Clarification vy ICAI on Harmonisation Differences between AS of ICAI and Companies Act

The Council has considered the differences between the Accounting Standards

issued by the Institute of Chartered Accountants of India and the Accounting

Companies (Accounting Standards) Rules, 2006. The Council decided the following

scheme for harmonisation of differences:

The Council noted that following differences between the Accounting Standards

issued by the ICAI and those notified by the Government are on account of language,

presentation, etc.

(a) The Accounting Standards notified by the Government use the term

‘accounting standard’ or ‘standard’ instead of the word ‘Statement’ used in the

Accounting Standards issued by the Institute of Chartered Accountants of

India

paragraphs in respect of the old accounting standards issued by the ICAI. For

example, the heading ‘Main Principles’ appears above paragraphs 24 to 27 of

AS 1 notified by the Government (The other accounting standards notified by

the Government in which this heading is used are AS 4, AS 6, AS 9, AS 10,

AS 12, AS 13 and AS 14).

(c) Paragraph numbers of certain Accounting Standards, notified by the

Government have been changed as compared to paragraph numbers of

Accounting Standards issued by the ICAI. For instance, in AS 10, issued by

the ICAI, numbers of paragraphs 9.2, 16.3 to 16.7, 37 and 38 appear even

though there is no matter in these paragraphs as the same have been

withdrawn due to subsequent issuance of Accounting Standards such as AS 16

and AS 26. In other words, the above paragraph numbers remain. However,

in the Accounting Standard notified by the Government, the paragraph

numbers have been changed by omitting the aforesaid paragraphs.

been done in the Accounting Standards notified by the Government, whereas

these were indicated as ‘bullets’ in Accounting Standards issued by the ICAI.

For example, paragraph 20 of AS 14 and paragraph 24 of AS 18.

the Government instead of ‘Examples’ as used in various Standards issued by

the ICAI. Similarly, the word ‘Appendix’ used in the Accounting Standards

issued by the ICAI, containing various examples at the end of an Accounting

Accounting Standards.

(e) Accounting Standards issued by the ICAI, at certain places make reference to

the Preface to the Statements of Accounting Standards. Since the

Government has not notified the Preface, some of the requirements of the

Preface, such as the consideration of materiality, have been included in the

‘General Instructions’ in the Rules. Accordingly, the Accounting Standards

notified by the Government make reference to the General Instructions.

The Council noted that consensus portion of certain ASIs have been included in the

notified Accounting Standards as ‘Explanation’ to the relevant paragraphs as

indicated below:

1 Substantial Period of Time (Re.

AS 16)

Paragraph 3.2 of Accounting Standard

3 Accounting for Taxes on Income

in the situations of Tax Holiday

under Sections 80-IA and 80-IB of

the Income-tax Act, 1961 (Re. AS

22)

Paragraph 13 of Accounting Standard

4 Losses under the head Capital

Gains (Re. AS 22)

Explanation 2 to paragraph 17 of

Accounting Standard (AS) 22,

5 Accounting for Taxes on Income

in the situations of Tax Holiday

under Sections 10A and 10B of

the Income-tax Act, 1961 (Re. AS

22)

Paragraph 13 of Accounting Standard

6 Accounting for Taxes on Income

in the context of Section 115JB of

the Income-tax Act, 1961 (Re. AS

22)

Paragraph 21 of Accounting Standard

7 Disclosure of deferred tax assets

and deferred tax liabilities in the

balance sheet of a company (Re.

