ACCOUNTING STANDARDS

(1)

ACCOUNTING

STANDARDS

P.GURU PRASAD P.GURU PRASAD P.GURU PRASAD P.GURU PRASAD FACULTY MEMBER FACULTY MEMBER FACULTY MEMBER FACULTY MEMBER ACADEMI

ACADEMIC C COORDICOORDINANATOR TOR ACADEMIC COORDINATOR

(2)

ACCOUNTING STANDARDS



The term standard denotes a

discipline, which provides both

guidelines and yardstick for

evaluation. As guidelines, they

provide uniform practices and

common techniques.

(3)

ACCOUNTING STANDARDS



Accounting bodies throughout the

world are striving to achieve a

reasonable degree of uniformity in

the

accounting

policies

by

the

accounting

policies

by

the

accounting

policies

by

the

accounting

policies

by

prescribing

certain

accounting

prescribing

certain

accounting

prescribing

certain

accounting

prescribing

certain

accounting

standards with respect to collection

and presentation of accounting

information

(4)

ACCOUNTING STANDARDS



 To formulate the accounting standards, theyTo formulate the accounting standards, theyTo formulate the accounting standards, theyTo formulate the accounting standards, they

established a committee called the established a committee called the established a committee called the

established a committee called the

international accounting standards committee international accounting standards committee international accounting standards committee

international accounting standards committee

(IASC) in 1973. (IASC) in 1973. (IASC) in 1973.

(IASC) in 1973.



 Accounting bodies of most of the countries,Accounting bodies of most of the countries,Accounting bodies of most of the countries,Accounting bodies of most of the countries,

including Institute of Chartered Accountants including Institute of Chartered Accountants including Institute of Chartered Accountants

including Institute of Chartered Accountants

of India ( ICAI ) are the members of this body of India ( ICAI ) are the members of this body of India ( ICAI ) are the members of this body

of India ( ICAI ) are the members of this body

and these members have resolved to conform and these members have resolved to conform and these members have resolved to conform

and these members have resolved to conform

to the standards developed by IASC to the standards developed by IASC to the standards developed by IASC

(5)

The objective of the committee



Formulating , publishing, and promoting

the use of the accounting standards world

wide.



To

work

for

improvement

and

harmonization of regulating accounting

standards and procedures relating to

financial statements

(6)

The importance of A.S



Globalization of the economy has led to

Indian

companies

expanding

their

Indian

companies

expanding

their

Indian

companies

expanding

their

Indian

companies

expanding

their

operations across the borders and this

calls for uniformity in accounts of their

facilities located in different countries.



Foreign investors would give more

weight -age to the accounts of those

companies which are based on IAS

(7)

Accounting Standards Board of

India (ASB)



 Recognizing the need to harmonize the diverseRecognizing the need to harmonize the diverseRecognizing the need to harmonize the diverseRecognizing the need to harmonize the diverse

accounting polices and practices prevalent in accounting polices and practices prevalent in accounting polices and practices prevalent in

accounting polices and practices prevalent in

India , the ICAI constituted ASB on April 21 India , the ICAI constituted ASB on April 21 India , the ICAI constituted ASB on April 21

India , the ICAI constituted ASB on April 21stststst

1977. the standards are intended to apply only to 1977. the standards are intended to apply only to 1977. the standards are intended to apply only to

1977. the standards are intended to apply only to

items which are material. Also the A.S canno items which are material. Also the A.S canno items which are material. Also the A.S cannot

items which are material. Also the A.S cannot

and do not override the local regulations which and do not override the local regulations which and do not override the local regulations which

and do not override the local regulations which

govern the preparation and presentation o govern the preparation and presentation o govern the preparation and presentation o

govern the preparation and presentation o

financial statements in our country financial statements in our country financial statements in our country

(8)

Auditors Duties



In case the company does not conform to

any of the mandatory accounting

standards, the auditor will have to qualify

his report by justifying his deviation. In

case he fails to do so the ICAI can take

disciplinary action against him on the

ground of professional misconduct

(9)

29 Accounting Standards



The accounting standards board has

in

line

with

the

international

in

line

with

the

international

in

line

with

the

international

in

line

with

the

international

standards,

issued

twenty

nine

standards,

issued

twenty

nine

standards,

issued

twenty

nine

standards,

issued

twenty

nine

standards to be followed by its

members, while auditing the accounts

of

companies.

The

importan

of

companies.

The

importan

of

companies.

The

important

of

companies.

The

important

standards discussed in our course

book

(10)

Differing accounting policies



 Methods of Depreciation, Depletion andMethods of Depreciation, Depletion andMethods of Depreciation, Depletion andMethods of Depreciation, Depletion and

Amortization. Amortization. Amortization.

Amortization.



