ACCOUNTING ACCOUNTING STANDARDSSTANDARDS

P.GURU PRASADP.GURU PRASAD

FACULTY MEMBERFACULTY MEMBER

ACADEMIC COORDINATORACADEMIC COORDINATOR

ACCOUNTING STANDARDSACCOUNTING STANDARDS

The term standard denotes a The term standard denotes a discipline, which provides both discipline, which provides both guidelines and yardstick for guidelines and yardstick for evaluation. As guidelines, they evaluation. As guidelines, they provide uniform practices and provide uniform practices and common techniques.common techniques.

ACCOUNTING STANDARDSACCOUNTING STANDARDS Accounting bodies throughout the Accounting bodies throughout the

world are striving to achieve a world are striving to achieve a reasonable degree of uniformity in reasonable degree of uniformity in the accounting policies by the accounting policies by prescribing certain accounting prescribing certain accounting standards with respect to collection standards with respect to collection and presentation of accounting and presentation of accounting informationinformation

ACCOUNTING STANDARDSACCOUNTING STANDARDS

To formulate the accounting standards, they To formulate the accounting standards, they established a committee called the established a committee called the international accounting standards committee international accounting standards committee (IASC) in 1973.(IASC) in 1973.

Accounting bodies of most of the countries, Accounting bodies of most of the countries, including Institute of Chartered Accountants including Institute of Chartered Accountants of India ( ICAI ) are the members of this body of India ( ICAI ) are the members of this body and these members have resolved to conform and these members have resolved to conform to the standards developed by IASCto the standards developed by IASC

The objective of the committeeThe objective of the committee

Formulating , publishing, and promoting Formulating , publishing, and promoting the use of the accounting standards world the use of the accounting standards world wide.wide.

To work for improvement and To work for improvement and harmonization of regulating accounting harmonization of regulating accounting standards and procedures relating to standards and procedures relating to financial statementsfinancial statements

The importance of A.SThe importance of A.S Globalization of the economy has led to Globalization of the economy has led to

Indian companies expanding their Indian companies expanding their operations across the borders and this operations across the borders and this calls for uniformity in accounts of their calls for uniformity in accounts of their facilities located in different countries.facilities located in different countries.

Foreign investors would give more Foreign investors would give more weight -age to the accounts of those weight -age to the accounts of those companies which are based on IAScompanies which are based on IAS

Accounting Standards Board of Accounting Standards Board of India (ASB)India (ASB)

Recognizing the need to harmonize the diverse Recognizing the need to harmonize the diverse accounting polices and practices prevalent in accounting polices and practices prevalent in India , the ICAI constituted ASB on April 21India , the ICAI constituted ASB on April 21stst 1977. the standards are intended to apply only to 1977. the standards are intended to apply only to items which are material. Also the A.S cannot items which are material. Also the A.S cannot and do not override the local regulations which and do not override the local regulations which govern the preparation and presentation of govern the preparation and presentation of financial statements in our countryfinancial statements in our country

Auditors DutiesAuditors Duties

In case the company does not conform to In case the company does not conform to any of the mandatory accounting any of the mandatory accounting standards, the auditor will have to qualify standards, the auditor will have to qualify his report by justifying his deviation. In his report by justifying his deviation. In case he fails to do so the ICAI can take case he fails to do so the ICAI can take disciplinary action against him on the disciplinary action against him on the ground of professional misconductground of professional misconduct

29 Accounting Standards29 Accounting Standards The accounting standards board has The accounting standards board has

in line with the international in line with the international standards, issued twenty nine standards, issued twenty nine standards to be followed by its standards to be followed by its members, while auditing the accounts members, while auditing the accounts of companies. The important of companies. The important standards discussed in our course standards discussed in our course bookbook

Differing accounting policiesDiffering accounting policies Methods of Depreciation, Depletion and Methods of Depreciation, Depletion and

Amortization.Amortization. Valuation of InventoriesValuation of Inventories Treatment of Good willTreatment of Good will Valuation of InvestmentsValuation of Investments Treatment of Retirement BenefitsTreatment of Retirement Benefits Valuation of Fixed AssetsValuation of Fixed Assets Treatment of Contingent LiabilitiesTreatment of Contingent Liabilities the above list of differing accounting polices the above list of differing accounting polices

are not exhaustive .are not exhaustive .

