THEORETICAL FRAMEWORK 1.

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UNIT – 7 ACCOUNTING STANDARDS

LEARNING OUTCOMES

After studying this unit, you will be able to:

♦ Understand the significance of issuance of Accounting Standards.
♦ Grasp the objectives, benefits and limitations of Accounting
Standards.
♦ Learn the process of formulation of Accounting Standards by the
Council of the Institute of Chartered Accountants of India.
♦ Familiarize with the list of applicable Accounting Standards in India.

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UNIT OVERVIEW

Accounting Standards deal with the issues of

Recognition of Measurement Presentation of

Disclosure
events and of transactions transactions
requirements
transactions and events and events

Formulation of Accounting Standards

Identification of area

Constitution of study group

Preparation of draft and its circulation

Ascertainment of views of different bodies on draft

Finalisation of exposure draft (E.D)

Comments received on exposure draft (E.D)

Modification of the draft

Issue of AS

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7.1 INTRODUCTION OF ACCOUNTING STANDARDS

Accounting as a ‘language of business’ communicates the financial results of an enterprise to
various stakeholders by means of financial statements. If the financial accounting process is
not properly regulated, there is possibility of financial statements being misleading,
tendentious and providing a distorted picture of the business, rather than the true. To ensure
transparency, consistency, comparability, adequacy and reliability of financial reporting, it is
essential to standardize the accounting principles and policies. Accounting Standards (ASs)
provide framework and standard accounting policies for treatment of transactions and events
so that the financial statements of different enterprises become comparable.

Accounting standards are written policy documents issued by the expert accounting body or
by the government or other regulatory body covering the aspects of recognition,
measurement, presentation and disclosure of accounting transactions and events in the
financial statements. The ostensible purpose of the standard setting bodies is to promote the
dissemination of timely and useful financial information to investors and certain other parties
having an interest in the company’s economic performance. The accounting standards deal
with the issues of -
(i) recognition of events and transactions in the financial statements;
(ii) measurement of these transactions and events;
(iii) presentation of these transactions and events in the financial statements in a manner
that is meaningful and understandable to the reader; and
(iv) the disclosure requirements which should be there to enable the public at large and
the stakeholders and the potential investors in particular, to get an insight into what
these financial statements are trying to reflect and thereby facilitating them to take
prudent and informed business decisions.

7.2 OBJECTIVES OF ACCOUNTING STANDARDS

The whole idea of accounting standards is centered around harmonisation of accounting
policies and practices followed by different business entities so that the diverse accounting
practices adopted for various aspects of accounting can be standardised. Accounting
Standards standardise diverse accounting policies with a view to:
(i) eliminate the non-comparability of financial statements and thereby improving the
reliability of financial statements; and

(ii) provide a set of standard accounting policies, valuation norms and disclosure
requirements.

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Accounting standards reduce the accounting alternatives in the preparation of financial

statements within the bounds of rationality, thereby ensuring comparability of financial
statements of different enterprises.

7.3 BENEFITS AND LIMITATIONS OF ACCOUNTING

STANDARDS
Accounting standards seek to describe the accounting principles, the valuation techniques and
the methods of applying the accounting principles in the preparation and presentation of
financial statements so that they may give a true and fair view. By setting the accounting
standards, the accountant has following benefits:
(i) Standards reduce to a reasonable extent or eliminate altogether confusing variations in
the accounting treatments used to prepare financial statements.
(ii) There are certain areas where important information are not statutorily required to be
disclosed. Standards may call for disclosure beyond that required by law.
(iii) The application of accounting standards would, to a limited extent, facilitate
comparison of financial statements of companies situated in different parts of the world
and also of different companies situated in the same country. However, it should be
noted in this respect that differences in the institutions, traditions and legal systems
from one country to another give rise to differences in accounting standards adopted in
different countries.

Standardisation
of Alternative
accounting
treatments

Benefits of
Accounting
Standards

Comparability Requirements
of financial for additional
statements disclosures

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However, there are some limitations of accounting standards:

(i) Difficulties in making choice between different treatments: Alternative solutions to

certain accounting problems may each have arguments to recommend them.
Therefore, the choice between different alternative accounting treatments may become
difficult.
(ii) Restricted scope: Accounting standards cannot override the statute. The standards are
required to be framed within the ambit of prevailing statutes.

