ICAI Notes: Applicability of Accounting Standards | Advanced Accounting for CA Intermediate PDF Download

 Page 1


 
 
 
 
LEARNING OUTCOMES 
 
 
 
APPLICABILITY OF  
ACCOUNTING  
STANDARDS  
 
 
 
After studying this chapter, you will be able to: 
? Comprehend the status of Accounting Standards; 
? Understand the applicability of Accounting Standards. 
  
    
 
CHAPTER 
a
 
3 
© The Institute of Chartered Accountants of India
Page 2


 
 
 
 
LEARNING OUTCOMES 
 
 
 
APPLICABILITY OF  
ACCOUNTING  
STANDARDS  
 
 
 
After studying this chapter, you will be able to: 
? Comprehend the status of Accounting Standards; 
? Understand the applicability of Accounting Standards. 
  
    
 
CHAPTER 
a
 
3 
© The Institute of Chartered Accountants of India
 
ADVANCED ACCOUNTING  
 3.2 
 
 
1. STATUS OF ACCOUNTING STANDARDS 
It has already been mentioned in chapter 1 that the standards are developed by 
the Accounting Standards Board (ASB) of the Institute of Chartered Accountants of 
India and are issued under the authority of its Council which are approved by the 
MCA (Ministry of Corporate Affairs) for Corporate entities. The standards cannot 
override laws and local regulations. The Accounting Standards are nevertheless 
made mandatory from the dates notified by the MCA and are generally applicable 
to all enterprises, subject to certain exceptions as stated below. The implication of 
mandatory status of an Accounting Standard depends on whether the statute 
governing the enterprise concerned requires compliance with the Standard, e.g., 
the Ministry of Corporate Affairs have notified Accounting Standards for companies 
incorporated under the Companies Act, 1956 (or the Companies Act, 2013).  
In assessing whether an accounting standard is applicable, one must find correct 
answer to the following three questions.  
(a) Does it apply to the enterprise concerned? If yes, the next question is: 
(b) Does it apply to the financial statement concerned? If yes, the next question is: 
(c) Does it apply to the financial item concerned? 
The preface to the statements of accounting standards answers the above 
questions. 
Applicability 
of AS for 
Non-Corporate Entities
Applicability of AS 
for  Corporate 
Entities 
Status of 
AS
CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
Page 3


 
 
 
 
LEARNING OUTCOMES 
 
 
 
APPLICABILITY OF  
ACCOUNTING  
STANDARDS  
 
 
 
After studying this chapter, you will be able to: 
? Comprehend the status of Accounting Standards; 
? Understand the applicability of Accounting Standards. 
  
    
 
CHAPTER 
a
 
3 
© The Institute of Chartered Accountants of India
 
ADVANCED ACCOUNTING  
 3.2 
 
 
1. STATUS OF ACCOUNTING STANDARDS 
It has already been mentioned in chapter 1 that the standards are developed by 
the Accounting Standards Board (ASB) of the Institute of Chartered Accountants of 
India and are issued under the authority of its Council which are approved by the 
MCA (Ministry of Corporate Affairs) for Corporate entities. The standards cannot 
override laws and local regulations. The Accounting Standards are nevertheless 
made mandatory from the dates notified by the MCA and are generally applicable 
to all enterprises, subject to certain exceptions as stated below. The implication of 
mandatory status of an Accounting Standard depends on whether the statute 
governing the enterprise concerned requires compliance with the Standard, e.g., 
the Ministry of Corporate Affairs have notified Accounting Standards for companies 
incorporated under the Companies Act, 1956 (or the Companies Act, 2013).  
In assessing whether an accounting standard is applicable, one must find correct 
answer to the following three questions.  
(a) Does it apply to the enterprise concerned? If yes, the next question is: 
(b) Does it apply to the financial statement concerned? If yes, the next question is: 
(c) Does it apply to the financial item concerned? 
The preface to the statements of accounting standards answers the above 
questions. 
Applicability 
of AS for 
Non-Corporate Entities
Applicability of AS 
for  Corporate 
Entities 
Status of 
AS
CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
 
