Accounting Standards
Concept of Accounting Standard
There are many users of financial statements as investors, creditors, government, consumers, owners, etc. They take many economic decisions on the basis of financial statements. If the financial statements are not properly regulated, there is possibility that the financial statements may mislead and provide the distorted picture of the business in the place of true and fair picture of the business. Proper regulation of the process of accounting it is essential so that these statements should be transparent, properly disclosed, consistent and reliable. Adequate disclosure in the accounts is also required. For this purpose, accounting standards are prepared at the national and international level. Actually the generally accepted accounting principles are codified by the accounting standards. Accounting standards prepares the norms and guidelines to prepare the financial statements and annual reports. At the international level the International Accounting Standard Committee (IASC) has issued the International Standards. In this committee, there are leading professional bodies of UK, USA, Australia, France and Canada. India is also a member of this committee. India has also prepared its own accounting standards, which are prepared by the Institute of Chartered Accountant of India (ICAI).
Meaning of Accounting Standards
It is a set of Certain generally accepted rules, principles, concepts and conventions issued by the Institute of chartered Accountants of India in consultation with other International Accounting bodies. The purpose of making uniform rules and principles is to make the preparation and presentation of financial statement easy, relevant, reliable, understandable and finally comparable. In other words, Accounting standards are the basis of accounting policies and practices to facilitate the recording of transactions and events in such a way which can change them into financial statements, to be used by the persons interested in getting the correct and reliable information with a view to take future decisions.
The basic objective of Accounting Standards is to remove variations in the treatment of several accounting aspects and to bring about 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.
Need and Formulation of Accounting Standards
Adopting and appreciating accounting standards ensures uniformity, comparability and qualitative improvement in preparing and presenting financial statements. So that they may give true and fair picture. What is the need for the adoption of accounting standards in the accounting process? How do the accounting standards help improve the quality of the financial statement? The answer of these questions may be explained by an example, suppose a company adopts LIFO method for the valuation of its closing stock and another company adopts the FIFO method for the valuation of its closing stock, valuation of the closing stock of both companies will differ. As a result the profit or loss of both companies will also differ. To avoid such a situation, AS-2 is made.
Take another example of depreciation, if a company adopts a diminishing balancing method for depreciation and another company adopts the fixed instalment method for depreciation, the amount of depreciation of both companies will differ. As a result, profit/loss will also differ and comparing these companies will not be possible. For this purpose, AS-6 is prepared by ICAI in India. Similarly, AS-1 gives guidelines for the disclosure of accounting policies so that the users of financial statements may perceive the reported profits in the correct perspective.
Did u know? In India, the Accounting Standards are formulated by the Accounting Standard Board (ASB). ASB determines the broad area required for the formulation of AS. At the time of preparation of Accounting Standards, ASB gets help from different groups for this purpose, a study group is made. In this group the members of ICAI participate. Then a wide discussion is held. The representatives of Government, Public Sector Units, and other organizations participate in this discussion. After the discussion, an Exposure Draft (ED) for AS is proposed and issued by ICAI.
Then it is dispatched to different outside bodies as ICWAI, ICSI, CBDT, SCOPE, etc. This ED comprises the following points:
1. A Statement of concepts and fundamental accounting principles relating to the standard.
2. Definitions of the terms used in the standard.
3. How the accounting principles have been applied to formulate the standard.
4. The presentation and disclosure requirements in complying with the standard.
5. Class of enterprises to which the standard will apply. Notes
6. Date from which the standard will be effective. After the publication of ED, the comments and views are collected from different corners.
Then ASB finalizes the proposed standard and submits it to the council of the Institute of chartered Accountants of India for approval. The council considers the ED and, if found necessary, modifies with the consolation of the Accounting Standard Board. Then final shape of the standard is issued under the authority of the council. In the beginning, this is recommendatory and after some period, it becomes mandatory. The board has issued the following standards for adoption worldwide. A number of provisional standards relating to other aspects of accounting are an anvil.
Nature of Accounting standards
The Institute of chartered Accountants of India had set up Accounting Standards Board on 22nd April, 1977 to formulate accounting standards on a number of accounting issues, taking into account the accounting standards developed by the International Accounting Standard Committee, prevailing laws in India, business customs usages and conventions etc. The Accounting Standards made were not mandatory initially but after the amendment in the Sec 211(3C) of Companies Act, 1956 Accounting Standards out of 28 have been made mandatory. The Auditor is required to give in his report to the shareholders that accounts are prepared (drawn) in accordance with the provisions relating to Accounting Standards in India.
The Purpose of this exercise is to make the financial statements more reliable, comparable, consistent and transparent. These standards consider the country's laws, business custom, environments etc. If there is a change in any country law or business custom or environment, the accounting standards are also changed/altered. This flexibility of Accounting Standards is a special feature which makes them more popular and friendly with the users.
If any enterprise wants to change/modify any business custom/practice the same must be properly disclosed along with its effects. For example—change of depreciation method, must be disclosed along with its effect on profit or loss.
The following are the accounting standards:
The Institute of Chartered Accountants of India has issued the following accounting standards:
AS 1. Disclosure of Accounting policies.
AS 2. Valuation of Inventories.
AS 3. Cash Flow Statement.
AS 4. Contingencies and Events occurring after the Balance Sheet Date.
AS 5. Net Profit or loss for the period, prior items and changes in accounting policies.
AS 6. Depreciation Accounting.
AS 7. Accounting for Construction Contracts.
AS 8. Accounting for research and development.
AS 9. Revenue Recognition.
AS 10. Accounting for fixed Assets.
AS 11. Accounting for the effects of changes in foreign Exchange rates.
AS 12. Accounting for Government grants.
AS 13. Accounting for Investments.
AS 14. Accounting for Amalgamations.
AS 15. Accounting for Retirement benefits in the financial statements of employers.
AS 16. Borrowing Costs.
AS 17. Segment Reporting.
AS 18. Related Party Disclosures.
AS 19. Leases.
AS 20. Earnings Per share.
AS 21. Consolidated financial statements.
AS 22. Accounting for Taxes on Income.
AS 23. Accounting for Investments in Associates in Consolidated Financial Statements.
AS 24. Discontinuing operations.
AS 25. Interim Financial Reporting.
AS 26. Intangible Assets.
AS 27. Financial Reporting of Interests in Joint Ventures.
AS 28. Impairment of Assets.
AS 29. Contingent Liabilities and Contingent Assets.
AS 30. Financial Instruments: Recognition and Measurement
AS 31. Financial Instruments: Presentation
AS 32. Financial Instruments: Disclosures and limited revision to AS-19