Difficulties in
Limitations of
making choice
accounting Restricted scope
between different
standards
treatments

7.4 PROCESS OF FORMULATION OF ACCOUNTING

STANDARDS IN INDIA
The Institute of Chartered Accountants of India (ICAI), being a premier accounting body in the
country, took upon itself the leadership role by constituting the Accounting Standards Board
(ASB) in 1977. The ICAI has taken significant initiatives in the setting and issuing procedure of
Accounting Standards to ensure that the standard-setting process is fully consultative and
transparent. The ASB considers International Financial Reporting Standards (IFRSs) while
framing Indian Accounting Standards (ASs) in India and try to integrate them, in the light of
the applicable laws, customs, usages and business environment in the country. The
composition of ASB includes, representatives of industries (namely, ASSOCHAM, CII, FICCI),
regulators, academicians, government departments etc. Although ASB is a body constituted
by the Council of the ICAI, it (ASB) is independent in the formulation of accounting standards
and Council of the ICAI is not empowered to make any modifications in the draft accounting
standards formulated by ASB without consulting with the ASB.
The standard-setting procedure of Accounting Standards Board (ASB) can be briefly outlined
as follows:
♦ Identification of broad areas by ASB for formulation of AS.
♦ Constitution of study groups by ASB to consider specific projects and to prepare
preliminary drafts of the proposed accounting standards. The draft normally includes
objective and scope of the standard, definitions of the terms used in the standard,
recognition and measurement principles wherever applicable and presentation and
disclosure requirements.

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♦ Consideration of the preliminary draft prepared by the study group of ASB and
revision, if any, of the draft on the basis of deliberations.
♦ Circulation of draft of accounting standard (after revision by ASB) to the Council
members of the ICAI and specified outside bodies such as Department of Company
Affairs (DCA), Securities and Exchange Board of India (SEBI), Comptroller and Auditor
General of India (C&AG), Central Board of Direct Taxes (CBDT), Standing Conference
of Public Enterprises (SCOPE), etc. for comments.
♦ Meeting with the representatives of the specified outside bodies to ascertain their
views on the draft of the proposed accounting standard.
♦ Finalisation of the exposure draft of the proposed accounting standard and its issuance
inviting public comments.
♦ Consideration of comments received on the exposure draft and finalisation of the draft
accounting standard by the ASB for submission to the Council of the ICAI for its
consideration and approval for issuance.
♦ Consideration of the final draft of the proposed standard and by the Council of the
ICAI, and if found necessary, modification of the draft in consultation with the ASB is
done.
♦ The accounting standard on the relevant subject (for non-corporate entities) is then
issued by the ICAI. For unlisted corporate entities, having net worth of less than 250
crores the accounting standards are issued by The Central Government of India.
There are three sets of Accounting Standards to cater different categories of entities based on
their nature, size, and legal framework under which they operate, ensuring that each entity
follows appropriate accounting principles for financial reporting These are:
(i) Indian Accounting Standards (Ind AS) are applicable to all listed companies and
Non-Banking Financial Companies (NBFCs) and to unlisted companies and unlisted
NBFCs with net worth of INR 250 crores or more.
(ii) Accounting Standards (AS) notified under Companies (Accounting Standards) Rules,
2021, are applicable to the companies other than those following Ind AS, as given in
point (i). These companies are required to apply Accounting Standards (AS) notified
under the Companies Act as Companies (Accounting Standards) Rules, 2021.
(iii) Accounting Standards (AS) prescribed by ICAI are applicable for entities other than
companies.

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7.5 LIST OF ACCOUNTING STANDARDS IN INDIA

The ‘Accounting Standards’ issued by the Accounting Standards Board establish standards
which have to be complied by the business entities so that the financial statements are
prepared in accordance with generally accepted accounting principles.
Following is the list of applicable Accounting Standards:
List* of Accounting Standards