 
v
v 
v
v 
    
v 
 3.3 
 
APPLICABILITY OF ACCOUNTING STANDARDS 
 
 
Enterprises to which the accounting standards apply? 
Accounting Standards apply in respect of any enterprise (whether organised in 
corporate, co-operative or other forms) engaged in commercial, industrial or 
business activities, whether or not profit oriented and even if established for 
charitable or religious purposes. Accounting Standards, however, do not apply to 
enterprises solely carrying on the activities, which are not of commercial, industrial 
or business nature, (e.g., an activity of collecting donations and giving them to 
flood affected people). Exclusion of an enterprise from the applicability of the 
Accounting Standards would be permissible only if no part of the activity of such 
enterprise is commercial, industrial or business in nature. Even if a very small 
proportion of the activities of an enterprise were considered to be commercial, 
industrial or business in nature, the Accounting Standards would apply to all its 
activities including those, which are not commercial, industrial or business in 
nature. 
Implication of mandatory status 
Where the statute governing the enterprise does not require compliance with the 
accounting standards, e.g. a partnership firm, the mandatory status of an 
accounting standard implies that, in discharging their attest functions, the 
members of the Institute are required to examine whether the financial statements 
are prepared in compliance with the applicable accounting standards. In the event 
of any deviation from the accounting standards, they have the duty to make 
adequate disclosures in their reports so that the users of financial statements may 
be aware of such deviations. It should nevertheless be noted that responsibility for 
the preparation of financial statements and for making adequate disclosure is that 
of the management of the enterprise. The auditor’s responsibility is to form his 
opinion and report on such financial statements.  
Section 129 (1) of the Companies Act, 2013 requires companies to present their 
financial statements in accordance with the accounting standards notified under 
Section 133 of the Companies Act, 2013 (refer Note below). Also, the auditor is 
required by Section 143(3)(e) to report whether, in his opinion, the financial 
statements of the company audited, comply with the accounting standards referred 
to in Section 133 of the Companies Act, 2013. Where the financial statements of a 
company do not comply with the accounting standards, the company should 
disclose in its financial statements, the deviation from the accounting standards, 
© The Institute of Chartered Accountants of India
Page 4


 
 
 
 
LEARNING OUTCOMES 
 
 
 
APPLICABILITY OF  
ACCOUNTING  
STANDARDS  
 
 
 
After studying this chapter, you will be able to: 
? Comprehend the status of Accounting Standards; 
? Understand the applicability of Accounting Standards. 
  
    
 
CHAPTER 
a
 
3 
© The Institute of Chartered Accountants of India
 
ADVANCED ACCOUNTING  
 3.2 
 
 
1. STATUS OF ACCOUNTING STANDARDS 
It has already been mentioned in chapter 1 that the standards are developed by 
the Accounting Standards Board (ASB) of the Institute of Chartered Accountants of 
India and are issued under the authority of its Council which are approved by the 
MCA (Ministry of Corporate Affairs) for Corporate entities. The standards cannot 
override laws and local regulations. The Accounting Standards are nevertheless 
made mandatory from the dates notified by the MCA and are generally applicable 
to all enterprises, subject to certain exceptions as stated below. The implication of 
mandatory status of an Accounting Standard depends on whether the statute 
governing the enterprise concerned requires compliance with the Standard, e.g., 
the Ministry of Corporate Affairs have notified Accounting Standards for companies 
incorporated under the Companies Act, 1956 (or the Companies Act, 2013).  
In assessing whether an accounting standard is applicable, one must find correct 
answer to the following three questions.  
(a) Does it apply to the enterprise concerned? If yes, the next question is: 
(b) Does it apply to the financial statement concerned? If yes, the next question is: 
(c) Does it apply to the financial item concerned? 
The preface to the statements of accounting standards answers the above 
questions. 
Applicability 
of AS for 
Non-Corporate Entities
Applicability of AS 
for  Corporate 
Entities 
Status of 
AS
CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
 
