Accounting Standards Summary | Principles and Practice of Accounting - CA Foundation PDF Download

Broadly speaking, an accounting standard comprises a set of regulations, norms, and principles that guide the recording of financial transactions in accounting books. These standards form the foundation for financial reporting in the majority of companies, specifying the criteria for identifying, measuring, recording, and presenting each transaction and accounting entry in financial reports and statements.

In the context of India, the Accounting Standards Board (ASB) is responsible for issuing accounting standards. Established by the Institute of Chartered Accountants in India (ICAI) in 1977, the ASB plays a pivotal role in shaping the framework for accounting practices in the country.

Indian Accounting Standards (Ind AS) list

The ASB has issued a list of accounting standards that are to be used by all companies. The standards are as follows –

1. Ind AS 101: First-Time Adoption of Indian Accounting Standards
2. Ind AS 102: Share-Based Payment
3. Ind AS 103: Business Combinations
4. Ind AS 104: Insurance Contracts
5. Ind AS 105: Non-Current Assets Held for Sale and Discontinued Operations
6. Ind AS 106: Exploration for and Evaluation of Mineral Resources
7. Ind AS 107: Financial Instruments – Disclosures
8. Ind AS 108: Operating Segments
9. Ind AS 109: Financial Instruments
10. Ind AS 110: Consolidated Financial Statements
11. Ind AS 111: Joint Arrangements
12. Ind AS 112: Disclosure of Interests in Other Entities
13. Ind AS 113: Fair Value Measurement
14. Ind AS 114: Regulatory Deferral Accounts
15. Ind AS 115: Revenue from Contracts with Customers
16. Ind AS 116: Leases
17. Ind AS 1: Presentation of Financial Statements
18. Ind AS 2: Inventories
19. Ind AS 7: Statement of Cash Flows
20. Ind AS 8: Accounting Policies, Changes in Accounting Estimates, and Errors
21. Ind AS 10: Events after the Reporting Period
22. Ind AS 12: Income Taxes
23. Ind AS 16: Property, Plant and Equipment
24. Ind AS 19: Employee Benefits
25. Ind AS 20: Accounting for Government Grants and Disclosure of Government Assistance
26. Ind AS 21: The Effects of Changes in Foreign Exchange Rates
27. Ind AS 23: Borrowing Costs
28. Ind AS 24: Related Party Disclosures
29. Ind AS 27: Consolidated and Separate Financial Statements
30. Ind AS 28: Investments in Associates and Joint Ventures
31. Ind AS 29: Financial Reporting in Hyperinflationary Economies
32. Ind AS 32: Financial Instruments: Presentation
33. Ind AS 33: Earnings per Share
34. Ind AS 34: Interim Financial Reporting
35. Ind AS 36: Impairment of Assets
36. Ind AS 37: Provisions, Contingent Liabilities, and Contingent Assets
37. Ind AS 38: Intangible Assets
38. Ind AS 40: Investment Property
39. Ind AS 41: Agriculture

Objectives of Accounting Standards

The objectives of accounting standards encompass several key facets:

1. Alignment with International Standards: Ensure that accounting principles in India align with globally recognized standards.

2. Uniformity in Financial Reporting: Adopt a consistent set of accounting principles to facilitate uniform financial reporting.

3. Establishment of a Recognized Framework: Create a single, recognized framework for the accounting system.

4. International Understanding: Enhance comprehension of Indian accounting practices by international companies.

5. Transparency in Financial Statements: Ensure transparency in the financial statements of companies.

6. Global Business Expansion: Expand the scope of conducting business on a global scale.

Importance of Accounting Standards

The significance of accounting standards lies in their ability to:

1. Ensure Uniformity: Bring consistency to accounting practices, making financial statements comparable across companies and industries.

2. Global Alignment: Align with internationally recognized standards, facilitating international expansion for companies.

3. Prevent Fraud and Errors: Mitigate the risk of fraud and inaccuracies through the enforcement of uniform accounting standards.