 Valuation of InventoriesValuation of InventoriesValuation of InventoriesValuation of Inventories



 Treatment of Good willTreatment of Good willTreatment of Good willTreatment of Good will



 Valuation of InvestmentsValuation of InvestmentsValuation of InvestmentsValuation of Investments



 Treatment of Retirement BenefitsTreatment of Retirement BenefitsTreatment of Retirement BenefitsTreatment of Retirement Benefits



 Valuation of Fixed AssetsValuation of Fixed AssetsValuation of Fixed AssetsValuation of Fixed Assets



 Treatment of Contingent LiabilitiesTreatment of Contingent LiabilitiesTreatment of Contingent LiabilitiesTreatment of Contingent Liabilities

the above list of differing accounting polices the above list of differing accounting polices the above list of differing accounting polices

the above list of differing accounting polices

are not exhaustive . are not exhaustive . are not exhaustive .

(11)

AS-1 – Disclosure of Accounting

Policies



To ensure proper understanding of

financial statements, it is necessary

that

all

significant

accounting

that

all

significant

accounting

that

all

significant

accounting

that

all

significant

accounting

policies adopted in the preparation

and

presentation

of

financial

and

presentation

of

financial

and

presentation

of

financial

and

presentation

of

financial

stateme

statements should

nts should be disclosed.

be disclosed.

statements should be disclosed.

(12)

AS-1 – Disclosure of Accounting

Policies



 Any change in an accounting policy which hasAny change in an accounting policy which hasAny change in an accounting policy which hasAny change in an accounting policy which has

a material effect on current and future periods a material effect on current and future periods a material effect on current and future periods

a material effect on current and future periods

should be disclosed. should be disclosed. should be disclosed.

should be disclosed.



 For this purpose, the major considerationsFor this purpose, the major considerationsFor this purpose, the major considerationsFor this purpose, the major considerations

governing the selection and application of governing the selection and application of governing the selection and application of

governing the selection and application of

accounting policies are: accounting policies are: accounting policies are:

accounting policies are:



 PrudencePrudencePrudencePrudence



 Substance over formSubstance over formSubstance over formSubstance over form



(13)

AS-1 – Disclosure of Accounting

Policies



 prudence prudence prudence prudence: in view of the uncertainty attached: in view of the uncertainty attached: in view of the uncertainty attached: in view of the uncertainty attached

to future events, profits are not anticipated but to future events, profits are not anticipated but to future events, profits are not anticipated but

to future events, profits are not anticipated but

recognized only when realized though not recognized only when realized though not recognized only when realized though not

recognized only when realized though not

necessarily in cash. Provision is made for all necessarily in cash. Provision is made for all necessarily in cash. Provision is made for all

necessarily in cash. Provision is made for all

known liabilities and losses even though the known liabilities and losses even though the known liabilities and losses even though the

known liabilities and losses even though the

amount cannot be determined with certainty amount cannot be determined with certainty amount cannot be determined with certainty

amount cannot be determined with certainty

and represents only a best estimate in the light and represents only a best estimate in the light and represents only a best estimate in the light

and represents only a best estimate in the light

of available information of available information of available information

(14)

AS-1 – Disclosure of Accounting

Policies



 Substance Substance Substance Substance over over over over FormFormFormForm: the accounting: the accounting: the accounting: the accounting

treatment and presentation in financial treatment and presentation in financial treatment and presentation in financial

treatment and presentation in financial

statements of transactions and events should statements of transactions and events should statements of transactions and events should

statements of transactions and events should

be governed by their substance and not merely be governed by their substance and not merely be governed by their substance and not merely

be governed by their substance and not merely

by the legal form by the legal form by the legal form

(15)

AS-1 – Disclosure of Accounting

Policies



 Materiality Materiality Materiality Materiality: : : : financial financial financial financial statements statements statements statements shouldshouldshouldshould

disclose all “material” items, i.e. items the disclose all “material” items, i.e. items the disclose all “material” items, i.e. items the

disclose all “material” items, i.e. items the

knowledge of which might influence the knowledge of which might influence the knowledge of which might influence the

knowledge of which might influence the

decisions of the user of the financial decisions of the user of the financial decisions of the user of the financial

decisions of the user of the financial

statements. statements. statements.

(16)

AS-1 – Disclosure of Accounting

Policies



 If the fundamental accounting assumption likeIf the fundamental accounting assumption likeIf the fundamental accounting assumption likeIf the fundamental accounting assumption like

Going Concern, Consistency and Accrual Going Concern, Consistency and Accrual Going Concern, Consistency and Accrual

Going Concern, Consistency and Accrual areareareare followed in financial statements, specific followed in financial statements, specific followed in financial statements, specific

followed in financial statements, specific

disclosure is not required. disclosure is not required. disclosure is not required.

disclosure is not required.