AS 22)

Paragraph 30 of Accounting Standard

Future’ (Re. AS 21, AS 23 and AS

27)

Explanation (b) to paragraph 11 of

Accounting Standard (AS) 21,

Paragraph 7 of Accounting Standard

Paragraph 28 of Accounting Standard

9 Virtual certainty supported by

convincing evidence (Re. AS 22)

Explanation 1 to paragraph 17 of

Accounting Standard (AS) 22,

10 Interpretation of paragraph 4(e) of

AS 16 (Re. AS 16)

Paragraph 4(e) of Accounting Standard

13 Interpretation of paragraphs 26

and 27 of AS 18 (Re. AS 18)

Paragraphs 26 and 27 of Accounting

14 Disclosure of Revenue from Sales

Transactions (Re. AS 9)

Paragraph 10 of Accounting Standard

15 Notes to the Consolidated

Financial Statements (Re. AS 21)

Paragraph 6 of Accounting Standard

16 Treatment of Proposed Dividend

under AS 23 (Re. AS 23)

Explanation (b) to paragraph 6 of

Accounting Standard (AS) 23,

17 Adjustments to the Carrying

Amount of Investment arising

from Changes in Equity not

Included in the Statement of Profit

and Loss of the Associate (Re. AS

23)

Explanation (a) to Paragraph 6 of

Accounting Standard (AS) 23,

18 Consideration of Potential Equity

Shares for Determining whether

an Investee is an Associate under

AS 23 (Re. AS 23)

Paragraph 4 of Accounting Standard

19 Interpretation of the term

‘intermediaries’ (Re. AS 18)

Paragraph 13 of Accounting Standard

20 Disclosure of Segment

Information (Re. AS 17)

Paragraph 38 of Accounting Standard

21 Non-Executive Directors on the

Board-whether related parties (Re.

AS 18)

Paragraph 14 of Accounting Standard

22 Treatment of Interest for

determining Segment Expense

(Re. AS 17)

Point (b) of the definition of ‘Segment

Expense’ under paragraph 5.6 of

Accounting Standard (AS) 17,

21)

Paragraph 10 of Accounting Standard

25 Exclusion of a subsidiary from

consolidation (Re. AS 21)

Explanation (a) to paragraph 11 of

Accounting Standard (AS) 21,

26 Accounting for taxes on income in

the consolidated financial

statements (Re. AS 21)

Explanation (a) to paragraph 13 of

Accounting Standard (AS) 21,

shares in post-acquisition reserves

of a subsidiary/jointly controlled

entity (Re. AS 21 and AS 27)

Explanation (b) to paragraph 13 of

Accounting Standard (AS) 21,

Paragraph 32 of Accounting Standard

30 Applicability of AS 29 to Onerous

Contracts (Re. AS 29)

Paragraph 1(b) of Accounting Standard

Following ASIs have not been included in the notified Accounting Standards:

(i) ASI 2 Accounting for Machinery Spares (Re. AS 2

and AS 10)

(ii) ASI 11 Accounting for Taxes on Income in case of an

Amalgamation (Re. AS 22)

(iii) ASI 12 Applicability of AS 20 (Re. AS 20)

(iv) ASI 23 Remuneration paid to key management

(Re. AS 18)

(v) ASI 27 Applicability of AS 25 to Interim Financial

Results (Re. AS 25)

(vi) ASI 29 Turnover in case of Contractors (Re. AS 7

(revised 2002))

The Council noted that as per its Announcement, ‘Applicability of Accounting

Standards’, issued by the ICAI (published in ‘The Chartered Accountant’, November

2003), there are three levels of entities. Level II entities and Level III entities as per

the said Announcement are considered to be the Small and Medium Entities (SMEs).

On the other hand, as per the Accounting Standards notified by the Government,

there are two levels, namely, Small and Medium-sized Companies (SMCs) as

defined in the Rules and companies other than SMCs. Non-SMCs are required to

comply with all the Accounting Standards in their entirety, while certain exemptions/

relaxations have been given to SMCs. Certain differences in the criteria for

classification of the levels were also noted.

In this regard, the Council decided that the ICAI should continue to have three levels

as at present instead of two as per the Government notification, as below:

(a) Level I should be as per the existing Level I, modified keeping in view the

definition of SMC under the Government Notification except co-operative banks

should be included along with the banks and reference to industrial, commercial and

business reporting entities should be retained as part of the criteria in (vi) and (vii) of

the existing ICAI criteria for Level I.

