial report, it should comply with this Standard.
2. A statute governing an enterprise or a regulator may require an enterprise to prepare and present certain information at an interim date, which may be different in form and/or content as required by this Standard. In such a case, the recognition and measurement principles as laid down in this Standard are applied in respect of such information, unless otherwise prescribed.
3. The requirements related to cash-flow statement, contained in this Standard are applicable where an enterprise prepares and presents a cash-flow statement for the purpose of its annual financial report.
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AS 27
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Financial reporting of interest in joint ventures
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This Standard is mandatory in respect of separate financial statements of an enterprise. In respect of consolidated financial statements of an enterprise, this Standard is mandatory in nature where the enterprise prepares and presents the consolidated financial statements.
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(b) Applicable to SMCs : Accounting Standards applicable to SMCs also are :
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Accounting Standard
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Particulars
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Remarks
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AS 1
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Disclosure of accounting policies
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Applicable in its entirety.
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AS 2
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Valuation of inventories
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Applicable in its entirety.
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AS 4
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Contingencies and events occurring after balance sheet date.
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Paragraphs that deal with contingencies are applicable only to the extent not covered by AS 29 prescribed by the Central Government.
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AS 5
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Net profit or loss for the period, prior period items and changes in accounting policies
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Applicable in its entirety.
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AS 6
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Depreciation accounting
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Applicable in its entirety.
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AS 7
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Construction contracts
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Applicable in its entirety. Also refer clarification 7(i) below.
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AS 9
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Revenue recognition
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Applicable in its entirety.
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AS 10
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Accounting for fixed assets
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Applicable in its entirety.
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AS 11
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The effects of changes in foreign exchange rates
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Applicable in its entirety. Also refer clarification 7 (ii) below.
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AS 12
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Accounting for Govt. grants
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Applicable in its entirety.
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AS 13
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Accounting for investments
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Applicable in its entirety.
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AS 14
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Accounting for amalgamations
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Applicable in its entirety.
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AS 16
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Borrowing costs
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Applicable in its entirety.
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AS 18
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Related-party disclosures
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Refer note 10 below.
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AS 19
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Leases
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Refer clarification 7 (iii) and note 10 below.
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AS 20
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Earnings per share
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Mandatory to all companies. However, disclosure of diluted earnings per share (both including and excluding extraordinary items) is not mandatory for SMCs. Companies, however, are encouraged to comply with the Standard voluntarily. Also refer note 10 below.
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AS 22
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Accounting for taxes on income
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Applicable in its entirety.
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AS 24
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Discontinuing operations
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Refer note 10 below. Requirements related to cash-flow statement contained in this Standard are applicable where an enterprise prepares and presents a cash-flow statement voluntarily.
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AS 26
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Intangible assets
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Applicable in its entirety. If another Accounting Standard deals with a specific type of intangible asset, an enterprise applies that Accounting Standard instead of this Standard.
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AS 28
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Impairment of assets
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Applicable in its entirety. This Standard should be applied in accounting for the impairment of all assets, other than :
(a) inventories (AS 2);
(b) assets arising from construction contracts (AS 7);
(c) financial assets that are included in the scope of Accounting for Investments (AS 13); and
(d) deferred tax assets (AS 22).
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AS 29
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Provisions, contingent liabilities and contingent assets
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Standard is applicable except paragraphs 66 & 67. All paragraphs of Accounting Standard (AS) 4, contingencies and events occurring after the balance sheet date, that deal with contingencies stand withdrawn, except to the extent they deal with impairment of assets not covered by other Indian Accounting Standards. Also refer note 10 below.
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7. Clarifications :
(i) In respect of contracts entered into prior to the effective date of the Notification prescribing AS 7 of Construction Contracts u/s.211 of the Companies Act, 1956, the applicability of this Standard would be determined on the basis of AS 7, revised by the ICAI in 2002.
(ii) In respect of accounting for transactions in foreign currencies entered into prior to the effective date of the Notification prescribing AS 11 of The Effects of Changes in Foreign Exchange Rates u/s 211 of the Companies Act, 1956, the applicability of this Standard would be determined on the basis of AS 11, revised by the ICAI in 2003.
(iii) In respect of assets leased prior to the effective date of the Notification prescribing AS 19 of Leases u/s.211 of the Companies Act, 1956, the applicability of this Standard would be determined on the basis of the AS 19, issued by the ICAI in 2001.
8. ASIs part of Accounting Standards : Many of the Accounting Standard Interpretations given by ICAI from time to time have now been incorporated as part of Govt.-notified Account-ing Standards. A few additional illustrations also have been added over and above the illustrations earlier given in ICAI-announced Accounting Standards.
9. Effect of future changes in law : In case there is a change in the law in future and a particular Accounting Standard is found to be not in conformity with such law, the provisions of the amended law will prevail over the Accounting Standard.
10. Materiality : Accounting Standards are applic-able only to items which are material.
11. Exemptions not available : Accounting Standards 18, 19, 20, 24 and 29 which were earlier not applicable were or partially ap-plicable to Level II and III companies are now made applicable to all the companies, ir-respective of whether they are SMCs or other-wise. Modifications are also noticed in ICAI-announced exemptions and Govt.-notified exemptions in AS 19 and AS 29.
Relaxations to SMCs :
Relaxations in application of Accounting Standards to SMCs are mentioned in the General Instructions given in Annexure A to the rules. Instructions to be followed by the SMCs with regard to Accounting Standards are :
1. SMC opting for exemptions/relaxations to disclose by way of note to its financial statements, as under :
"The company is a Small and Medium-sized Company (SMC) as defined in the General Instructions in respect of Accounting Standards notified under the Companies Act, 1956. Accordingly, the company has complied with the Accounting Standards as applicable to a Small and Medium-sized Company."
This disclosure requirement appears to be in addition to the disclosure to be made in the main statutory audit report regarding compliance of Accounting Standards in Para 4d as per the specified audit report format.
2. In case of a company which was earlier an SMC but now no longer qualifies for relevant relaxation, the Standards or requirements become applicable from the current period and the figures for corresponding previous period need not be revised. However, the fact that the company was an SMC in the previous period and it had availed the relaxations shall be disclosed in the notes to the financial statements.
3. In case an SMC opts not to avail relaxations available to an SMC in a selective manner, it shall disclose the Standards on which relaxation is availed. Partial relaxation from compliance shall not be permitted so as not to mislead any person or public.
4. An SMC opting to disclose information though not required pursuant to relaxations available, shall disclose the information in compliance with the relevant Accounting Standard.
Conclusion :
We are fortunate that when the Accounting Standards finally arrived as part of the prevailing Companies Act, 1956, no one is caught off guard thanks mainly to the ICAI initiative in this regard, much earlier. It is now the turn of various other Central and State statutes to incorporate the ASs as part of legislation, so that the application becomes universal by law to all entities.
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