ICAI Notes- Unit 7: Accounting Standards | Principles and Practice of Accounting - CA Foundation PDF Download

 Page 1


1.101 
THEORETICAL FRAMEWORK 
 
LEARNING OUTCOMES 
UNIT – 7 ACCOUNTING STANDARDS 
 
 
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. 
 
 
© The Institute of Chartered Accountants of India
Page 2


1.101 
THEORETICAL FRAMEWORK 
 
LEARNING OUTCOMES 
UNIT – 7 ACCOUNTING STANDARDS 
 
 
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. 
 
 
© The Institute of Chartered Accountants of India
  ACCOUNTING 
1.
102 
1.102 
 
 
 
 
 
 
 
 
Formulation of Accounting Standards 
 
 
 
 
Accounting Standards deal with the issues of
Recognition of 
events and 
transactions
Measurement 
of transactions 
and events
Presentation of 
transactions 
and events
Disclosure 
requirements
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 
UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
Page 3


1.101 
THEORETICAL FRAMEWORK 
 
LEARNING OUTCOMES 
UNIT – 7 ACCOUNTING STANDARDS 
 
 
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. 
 
 
© The Institute of Chartered Accountants of India
  ACCOUNTING 
1.
102 
1.102 
 
 
 
 
 
 
 
 
Formulation of Accounting Standards 
 
 
 
 
Accounting Standards deal with the issues of
Recognition of 
events and 
transactions
Measurement 
of transactions 
and events
Presentation of 
transactions 
and events
Disclosure 
requirements
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 
UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
1.103 
THEORETICAL FRAMEWORK 
 
 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. 
© The Institute of Chartered Accountants of India
Page 4


1.101 
THEORETICAL FRAMEWORK 
 
LEARNING OUTCOMES 
UNIT – 7 ACCOUNTING STANDARDS 
 
 
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. 
 
 
© The Institute of Chartered Accountants of India
  ACCOUNTING 
1.
102 
1.102 
 
 
 
 
 
 
 
 
Formulation of Accounting Standards 
 
 
 
 
Accounting Standards deal with the issues of
Recognition of 
events and 
transactions
Measurement 
of transactions 
and events
Presentation of 
transactions 
and events
Disclosure 
requirements
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 
UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
1.103 
THEORETICAL FRAMEWORK 
 
 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. 
© The Institute of Chartered Accountants of India
  ACCOUNTING 
1.
104 
1.104 
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. 
 
 
 
 
 
 
 
 
 
 
 
 
Benefits of 
Accounting 
Standards
Standardisation 
of Alternative 
accounting 
treatments
Requirements 
for additional 
disclosures
Comparability 
of financial 
statements
© The Institute of Chartered Accountants of India
Page 5


1.101 
THEORETICAL FRAMEWORK 
 
LEARNING OUTCOMES 
UNIT – 7 ACCOUNTING STANDARDS 
 
 
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. 
 
 
© The Institute of Chartered Accountants of India
  ACCOUNTING 
1.
102 
1.102 
 
 
 
 
 
 
 
 
Formulation of Accounting Standards 
 
 
 
 
Accounting Standards deal with the issues of
Recognition of 
events and 
transactions
Measurement 
of transactions 
and events
Presentation of 
transactions 
and events
Disclosure 
requirements
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 
UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
1.103 
THEORETICAL FRAMEWORK 
 
 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. 
© The Institute of Chartered Accountants of India
  ACCOUNTING 
1.
104 
1.104 
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. 
 
 
 
 
 
 
 
 
 
 
 
 
Benefits of 
Accounting 
Standards
Standardisation 
of Alternative 
accounting 
treatments
Requirements 
for additional 
disclosures
Comparability 
of financial 
statements
© The Institute of Chartered Accountants of India
1.105 
THEORETICAL FRAMEWORK 
 
 
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. 
 
 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. 
Limitations of 
accounting 
standards
Difficulties in 
making choice 
between different 
treatments
Restricted scope
© The Institute of Chartered Accountants of India