 
v
v 
v
v 
    
v 
 3.3 
 
APPLICABILITY OF ACCOUNTING STANDARDS 
 
 
Enterprises to which the accounting standards apply? 
Accounting Standards apply in respect of any enterprise (whether organised in 
corporate, co-operative or other forms) engaged in commercial, industrial or 
business activities, whether or not profit oriented and even if established for 
charitable or religious purposes. Accounting Standards, however, do not apply to 
enterprises solely carrying on the activities, which are not of commercial, industrial 
or business nature, (e.g., an activity of collecting donations and giving them to 
flood affected people). Exclusion of an enterprise from the applicability of the 
Accounting Standards would be permissible only if no part of the activity of such 
enterprise is commercial, industrial or business in nature. Even if a very small 
proportion of the activities of an enterprise were considered to be commercial, 
industrial or business in nature, the Accounting Standards would apply to all its 
activities including those, which are not commercial, industrial or business in 
nature. 
Implication of mandatory status 
Where the statute governing the enterprise does not require compliance with the 
accounting standards, e.g. a partnership firm, the mandatory status of an 
accounting standard implies that, in discharging their attest functions, the 
members of the Institute are required to examine whether the financial statements 
are prepared in compliance with the applicable accounting standards. In the event 
of any deviation from the accounting standards, they have the duty to make 
adequate disclosures in their reports so that the users of financial statements may 
be aware of such deviations. It should nevertheless be noted that responsibility for 
the preparation of financial statements and for making adequate disclosure is that 
of the management of the enterprise. The auditor’s responsibility is to form his 
opinion and report on such financial statements.  
Section 129 (1) of the Companies Act, 2013 requires companies to present their 
financial statements in accordance with the accounting standards notified under 
Section 133 of the Companies Act, 2013 (refer Note below). Also, the auditor is 
required by Section 143(3)(e) to report whether, in his opinion, the financial 
statements of the company audited, comply with the accounting standards referred 
to in Section 133 of the Companies Act, 2013. Where the financial statements of a 
company do not comply with the accounting standards, the company should 
disclose in its financial statements, the deviation from the accounting standards, 
© The Institute of Chartered Accountants of India
 
 
ADVANCED ACCOUNTING 
v
v 
v
v 
 
 3.4 
the reasons for such deviation and the financial effects, if any, arising out of such 
deviations as per Section 129(5) of the Companies Act, 2013. Provided also that the 
financial statements should not be treated as not disclosing a true and fair view of 
the state of affairs of the company, merely by reason of the fact that they do not 
disclose — 
(a) in the case of an insurance company, any matters which are not required to 
be disclosed by the Insurance Act, 1938, or the Insurance Regulatory and 
Development Authority Act, 1999; 
(b) in the case of a banking company, any matters which are not required to be 
disclosed by the Banking Regulation Act, 1949; 
(c) in the case of a company engaged in the generation or supply of electricity, 
any matters which are not required to be disclosed by the Electricity Act, 2003; 
(d) in the case of a company governed by any other law for the time being in 
force, any matters which are not required to be disclosed by that law. 
Note: As per the Companies Act, 2013, the Central Government may prescribe 
standards of accounting or addendum thereto, as recommended by the Institute of 
Chartered Accountants of India, in consultation with the National Financial 
Reporting Authority (NFRA).  
Financial items to which the accounting standards apply 
The Accounting Standards are intended to apply only to items, which are material. 
An item is considered material, if its omission or misstatement is likely to affect 
economic decision of the user. Materiality is not necessarily a function of size; it is 
the information content i.e. the financial item which is important. A penalty of  
` 50,000 paid for breach of law by a company can seem to be a relatively small 
amount for a company incurring crores of rupees in a year, yet is a material item 
because of the information it conveys. The materiality should, therefore, be judged 
on a case-to-case basis. If an item is material, it should be shown separately instead 
of clubbing it with other items. For example, it is not appropriate to club the 
penalties paid with legal charges.  
Accounting Standards and Income Tax Act, 1961 
Accounting standards intend to reduce diversity in application of accounting 
principles. They improve comparability of financial statements and promote 
© The Institute of Chartered Accountants of India
Page 5


 
 
 
 
LEARNING OUTCOMES 
 
 
 
APPLICABILITY OF  
ACCOUNTING  
STANDARDS  
 
 
 
After studying this chapter, you will be able to: 
? Comprehend the status of Accounting Standards; 
? Understand the applicability of Accounting Standards. 
  