Applicability of Ind AS in India

Voluntary Applicability

Companies have the option to voluntarily adopt Ind AS, even if not mandatory. Once chosen, this adoption must be consistent for all subsequent financial statements.

Phase-wise Mandatory Adoption of Ind AS

1. Phase - 1 (2016-2017):

   • Applicable to unlisted or listed companies with a net worth of Rs. 500 cr or more.
   • Includes holding companies, subsidiaries, joint ventures, or associates meeting the above criteria.

2. Phase - 2 (2017-2018):

   • Enforced for companies not listed but having a net worth of at least Rs. 250 cr.
   • Includes listed or soon-to-be-listed companies with equity or debt listed in any stock exchange.

3. Phase - 3 (2018-2019):

   • Implementation for banks, insurance companies, and NBFCs with a net worth equal to or exceeding Rs. 500 cr.
   • Includes the relevant holding companies, subsidiaries, joint ventures, or associates.

Note: Implementation dates for Banks and Insurance Companies have been postponed, with RBI deferring Ind AS implementation for Banks from April 1, 2019. Insurance Companies have a two-year deferment starting from April 1, 2020.

4. Phase - 4 (2019-2020):
   • Adoption required for listed NBFCs or those in the process of listing, with a net worth exceeding Rs. 500 cr.
   • Unlisted NBFCs with a net worth exceeding Rs. 250 cr also fall under this phase.
   • Includes holding companies, subsidiaries, joint ventures, or associates meeting the specified criteria.

Net Worth Calculation

Legislative Framework
Net worth calculation is governed by Section 2(57) of the Companies Act, 2013. According to this section, net worth is determined based on audited standalone financial statements.

Mathematical Representation
Net worth is computed as the aggregate of paid-up share capital and all reserves (including those from profit and securities premium account). This sum is then adjusted by subtracting deferred expenditure, accumulated losses, and miscellaneous expenditures not written off. The mathematical expression is:

Net Worth=Total Paid-up Share Capital + All Reserves (including Securities Premium Account)− Deferred Expenditure − Miscellaneous Expenditure (not written off)−Accumulated Losses

Capital reserves arising from promoters' contributions and government grants received should be included in the calculation.

Benefits of Accounting Standards

Uniformity in Accounting Methods
Accounting standards foster uniformity in financial reporting, simplifying the maintenance of accounts through a standardized format.

Reliability of Financial Statements
Since financial statements adhere to accepted standards, they become reliable, eliminating ambiguity and ensuring authenticity.

Fraud Prevention
Compliance with accounting standards reduces the likelihood of fraud and malpractice, as accountants are bound by prescribed rules.

Facilitation of Auditing
Prescribed standards facilitate auditing by providing auditors with a systematic approach to verifying entries and statements.

Comparative Analysis
Uniformity allows stakeholders to compare financial statements across companies, aiding investors in assessing potential investments' profitability.

Establishment of Accountability
Stakeholders can fairly evaluate management performance through financial statements, contributing to accountability.

Limitations of Accounting Standards

Legal Constraints
Accounting standards are subject to legal restrictions and must align with prevailing laws and regulations, such as the Companies Act 1953.

Availability of Alternatives
Diverse accounting standards may permit alternative methods for recording entries, introducing variations in practices among companies.

Restriction on Companies
Companies might face unique transactions and have distinct accounting needs, but they are constrained by the predefined rules of accounting standards.

Despite these limitations, accounting standards remain widely accepted as fundamental accounting principles.

Benefits of Ind AS for Businesses

Ind AS offers valuable advantages to businesses, enhancing both acceptability and comprehensibility, thus increasing their attractiveness to foreign investors. The standardized norms provided by Ind AS enable businesses to implement essential adjustments when faced with adverse economic conditions.

The streamlined methodologies inherent in Ind AS play a crucial role in preventing monetary fraud. By doing so, the standard ensures that company management refrains from manipulating or providing inaccurate accounts of vital financial information.