(b) Level II should include companies other than those covered under Level I

and the non-corporate entities having the same criteria as at present for ICAI Level

II. The exemptions or relaxations available to this Level should be the same as

available to SMCs under the Government Notification.

(c) Level III should cover only non-corporates not covered in Levels I and II.

Exemptions or relaxations available at Level III as at present should continue to be

available at this Level.

(d) Exemptions or relaxations available to enterprises employing less than 50

should continue to be available to non-corporate entities under Levels II and III.

Non-corporate entities which fall in any one or more of the following categories, at

the end of the relevant accounting period, are classified as Level I entities:

(i) Entities whose equity or debt securities are listed or are in the process

of listing on any stock exchange, whether in India or outside India.

(ii) Banks (including co-operative banks), financial institutions or entities

carrying on insurance business.

(iii) All commercial, industrial and business reporting entities, whose

turnover (excluding other income) exceeds rupees fifty crore in the

immediately preceding accounting year.

(iv) All commercial, industrial and business reporting entities having

borrowings (including public deposits) in excess of rupees ten crore at

any time during the immediately preceding accounting year.

(v) Holding and subsidiary entities of any one of the above.

Non-corporate entities which are not Level I entities but fall in any one or more of

the following categories are classified as Level II entities:

(i) All commercial, industrial and business reporting entities, whose

turnover (excluding other income) exceeds rupees forty lakh but does

not exceed rupees fifty crore in the immediately preceding accounting

year.

(ii) All commercial, industrial and business reporting entities having

borrowings (including public deposits) in excess of rupees one crore

but not in excess of rupees ten crore at any time during the

immediately preceding accounting year.

(iii) Holding and subsidiary entities of any one of the above.

Non-corporate entities which are not covered under Level I and Level II are

considered as Level III entities.

(1) An SME which does not disclose certain information pursuant to the exemptions

or relaxations given to it should disclose (by way of a note to its financial statements)

the fact that it is an SME and has complied with the Accounting Standards insofar as

they are applicable to entities falling in Level II or Level III, as the case may be.

(2) Where an entity, being covered in Level II or Level III, had qualified for any

exemption or relaxation previously but no longer qualifies for the relevant exemption

or relaxation in the current accounting period, the relevant standards or requirements

become applicable from the current period and the figures for the corresponding

period of the previous accounting period need not be revised merely by reason of its

having ceased to be covered in Level II or Level III, as the case may be. The fact

that the entity was covered in Level II or Level III, as the case may be, in the

previous period and it had availed of the exemptions or relaxations available to that

Level of entities should be disclosed in the notes to the financial statements.

(3) Where an entity has been covered in Level I and subsequently, ceases to be so

covered, the entity will not qualify for exemption/relaxation available to Level II

entities, until the entity ceases to be covered in Level I for two consecutive years.

Similar is the case in respect of an entity, which has been covered in Level I or Level

II and subsequently, gets covered under Level III.

(4) If an entity covered in Level II or Level III opts not to avail of the exemptions or

relaxations available to that Level of entities in respect of any but not all of the

Accounting Standards, it should disclose the Standard(s) in respect of which it has

availed the exemption or relaxation.

(5) If an entity covered in Level II or Level III desires to disclose the information not

required to be disclosed pursuant to the exemptions or relaxations available to that

Level of entities, it should disclose that information in compliance with the relevant

Accounting Standard.

(6) An entity covered in Level II or Level III may opt for availing certain exemptions

or relaxations from compliance with the requirements prescribed in an Accounting

Standard:

Provided that such a partial exemption or relaxation and disclosure should not be

permitted to mislead any person or public.

relaxations are available to Level II and Level III entities, under two subclassifications,

viz., (i) entities whose average number of persons employed during

the year is 50 or more, and (ii) entities whose average number of persons employed

during the year is less than 50. The requirements stated in paragraphs (1) to (6)

above, mutatis mutandis, apply to these sub-classifications.