AS-1 – Disclosure of Accounting AS-1 – Disclosure of Accounting PoliciesPolicies

To ensure proper understanding of To ensure proper understanding of financial statements, it is necessary financial statements, it is necessary that all significant accounting that all significant accounting policies adopted in the preparation policies adopted in the preparation and presentation of financial and presentation of financial statements should be disclosed.statements should be disclosed.

AS-1 – Disclosure of Accounting AS-1 – Disclosure of Accounting PoliciesPolicies

Any change in an accounting policy which has Any change in an accounting policy which has a material effect on current and future periods a material effect on current and future periods should be disclosed.should be disclosed.

For this purpose, the major considerations For this purpose, the major considerations governing the selection and application of governing the selection and application of accounting policies are:accounting policies are:

PrudencePrudence Substance over formSubstance over form Materiality.Materiality.

AS-1 – Disclosure of Accounting AS-1 – Disclosure of Accounting PoliciesPolicies

prudenceprudence: in view of the uncertainty attached : in view of the uncertainty attached to future events, profits are not anticipated but to future events, profits are not anticipated but recognized only when realized though not recognized only when realized though not necessarily in cash. Provision is made for all necessarily in cash. Provision is made for all known liabilities and losses even though the known liabilities and losses even though the amount cannot be determined with certainty amount cannot be determined with certainty and represents only a best estimate in the light and represents only a best estimate in the light of available informationof available information

AS-1 – Disclosure of Accounting AS-1 – Disclosure of Accounting PoliciesPolicies

Substance over FormSubstance over Form: the accounting : the accounting treatment and presentation in financial treatment and presentation in financial statements of transactions and events should statements of transactions and events should be governed by their substance and not merely be governed by their substance and not merely by the legal form by the legal form

AS-1 – Disclosure of Accounting AS-1 – Disclosure of Accounting PoliciesPolicies

MaterialityMateriality: financial statements should : financial statements should disclose all “material” items, i.e. items the disclose all “material” items, i.e. items the knowledge of which might influence the knowledge of which might influence the decisions of the user of the financial decisions of the user of the financial statements.statements.

AS-1 – Disclosure of Accounting AS-1 – Disclosure of Accounting PoliciesPolicies

If the fundamental accounting assumption like If the fundamental accounting assumption like Going Concern, Consistency and AccrualGoing Concern, Consistency and Accrual are are followed in financial statements, specific followed in financial statements, specific disclosure is not required. disclosure is not required.

If a fundamental accounting assumption is not If a fundamental accounting assumption is not followed , the fact should be disclosedfollowed , the fact should be disclosed

Companies Amendment Act,1999Companies Amendment Act,1999

Realizing the importance of accounting Realizing the importance of accounting standards, the companies amendment standards, the companies amendment act,1999 has inserted sub-sec(3A),(3B),act,1999 has inserted sub-sec(3A),(3B),(3C) in the section 311, which provides (3C) in the section 311, which provides that every company has to follow the that every company has to follow the accounting standards as issued by the accounting standards as issued by the ICAIICAI

AS-1 – Disclosure of Accounting AS-1 – Disclosure of Accounting PoliciesPolicies

Since the accounting polices adopted could Since the accounting polices adopted could vastly differ from company to company and vastly differ from company to company and even year to year in respect of the same even year to year in respect of the same company, AS-1, by forcing the disclosure of company, AS-1, by forcing the disclosure of accounting policies ensures that the users of accounting policies ensures that the users of the financial statements would be able to do a the financial statements would be able to do a meaningful comparison of such statements and meaningful comparison of such statements and draw proper conclusion from themdraw proper conclusion from them

AS-1 – Disclosure of Accounting AS-1 – Disclosure of Accounting PoliciesPolicies

DisclosureDisclosure:- to ensure proper understanding of :- to ensure proper understanding of financial statements, it is necessary that all financial statements, it is necessary that all significant accounting policies adopted in the significant accounting policies adopted in the preparation and prevention of financial preparation and prevention of financial statements should be disclosed.statements should be disclosed.

Accounting standard - 4Accounting standard - 4

AS – 4 deals with the treatment in financial AS – 4 deals with the treatment in financial statements of contingencies and events occurring statements of contingencies and events occurring after the balance sheet date.after the balance sheet date.

