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Accounting Standards

Accounting is often called the language of the business. The basic function of any language is to serve as a mean of communication. It communicates the results of the business operation to various parties who have some stake in the business .The need for accounting is much felt by those who are running a business. . The financial statement prepared by one enterprise may be based on one set of policies, and while other policies may be adopted by other enterprises. It is often contended that the companies fail to meet this basic objective of corporate reporting. For accounting, the management can use the creative accounting practices to change the reporting and operating results according to their wishes. This is so because different organizations follow different accounting policies for treating similar items in accounts. Therefore, accounting standards are the prescribed rules to bring uniformity in financial statement.

Concept of Accounting Standards -Accounting standards are rules (framed by an expert committee) in relation to recognition, measurement and disclosure of financial information in preparation of financial information. The basic objective of accounting standard is to standardize the accounting principles and the policies with a view to bring a common approach in preparation of financial statements. The accounting standards also aim to provide valuation norms and disclosure requirement in respect of certain specific transaction and events. In India process of formulation of accounting standards was initiated in April 1977, when the institute of chartered accountants in India (ICAI) constituted Accounting Standard Board. (ASB) However

For Example:A Ltd. Profit before Depreciation 10 crores Gross block 10 crores Net block 9 crores Depreciation method Straight line Depreciation Rate 10% Depreciation (2nd year) 1crore Profit after Depreciation 8 crore (2nd year) B ltd. 10 crores 10 crores 9 crores WDV 10% 90Lacs 8.10crore

Thus the profit of A ltd. is lower by 10 lacs as compared to B ltd .This show the effect of different accounting policy adoption According to Michael Bromwich Accounting Standards are defined as uniform rules to external financial reporting applicable either to all or to certain class of entity. Those rules seek to prescribe the preferred accounting treatment from the available set of methods for treating a given accounting problem

Accounting standards setting bodies


ICAI-:The Institute of Chartered Accountants of India (ICAI) is a statutory body established under the Chartered Accountants Act, 1949 (Act No. XXXVIII of 1949) for the regulation of the profession of chartered accountancy in India. Accounting standard and company law- Accounting standards and company bill 1997, 415(2) of the companys bill 1999 now (withdrawn) proposed prescription of accounting standard by the central government in consultation with the national Advisory committee on Accounting Standards (NACAS) Accounting Standard and SEBI: - Securities and Exchange Board of India was established in 1992 and it deals with the formulation of laws, by laws, rules and amendments for the purpose of giving smooth and strong support to stock market Accounting Standard and Income Tax Act 1961-: Section 145 of the income tax Act 1961 deals with the method of accounting to be adopted for computing the income under the head of Profit and gains from business and Profession. The finance Act 1995 had amended section 145 w.e.f. from 1st April 1997

List of Indian Accounting Standards:AS- 1 Disclosure of the accounting policies AS- 2 Valuation of Inventories AS- 3 Cash Flow Statements AS- 4 Contingencies and Events Occurring after the Balance Sheet Date AS- 5 Net Profit or Loss for the period, Prior Period Items and Changes in Accounting Policies AS- 6 Depreciation Accounting AS- 7 Construction Contracts (revised 2002) AS- 8 Accounting for Research and Development AS- 9 Revenue Recognition AS- 10 Accounting for Fixed Assets AS- 11 The Effects of Changes in Foreign Exchange Rates (revised 2003), AS- 12 Accounting for Government Grants AS- 13 Accounting for Investments AS- 14 Accounting for Amalgamations AS- 15 (issued 1995) Accounting for Retirement Benefits in the Financial Statement of Employers AS- 16 Borrowing Costs

ASASASAS-

18, Related Party Disclosure 19 Leases 20 Earnings Per Share 21 Consolidated Financial Statements AS- 22 Accounting for Taxes on Income. AS- 23 Accounting for Investments in Associates in Consolidated Financial Statements AS24 Discontinuing operation AS25 Interim financial reporting AS26 Intangible asset AS27 Financial reporting of interest in joint venture AS28 Impairment of assets As29 Provisions, contingent liabilities and contingent assets Besides there are two more standards introduced by ICAI, AS 30Financial Instruments: - recognition and measurement and As-31- Financial Instrument Presentation and AS 32 financial instrument-Disclosure Related issues in accounting standards:-According to G. Sriniwasan following are the issues related with accounting standardsFacilitate transparent and meaningful reporting of financial statements Reduce accounting alternatives to reasonable and practical level. Enhance comparability of financial statements in time and space. Encourage consistency in accounting practices

Applicability of Accounting Standards effective Institute of Chartered Accountants of India (ICAI) have notified in October 2003 certain relaxation in applicability of accounting standards after due consideration of the representations from industry and profession.. For the purpose of applicability of accounting standards, enterprises are classified into three categories - Level -I enterprise - Level-II enterprise

Level I enterprise- Enterprises which fall in any one or more of the following categories, at any time during the accounting period, are classified as LevelI enterprises: Enterprise whose equity or debt securities are listed whether in India or outside India. Enterprises, which are in the process of listing their equity or debt securities Banks including co-operative banks. Financial institutions. Enterprises carrying on insurance business

the immediately preceding accounting period on the basis of audited financial statements exceeds Rs. 50 crores. Turnover does not include other income. All commercial, industrial and business reporting enterprise having borrowings, including public deposits, in excess of Rs. 10 crores at any time during the accounting period. Holding and subsidiary enterprise of any one of the above at any time during the accounting period.

Level-II Enterprise- Enterprises, which are not Level-I enterprises but fall in any one or more of the following categories, are classified as Level-II enterprises: All commercial, industrial and business reporting enterprises, whose turnover for the immediately preceding accounting period on the basis of audited financial statements exceeds Rs. 40 lakhs but does not exceed Rs. 50 crores. Turnover does not include other income. All commercial, industrial and business reporting enterprises having borrowings, including public deposits, in excess of Rs. 1 crore but not in excess of Rs. 10 crores at any time during the accounting period. Level-III enterprise- Enterprises, which are not covered under Level-I and Level- II, are considered as Level-III enterprises.

Applicability of Accounting Standard to Level I- All the 29 Accounting standards are fully applicable to Level-I enterprises. Applicability of Accounting Standard to Level II and III enterprises (SMEs) - For the purpose of applicability of accounting standard to Level-II enterprises, the case can be divided into three categories: Accounting standards fully applicable Accounting standards applicable but relaxation from certain disclosure requirements. Accounting standards not applicable Accounting Standards fully applicable AS-1, AS-2, AS-4, AS-5, AS-6, AS-7, AS-8, AS-9, AS-10, AS-11, AS12, AS-13, AS-14, AS- 5, AS-16, AS-22, AS-26 and AS28. AS-28, Impairment of Assets is applicable - For Level-I enterprises w.e.f. 1.4.2004 - For Level-II enterprises w.e.f. 1.4.2006 and, - For Level-III enterprises w.e.f. 1.4.2008. Accounting Standards applicable but relaxation from certain disclosure requirements As prescribed in AS-19, AS-20, and AS-29. Accounting Standards not applicable AS-3, AS-17, AS-18, AS-24, AS-21, AS-23, AS-25 and AS-27 are not applicable because of Indian existing rules