Sl. Number of the Title of the Accounting Standard

No. Accounting
Standard (AS)
1. AS 1 Disclosure of Accounting Policies
2. AS 2 (Revised) Valuation of Inventories
3. AS 3 (Revised) Cash Flow Statements
4. AS 4 (Revised) Contingencies and Events Occurring after the Balance Sheet
Date
5. AS 5 (Revised) Net Profit or Loss for the Period, Prior Period Items and
Changes in Accounting Policies
6. AS 7 (Revised) Accounting for Construction Contracts
7. AS 9 Revenue Recognition
8. AS 10 Property, Plant and Equipment
9. AS 11 (Revised) The Effects of Changes in Foreign Exchange Rates
10. AS 12 Accounting for Government Grants
11. AS 13 Accounting for Investments
12. AS 14 Accounting for Amalgamations
13. AS 15 (Revised) Employee Benefits
14. AS 16 Borrowing Costs
15. AS 17 Segment Reporting
16. AS 18 Related Party Disclosures
17. AS 19 Leases
18. AS 20 Earnings Per Share
19. AS 21 Consolidated Financial Statements

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20. AS 22 Accounting for Taxes on Income

21. AS 23 Accounting for Investments in Associates in Consolidated
Financial Statements
22. AS 24 Discontinuing Operations
23. AS 25 Interim Financial Reporting
24. AS 26 Intangible Assets
25. AS 27 Financial Reporting of Interests in Joint Ventures
26. AS 28 Impairment of Assets
27. AS 29 Provisions, Contingent Liabilities & Contingent Assets

* Note: The list of accounting standards given above does not form part of syllabus. It
has been given here for the knowledge of students only.

**Indian Accounting Standards (IND AS)

The Institute of Chartered Accountants of India (ICAI) being the accounting standards-setting
body in India, way back in 2006, initiated the process of moving towards the International
Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board
(IASB) with a view to enhance acceptability and transparency of the financial information
communicated by the Indian corporates through their financial statements. This move towards
IFRS was subsequently accepted by the Government of India.

The Government of India in consultation with the ICAI decided to converge and not to adopt
IFRSs issued by the IASB. The decision of convergence rather than adoption was taken after
the detailed analysis of IFRS requirements and extensive discussion with various stakeholders.
Accordingly, while formulating IFRS- converged Indian Accounting Standards (Ind AS), efforts
have been made to keep these Standards, as far as possible, in line with the corresponding IFRS
and departures have been made where considered absolutely essential. Certain changes have
been made considering the economic environment of the country, which is different as
compared to the economic environment presumed to be in existence by IFRS.

List of Ind as on 1st August, 2024

Ind AS Title of Ind AS
101 First -Time Adoption of Indian Accounting Standards
102 Share- Based Payment
103 Business Combinations

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Ind AS Title of Ind AS

104 Insurance Contracts
105 Non-current Assets Held for Sale and Discontinued Operations
106 Exploration for and Evaluation of Mineral Resources
107 Financial Instruments: Disclosures
108 Operating Segments
109 Financial Instruments
110 Consolidated Financial Statements
111 Joint Arrangements
112 Disclosure of Interests in Other Entities
113 Fair Value Measurement
114 Regulatory Deferral Accounts
115 Revenue from Contracts with Customers
116 Leases
1 Presentation of Financial Statements
2 Inventories
7 Statement of Cash Flows
8 Accounting Policies, Changes in Accounting Estimates and Errors
10 Events after the Reporting Period
12 Income Taxes
16 Property, Plant and Equipment
19 Employee Benefits
20 Accounting for Government Grants and Disclosure of Government Assistance
21 The Effects of Changes in Foreign Exchange Rates
23 Borrowing Costs
24 Related Party Disclosures
27 Separate Financial Statements
28 Investment in Associates and Joint Ventures
29 Financial Reporting in Hyperinflationary Economies
32 Financial Instruments: Presentation
33 Earnings per Share
34 Interim Financial Reporting

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Ind AS Title of Ind AS

36 Impairment of Assets
37 Provisions, Contingent Liabilities and Contingent Assets
38 Intangible Assets
40 Investment Property
41 Agriculture

**Accounting Standards for Local Bodies

Accounting Standards for local bodies are Accounting Standards that are applicable to the
local bodies whose primary objective is to deliver services to the public, rather than to make
profits and generate a return on equity to investors. Consequently, the performance of such
entities can be only partially evaluated by examination of financial position, financial
performance and cash flows.