However it However it does not coverdoes not cover certain contingencies such certain contingencies such as liabilities of life assurance and general insurance as liabilities of life assurance and general insurance enterprises arising from the policies issued, enterprises arising from the policies issued, obligations under retirement benefit plans, and obligations under retirement benefit plans, and commitments arising from long term lease contracts commitments arising from long term lease contracts in view of special considerations applicable to themin view of special considerations applicable to them

Accounting standard - 4Accounting standard - 4

The accounting treatment of a The accounting treatment of a contingent losscontingent loss is determined by the expected outcome of the is determined by the expected outcome of the contingency. If it is likely that a contingency contingency. If it is likely that a contingency will result in a loss to the enterprise, then it is will result in a loss to the enterprise, then it is prudent to provide for that loss in the financial prudent to provide for that loss in the financial statements.statements.

Accounting standard - 4Accounting standard - 4

Contingent gainsContingent gains are not recognized in are not recognized in financial statements since their recognition financial statements since their recognition may result in the recognition of revenue, may result in the recognition of revenue, which may never be realized.which may never be realized.

A substantial legal claim against/in favor of A substantial legal claim against/in favor of the enterprise may represent a contingency.the enterprise may represent a contingency.

DisclosureDisclosure:- If a reliable estimate of the :- If a reliable estimate of the financial effect cannot be made, this fact is financial effect cannot be made, this fact is disclosed.disclosed.

Events occurring after the balance Events occurring after the balance sheet datesheet date

Adjustments to assets and liabilities are Adjustments to assets and liabilities are required for events occurring after the balance required for events occurring after the balance sheet date that provide additional information sheet date that provide additional information materially affecting the determination of the materially affecting the determination of the amounts relating to conditions existing at the amounts relating to conditions existing at the balance sheet date.balance sheet date.

For example, an adjustment may be made for a For example, an adjustment may be made for a loss on a trade receivable account, which is loss on a trade receivable account, which is confirmed by the insolvency of a customer, confirmed by the insolvency of a customer, which occurs after the balance sheet datewhich occurs after the balance sheet date

Events occurring after the balance Events occurring after the balance sheet datesheet date

Adjustments to assets and liabilities are not Adjustments to assets and liabilities are not appropriate for events occurring after the appropriate for events occurring after the balance sheet date, if such events do not relate balance sheet date, if such events do not relate to conditions existing at the balance sheet date.to conditions existing at the balance sheet date.

An example is the decline in market value of An example is the decline in market value of investments between the balance sheet date on investments between the balance sheet date on which the financial statements are approved.which the financial statements are approved.

Events occurring after the balance Events occurring after the balance sheet datesheet date

There are events , which , although they take There are events , which , although they take place after the balance sheet date, are place after the balance sheet date, are sometimes reflected, in the financial sometimes reflected, in the financial statements because of statutory requirements statements because of statutory requirements or because of their special nature.or because of their special nature.

Such items include the amount of dividend Such items include the amount of dividend proposed or declared by the enterprise after the proposed or declared by the enterprise after the balance sheet date in respect of the period balance sheet date in respect of the period covered by the financial statementscovered by the financial statements

Events occurring after the balance Events occurring after the balance sheet datesheet date

Events occurring after the balance sheet date may Events occurring after the balance sheet date may indicate that the enterprise ceases to be a going indicate that the enterprise ceases to be a going concern. Worsening in operating results and financial concern. Worsening in operating results and financial position, or unusual changes affecting the existence position, or unusual changes affecting the existence or substratum of the enterprise after the balance sheet or substratum of the enterprise after the balance sheet date (e.g., destruction of a major production plant by date (e.g., destruction of a major production plant by a fire after the balance sheet date) may indicate a a fire after the balance sheet date) may indicate a need to consider whether it is proper to use the need to consider whether it is proper to use the fundamental accounting assumption of going concern fundamental accounting assumption of going concern in the preparation of the financial statementsin the preparation of the financial statements

Events occurring after the balance Events occurring after the balance sheet datesheet date

DisclosureDisclosure :- when the events occurring after :- when the events occurring after the balance sheet date are disclosed in the the balance sheet date are disclosed in the report of the approving authority, the report of the approving authority, the information given comprises the nature of the information given comprises the nature of the events and an estimate of their effects or a events and an estimate of their effects or a statement that such an estimate cannot be statement that such an estimate cannot be made.made.

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