(i) whose equity or debt securities are not listed or are not in the process

of listing on any stock exchange, whether in India or outside India;

(ii) which is not a bank, financial institution or an insurance company;

(iii) whose turnover (excluding other income) does not exceed rupees fifty

crore in the immediately preceding accounting year;

(iv) which does not have borrowings (including public deposits) in excess

of rupees ten crore at any time during the immediately preceding

accounting year; and

(v) which is not a holding or subsidiary company of a company which is

not a small and medium-sized company.

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Small and Medium Sized Company, if the conditions mentioned therein are

satisfied as at the end of the relevant accounting period.

Companies not falling within the definition of SMC are considered as Non-

SMCs.

1. SMCs shall follow the following instructions while complying with

Accounting Standards under these Rules:-

1.1 the SMC which does not disclose certain information pursuant to the

exemptions or relaxations given to it shall disclose (by way of a note

to its financial statements) the fact that it is an SMC and has complied

with the Accounting Standards insofar as they are applicable to an

SMC on the following lines:

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.”

1.2 Where a company, being an SMC, has qualified for any exemption or

relaxation previously but no longer qualifies for the relevant

exemption or relaxation in the current accounting period, the relevant

standards or requirements become applicable from the current period

and the figures for the corresponding period of the previous

accounting period need not be revised merely by reason of its having

ceased to be an SMC. The fact that the company was an SMC in the

previous period and it had availed of the exemptions or relaxations

available to SMCs shall be disclosed in the notes to the financial

statements.

1.3 If an SMC opts not to avail of the exemptions or relaxations available

to an SMC in respect of any but not all of the Accounting Standards,

it shall disclose the standard(s) in respect of which it has availed the

exemption or relaxation.

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1.4 If an SMC desires to disclose the information not required to be

disclosed pursuant to the exemptions or relaxations available to the

SMCs, it shall disclose that information in compliance with the

relevant accounting standard.

1.5 The SMC may opt for availing certain exemptions or relaxations from

compliance with the requirements prescribed in an Accounting

Standard:

Provided that such a partial exemption or relaxation and disclosure

shall not be permitted to mislead any person or public.

Rule 5 of the Companies (Accounting Standards) Rules, 2006, provides as below:

“5. An existing company, which was previously not a Small and Medium

Sized Company (SMC) and subsequently becomes an SMC, shall not be

qualified for exemption or relaxation in respect of Accounting Standards

available to an SMC until the company remains an SMC for two consecutive

accounting periods.”

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AS 1 Disclosures of Accounting Policies

AS 2 Valuation of Inventories

AS 4 Contingencies and Events Occurring After the Balance Sheet Date

AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in

Accounting Policies

AS 6 Depreciation Accounting

AS 7 Construction Contracts (revised 2002)

AS 9 Revenue Recognition

AS 10 Accounting for Fixed Assets

AS 11 The Effects of Changes in Foreign Exchange Rates (revised 2003)

AS 12 Accounting for Government Grants

AS 13 Accounting for Investments

AS 14 Accounting for Amalgamations

AS 16 Borrowing Costs

AS 18 Related Party Disclosures

AS 22 Accounting for Taxes on Income

AS 24 Discontinuing Operations

AS 26 Intangible Assets

AS 3 Cash Flow Statements.

AS 17 Segment Reporting

with by a company if the company, pursuant to the requirements of a statute/regulator or voluntarily,

prepares and presents consolidated financial statements.