    
 
CHAPTER 
a
 
3 
© The Institute of Chartered Accountants of India
 
ADVANCED ACCOUNTING  
 3.2 
 
 
1. STATUS OF ACCOUNTING STANDARDS 
It has already been mentioned in chapter 1 that the standards are developed by 
the Accounting Standards Board (ASB) of the Institute of Chartered Accountants of 
India and are issued under the authority of its Council which are approved by the 
MCA (Ministry of Corporate Affairs) for Corporate entities. The standards cannot 
override laws and local regulations. The Accounting Standards are nevertheless 
made mandatory from the dates notified by the MCA and are generally applicable 
to all enterprises, subject to certain exceptions as stated below. The implication of 
mandatory status of an Accounting Standard depends on whether the statute 
governing the enterprise concerned requires compliance with the Standard, e.g., 
the Ministry of Corporate Affairs have notified Accounting Standards for companies 
incorporated under the Companies Act, 1956 (or the Companies Act, 2013).  
In assessing whether an accounting standard is applicable, one must find correct 
answer to the following three questions.  
(a) Does it apply to the enterprise concerned? If yes, the next question is: 
(b) Does it apply to the financial statement concerned? If yes, the next question is: 
(c) Does it apply to the financial item concerned? 
The preface to the statements of accounting standards answers the above 
questions. 
Applicability 
of AS for 
Non-Corporate Entities
Applicability of AS 
for  Corporate 
Entities 
Status of 
AS
CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
 
 
v
v 
v
v 
    
v 
 3.3 
 
APPLICABILITY OF ACCOUNTING STANDARDS 
 
 
Enterprises to which the accounting standards apply? 
Accounting Standards apply in respect of any enterprise (whether organised in 
corporate, co-operative or other forms) engaged in commercial, industrial or 
business activities, whether or not profit oriented and even if established for 
charitable or religious purposes. Accounting Standards, however, do not apply to 
enterprises solely carrying on the activities, which are not of commercial, industrial 
or business nature, (e.g., an activity of collecting donations and giving them to 
flood affected people). Exclusion of an enterprise from the applicability of the 
Accounting Standards would be permissible only if no part of the activity of such 
enterprise is commercial, industrial or business in nature. Even if a very small 
proportion of the activities of an enterprise were considered to be commercial, 
industrial or business in nature, the Accounting Standards would apply to all its 
activities including those, which are not commercial, industrial or business in 
nature. 
Implication of mandatory status 
Where the statute governing the enterprise does not require compliance with the 
accounting standards, e.g. a partnership firm, the mandatory status of an 
accounting standard implies that, in discharging their attest functions, the 
members of the Institute are required to examine whether the financial statements 
are prepared in compliance with the applicable accounting standards. In the event 
of any deviation from the accounting standards, they have the duty to make 
adequate disclosures in their reports so that the users of financial statements may 
be aware of such deviations. It should nevertheless be noted that responsibility for 
the preparation of financial statements and for making adequate disclosure is that 
of the management of the enterprise. The auditor’s responsibility is to form his 
opinion and report on such financial statements.  
Section 129 (1) of the Companies Act, 2013 requires companies to present their 
financial statements in accordance with the accounting standards notified under 
Section 133 of the Companies Act, 2013 (refer Note below). Also, the auditor is 
required by Section 143(3)(e) to report whether, in his opinion, the financial 
statements of the company audited, comply with the accounting standards referred 
to in Section 133 of the Companies Act, 2013. Where the financial statements of a 
company do not comply with the accounting standards, the company should 
disclose in its financial statements, the deviation from the accounting standards, 
© The Institute of Chartered Accountants of India
 