List of Accounting Standards for Local Bodies (ASLB) as on

1st August, 2024
ASLB Title of ASLB
1 Presentation of Financial Statements
2 Cash Flow Statements
3 Accounting Policies, changes in Accounting Estimates and Errors
4 The Effects of Changes in Foreign Exchange Rates
5 Borrowing Costs
9 Revenue from Exchange Transactions
11 Construction Contracts
12 Inventories
13 Leases
14 Events After the Reporting Date
16 Investment Property
17 Property, Plant and Equipment
18 Segment Reporting
19 Provision, Contingent Liabilities and Contingent Assets
20 Related Party Disclosures
21 Impairment of Non-Cash-Generating Assets
23 Revenue from Non-Exchange Transaction (Taxes and Transfers)

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ASLB Title of ASLB

24 Presentation of Budget Information in Financial Statements
26 Impairment of Cash-Generating Assets
31 Intangible Assets
32 Service Concession Arrangements: Grantor
33 First-Time Adoption of Accrual Basis Accounting Standards for Local Bodies (ASLBs)
34 Separate Financial Statements
35 Consolidated Financial Statements
36 Investment in Associates and Joint Ventures
37 Joint Arrangements
38 Disclosure of Interests in Other Entities
39 Employee Benefits
40 Entity Combinations
42 Social Benefits
Financial Reporting under Cash Basis of Accounting
**Note: Ind AS and ASLB given above do not form part of the syllabus. They have been
discussed here for the knowledge of students only.

SUMMARY
♦ Accounting Standards (ASs) provide framework and standard accounting policies for
treatment of transactions and events so that the financial statements of different
enterprises become comparable. Accounting Standards standardise diverse
accounting policies with a view to:
(i) eliminate the non-comparability of financial statements
(ii) provide a set of standard accounting policies, valuation norms and disclosure
requirements
♦ By setting the accounting standards, the accountant has following benefits:
(i) Comparability of financial statements
(ii) Requirements of additional disclosures
♦ Following are the limitations of accounting standards
(i) Difficulties in making choice between different treatments.
(ii) Accounting standards cannot override the statute

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TEST YOUR KNOWLEDGE

True and False
1. Accounting standards are written policy documents issued by the expert accounting body
or by the government or other regulatory body covering the aspects of recognition,
measurement, presentation and disclosure of accounting transactions and events in the
financial statements.
2. Accounting standards can override the statute.
3. Difficulties in making choice between different treatments is one of the benefits of
accounting standards.
4. Requirements for additional disclosures is limitation of accounting standards.
5. ASB stands for Accounting standardisation benchmarking.
6. There are no limitation to accounting standards.

Multiple Choice Questions

1. Accounting Standards for Non-Corporate entities in India are issued by
(a) Central Govt.
(b) State Govt.
(c) Institute of Chartered Accountants of India.
2. Accounting Standards
(a) Harmonise accounting policies.

(b) Eliminate the non-comparability of financial statements.

(c) Both the above.
3. It is essential to standardize the accounting principles and policies in order to ensure

(a) Transparency.
(b) Consistency.
(c) Both the above.

Theoretical Questions
1. Explain the objective of “Accounting Standards” in brief.

2. State the advantages of setting Accounting Standards.

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ANSWERS/HINTS
True and False
1. True: Accounting standards are documents covering recognition, measurement, presentation
and disclosure of accounting transactions and events in the financial statements.
2. False: Accounting standards can never override the statute. The standards are required
to be framed within the ambit of prevailing statutes.
3. False: Difficulties in making choice between different treatments is one of the limitation of
accounting standard.
4. False: Benefits of accounting standards are:
• Standardisation of alternative accounting treatments
• Comparability of financial statements
• Requirements for additional disclosures.
5. False: ASB stands for Accounting Standard Board.
6. False: limitations of accounting standards
• Difficulties in making choice between different treatments
• Restricted scope

Multiple Choice Questions

1. (c) 2. (c) 3. (c)

Theoretical Questions
1. Accounting Standards are selected set of accounting policies or broad guidelines
regarding the principles and methods to be chosen out of several alternatives. The
main objective of Accounting Standards is to establish standards which have to be
complied with, to ensure that financial statements are prepared in accordance with
generally accepted accounting principles. Accounting Standards seek to suggest rules
and criteria of accounting measurements. These standards harmonize the diverse
accounting policies and practices at present in use in India.
2. The main advantage of setting accounting standards is that the adoption and application of
accounting standards ensure uniformity, comparability and qualitative improvement in the
preparation and presentation of financial statements. The other advantages are:
Reduction in variations; Disclosures beyond that required by law and Facilitates comparison.

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