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(i) AS 21, Consolidated Financial Statements

(ii) AS 23, Accounting for Investments in Associates in Consolidated

Financial Statements

(iii) AS 27, Financial Reporting of Interests in Joint Ventures (to the

extent of requirements relating to Consolidated Financial Statements)

(i) Accounting Standard (AS) 15, Employee Benefits (revised 2005)

(a) paragraphs 11 to 16 of the standard to the extent they deal with

recognition and measurement of short-term accumulating

compensated absences which are non-vesting (i.e., short-term

accumulating compensated absences in respect of which employees

are not entitled to cash payment for unused entitlement on leaving);

(b) paragraphs 46 and 139 of the Standard which deal with

discounting of amounts that fall due more than 12 months after the

balance sheet date;

(c) recognition and measurement principles laid down in paragraphs

50 to 116 and presentation and disclosure requirements laid down in

paragraphs 117 to 123 of the Standard in respect of accounting for

defined benefit plans. However, such companies should actuarially

determine and provide for the accrued liability in respect of defined

benefit plans by using the Projected Unit Credit Method and the

discount rate used should be determined by reference to market yields

at the balance sheet date on government bonds as per paragraph 78 of

the Standard. Such companies should disclose actuarial assumptions

as per paragraph 120(l) of the Standard; and

(d) recognition and measurement principles laid down in paragraphs

129 to 131 of the Standard in respect of accounting for other longterm

employee benefits. However, such companies should actuarially

determine and provide for the accrued liability in respect of other

long-term employee benefits by using the Projected Unit Credit

Method and the discount rate used should be determined by reference

to market yields at the balance sheet date on government bonds as per

paragraph 78 of the Standard.

(ii) AS 19, Leases

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Paragraphs 22 (c),(e) and (f); 25 (a), (b) and (e); 37 (a) and (f); and 46

(b) and (d) relating to disclosures are not applicable to SMCs.

(iii) AS 20, Earnings Per Share

Disclosure of diluted earnings per share (both including and excluding

extraordinary items) is exempted for SMCs.

(iv) AS 28, Impairment of Assets

SMCs are allowed to measure the ‘value in use’ on the basis of

reasonable estimate thereof instead of computing the value in use by

present value technique. Consequently, if an SMC chooses to measure

relevant provisions of AS 28, such as discount rate etc., would not be

applicable to such an SMC. Further, such an SMC need not disclose

the information required by paragraph 121(g) of the Standard.

(v) AS 29, Provisions, Contingent Liabilities and Contingent Assets

Paragraphs 66 and 67 relating to disclosures are not applicable to

SMCs.

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AS 1 Disclosures of Accounting Policies

AS 2 Valuation of Inventories

AS 4 Contingencies and Events Occurring After the Balance Sheet Date

AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in

Accounting Policies

AS 6 Depreciation Accounting

AS 7 Construction Contracts (revised 2002)

AS 9 Revenue Recognition

AS 10 Accounting for Fixed Assets

AS 11 The Effects of Changes in Foreign Exchange Rates (revised 2003)

AS 12 Accounting for Government Grants

AS 13 Accounting for Investments

AS 14 Accounting for Amalgamations

AS 16 Borrowing Costs

AS 22 Accounting for Taxes on Income

AS 26 Intangible Assets

AS 3 Cash Flow Statements

AS 17 Segment Reporting

AS 3 Cash Flow Statements

AS 17 Segment Reporting

AS 18 Related Party Disclosures

AS 24 Discontinuing Operations

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(i) AS 21, Consolidated Financial Statements

(ii) AS 23, Accounting for Investments in Associates in Consolidated

Financial Statements

(iii) AS 27, Financial Reporting of Interests in Joint Ventures (to the

extent of requirements relating to Consolidated Financial Statements)

(i) Accounting Standard (AS) 15, Employee Benefits (revised 2005)

(1) Level II and Level III Non-corporate entities whose average

number of persons employed during the year is 50 or more are

exempted from the applicability of the following paragraphs:

(a) paragraphs 11 to 16 of the standard to the extent they deal with

recognition and measurement of short-term accumulating

compensated absences which are non-vesting (i.e., short-term

accumulating compensated absences in respect of which

employees are not entitled to cash payment for unused entitlement

on leaving);