 
ADVANCED ACCOUNTING 
v
v 
v
v 
 
 3.4 
the reasons for such deviation and the financial effects, if any, arising out of such 
deviations as per Section 129(5) of the Companies Act, 2013. Provided also that the 
financial statements should not be treated as not disclosing a true and fair view of 
the state of affairs of the company, merely by reason of the fact that they do not 
disclose — 
(a) in the case of an insurance company, any matters which are not required to 
be disclosed by the Insurance Act, 1938, or the Insurance Regulatory and 
Development Authority Act, 1999; 
(b) in the case of a banking company, any matters which are not required to be 
disclosed by the Banking Regulation Act, 1949; 
(c) in the case of a company engaged in the generation or supply of electricity, 
any matters which are not required to be disclosed by the Electricity Act, 2003; 
(d) in the case of a company governed by any other law for the time being in 
force, any matters which are not required to be disclosed by that law. 
Note: As per the Companies Act, 2013, the Central Government may prescribe 
standards of accounting or addendum thereto, as recommended by the Institute of 
Chartered Accountants of India, in consultation with the National Financial 
Reporting Authority (NFRA).  
Financial items to which the accounting standards apply 
The Accounting Standards are intended to apply only to items, which are material. 
An item is considered material, if its omission or misstatement is likely to affect 
economic decision of the user. Materiality is not necessarily a function of size; it is 
the information content i.e. the financial item which is important. A penalty of  
` 50,000 paid for breach of law by a company can seem to be a relatively small 
amount for a company incurring crores of rupees in a year, yet is a material item 
because of the information it conveys. The materiality should, therefore, be judged 
on a case-to-case basis. If an item is material, it should be shown separately instead 
of clubbing it with other items. For example, it is not appropriate to club the 
penalties paid with legal charges.  
Accounting Standards and Income Tax Act, 1961 
Accounting standards intend to reduce diversity in application of accounting 
principles. They improve comparability of financial statements and promote 
© The Institute of Chartered Accountants of India
 
 
v
v 
v
v 
    
v 
 3.5 
 
APPLICABILITY OF ACCOUNTING STANDARDS 
 
 
transparency and fairness in their presentation. Deductions and exemptions 
allowed in computation of taxable income on the other hand, is a matter of fiscal 
policy of the government.  
Thus, an expense required to be taken to the Statement of profit and loss by an 
accounting standard does not imply that the same is always deductible for income 
tax purposes. For example, depreciation on assets taken on finance lease is charged 
in the books of lessee as per AS 19 but depreciation for tax purposes is allowed to 
lessor, being legal owner of the asset, rather than to lessee. Likewise, recognition 
of revenue in the financial statements cannot be avoided simply because it is 
exempted under Section 10 of the Income Tax Act, 1961.  
Income Computation and Disclosure Standards 
Section 145(2) of the Income Tax Act, 1961, empowers the Central Government to 
notify in the Official Gazette from time to time, Income Computation and Disclosure 
Standards to be followed by any class of assesses or in respect of any class of 
income. Accordingly, the Central Government has, in exercise of the powers 
conferred under Section 145(2) of the Income Tax Act, 1961, notified ten Income 
Computation and Disclosure Standards (ICDSs) to be followed by all assesses (other 
than an individual or a Hindu undivided family who is not required to get his 
accounts of the previous year audited in accordance with the provisions of Section 
44AB of the Income Tax Act, 1961) following the mercantile system of accounting, 
for the purposes of computation of income chargeable to income-tax under the 
head “Profit and gains of business or profession” or “ Income from other sources”, 
from the Assessment Year (A.Y.) 2017-18. The ten notified ICDSs are: 
ICDS I : Accounting Policies 
ICDS II : Valuation of Inventories 
ICDS III : Construction Contracts 
ICDS IV : Revenue Recognition 
ICDS V : Tangible Fixed Assets 
ICDS VI : The Effects of Changes in Foreign Exchange Rates 
© The Institute of Chartered Accountants of India