8.1 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 dierent 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.
8.2 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.
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.
8.3 Benefits and limitations of Accounting Standards
Accounting standards seek to describe the accounting principles, the valuation techniques and the methods of a pplying 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 dierent 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 dierent countries.
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.
8.4 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:
8.5 List of Accounting Standards In India
List* of Accounting Standards
Number of the Accounting Standard (AS)
Title of the Accounting Standard
Disclosure of Accounting Policies
AS 2 (Revised)
Valuation of Inventories
AS 3 (Revised)
Cash Flow Statements
AS 4 (Revised)
Contingencies and Events Occurring after the Balance Sheet Date
AS 5 (Revised)
Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies
AS 6 (withdrawn pursuant to issuance of AS 10 on Property, Plant and Equipment 2016)
AS 7 (Revised)
Accounting for Construction Contracts
AS 8 (withdrawn pursuant to AS 26 becoming mandatory)
Accounting for Research and Development
Property, Plant and Equipment
AS 11 (Revised)
The Effects of Changes in Foreign Exchange Rates
Accounting for Government Grants
Accounting for Investments
Accounting for Amalgamations
AS 15 (Revised)
Related Party Disclosures
Earnings Per Share
Consolidated Financial Statements
Accounting for Taxes on Income
Accounting for Investments in Associates in Consolidated Financial Statements
Interim Financial Reporting
Financial Reporting of Interests in Joint Ventures
Impairment of Assets
Provisions, Contingent Liabilities & Contingent Assets
(Question with Answer)
Ques 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.
(d) Reserve Bank of India.
Ques 2. Accounting Standards
(a) Harmonise accounting policies.
(b) Eliminate the non-comparability of financial statements.
(c) Improve the reliability of financial statements.
(d) All the three.
Ques 3. It is essential to standardize the accounting principles and policies in order to ensure
(d) All the three.