(b) paragraphs 46 and 139 of the Standard which deal with

discounting of amounts that fall due more than 12 months after the

balance sheet date;

(c) recognition and measurement principles laid down in

paragraphs 50 to 116 and presentation and disclosure requirements

laid down in paragraphs 117 to 123 of the Standard in respect of

accounting for defined benefit plans. However, such entities

should actuarially determine and provide for the accrued liability

in respect of defined benefit plans by using the Projected Unit

Credit Method and the discount rate used should be determined by

statements) are required to be complied with by a non-corporate entity if the non-corporate entity,

pursuant to the requirements of a statute/regulator or voluntarily, prepares and presents consolidated

financial statements.

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reference to market yields at the balance sheet date on government

bonds as per paragraph 78 of the Standard. Such entities should

disclose actuarial assumptions as per paragraph 120(l) of the

Standard; and

(d) recognition and measurement principles laid down in

paragraphs 129 to 131 of the Standard in respect of accounting for

other long-term employee benefits. However, such entities should

actuarially determine and provide for the accrued liability in

respect of other long-term employee benefits by using the

Projected Unit Credit Method and the discount rate used should be

determined by reference to market yields at the balance sheet date

on government bonds as per paragraph 78 of the Standard.

(2) Level II and Level III Non-corporate entities whose average

number of persons employed during the year is less than 50 are

exempted from the applicability of the following paragraphs:

(a) paragraphs 11 to 16 of the standard to the extent they deal with

recognition and measurement of short-term accumulating

compensated absences which are non-vesting (i.e., short-term

accumulating compensated absences in respect of which

employees are not entitled to cash payment for unused entitlement

on leaving);

(b) paragraphs 46 and 139 of the Standard which deal with

discounting of amounts that fall due more than 12 months after the

balance sheet date;

(c) recognition and measurement principles laid down in

paragraphs 50 to 116 and presentation and disclosure requirements

laid down in paragraphs 117 to 123 of the Standard in respect of

accounting for defined benefit plans. However, such entities may

calculate and account for the accrued liability under the defined

benefit plans by reference to some other rational method, e.g., a

method based on the assumption that such benefits are payable to

all employees at the end of the accounting year; and

(d) recognition and measurement principles laid down in

paragraphs 129 to 131 of the Standard in respect of accounting for

other long-term employee benefits. Such entities may calculate

and account for the accrued liability under the other long-term

employee benefits by reference to some other rational method,

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e.g., a method based on the assumption that such benefits are

payable to all employees at the end of the accounting year.

(ii) AS 19, Leases

Paragraphs 22 (c),(e) and (f); 25 (a), (b) and (e); 37 (a) and (f); and

46 (b) and (d) relating to disclosures are not applicable to noncorporate

entities falling in Level II .

Paragraphs 22 (c),(e) and (f); 25 (a), (b) and (e); 37 (a), (f) and (g);

and 46 (b), (d) and (e) relating to disclosures are not applicable to

Level III entities.

(iii) AS 20, Earnings Per Share

Diluted earnings per share (both including and excluding

extraordinary items) is not required to be disclosed by non-corporate

entities falling in Level II and Level III and information required by

paragraph 48(ii) of AS 20 is not required to be disclosed by Level III

entities if this standard is applicable to these entities.

(iv) AS 28, Impairment of Assets

Non-corporate entities falling in Level II and Level III are allowed to

instead of computing the value in use by present value technique.

Consequently, if a non-corporate entity falling in Level II or Level III

chooses to measure the ‘value in use’ by not using the present value

technique, the relevant provisions of AS 28, such as discount rate etc.,

would not be applicable to such an entity. Further, such an entity need

not disclose the information required by paragraph 121(g) of the

Standard.

(v) AS 29, Provisions, Contingent Liabilities and Contingent Assets

Paragraphs 66 and 67 relating to disclosures are not applicable to noncorporate

entities falling in Level II and Level III.

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