 If a fundamental accounting assumption is notIf a fundamental accounting assumption is notIf a fundamental accounting assumption is notIf a fundamental accounting assumption is not

followed , the fact should be disclosed followed , the fact should be disclosed followed , the fact should be disclosed

(17)

Companies Amendment Act,1999



Realizing the importance of accounting

standards, the companies amendment

act,1999

has

inserted

sub-act,1999

has

inserted

sub-act,1999

has

inserted

sub-act,1999

has

inserted

sub-sec(3A),(3B),(3C) in the section 311,

sec(3A),(3B),(3C) in the section 311,

which provides that every company has

to follow the accounting standards as

issued by the ICAI

(18)

AS-1 – Disclosure of Accounting

Policies



 Since the accounting polices adopted couldSince the accounting polices adopted couldSince the accounting polices adopted couldSince the accounting polices adopted could

vastly differ from company to company and vastly differ from company to company and vastly differ from company to company and

vastly differ from company to company and

even year to year in respect of the same even year to year in respect of the same even year to year in respect of the same

even year to year in respect of the same

company, AS-1, by forcing the disclosure o company, AS-1, by forcing the disclosure o company, AS-1, by forcing the disclosure o

company, AS-1, by forcing the disclosure o

accounting policies ensures that the users o accounting policies ensures that the users o accounting policies ensures that the users o

accounting policies ensures that the users o

the financial statements would be able to do a the financial statements would be able to do a the financial statements would be able to do a

the financial statements would be able to do a

meaningful comparison of such statements and meaningful comparison of such statements and meaningful comparison of such statements and

meaningful comparison of such statements and

draw proper conclusion from them draw proper conclusion from them draw proper conclusion from them

(19)

AS-1 – Disclosure of Accounting

Policies



 Disclosure Disclosure Disclosure Disclosure:- to ensure proper understanding of :- to ensure proper understanding of :- to ensure proper understanding of :- to ensure proper understanding of

financial statements, it is necessary that all financial statements, it is necessary that all financial statements, it is necessary that all

financial statements, it is necessary that all

significant accounting policies adopted in the significant accounting policies adopted in the significant accounting policies adopted in the

significant accounting policies adopted in the

preparation and prevention of financial preparation and prevention of financial preparation and prevention of financial

preparation and prevention of financial

statements should be disclosed. statements should be disclosed. statements should be disclosed.

(20)

Accounting standard - 4



 AS – 4 deals with the treatment in financialAS – 4 deals with the treatment in financialAS – 4 deals with the treatment in financialAS – 4 deals with the treatment in financial statements of contingencies and events occurring statements of contingencies and events occurring statements of contingencies and events occurring

statements of contingencies and events occurring

after the balance sheet date. after the balance sheet date. after the balance sheet date.

after the balance sheet date.



 However itHowever itHowever itHowever it does not cover does not cover does not cover does not cover certain contingencies suchcertain contingencies suchcertain contingencies suchcertain contingencies such as liabilities of life assurance and general insurance as liabilities of life assurance and general insurance as liabilities of life assurance and general insurance

as liabilities of life assurance and general insurance

enterprises arising from the policies issued, enterprises arising from the policies issued, enterprises arising from the policies issued,

enterprises arising from the policies issued,

obligations under retirement benefit plans, and obligations under retirement benefit plans, and obligations under retirement benefit plans, and

obligations under retirement benefit plans, and

commitments arising from long term lease contracts commitments arising from long term lease contracts commitments arising from long term lease contracts

commitments arising from long term lease contracts

in view of special considerations applicable to them in view of special considerations applicable to them in view of special considerations applicable to them

(21)

Accounting standard - 4



 The accounting treatment of aThe accounting treatment of aThe accounting treatment of aThe accounting treatment of a contingent losscontingent losscontingent losscontingent loss

is determined by the expected outcome of the is determined by the expected outcome of the is determined by the expected outcome of the

is determined by the expected outcome of the

contingency. If it is likely that a contingency contingency. If it is likely that a contingency contingency. If it is likely that a contingency

contingency. If it is likely that a contingency

will result in a loss to the enterprise, then it is will result in a loss to the enterprise, then it is will result in a loss to the enterprise, then it is

will result in a loss to the enterprise, then it is

prudent to provide for that loss in the financial prudent to provide for that loss in the financial prudent to provide for that loss in the financial

prudent to provide for that loss in the financial

statements. statements. statements.

(22)

Accounting standard - 4



 Contingent gainsContingent gainsContingent gainsContingent gains are not recognized inare not recognized inare not recognized inare not recognized in

financial statements since their recognition financial statements since their recognition financial statements since their recognition

financial statements since their recognition

may result in the recognition of revenue, may result in the recognition of revenue, may result in the recognition of revenue,

may result in the recognition of revenue,

which may never be realized. which may never be realized. which may never be realized.

which may never be realized.



 A substantial legal claim against/in favor of A substantial legal claim against/in favor of A substantial legal claim against/in favor of A substantial legal claim against/in favor of

the enterprise may represent a contingency. the enterprise may represent a contingency. the enterprise may represent a contingency.

the enterprise may represent a contingency.



 Disclosure Disclosure Disclosure Disclosure:- If a reliable estimate of the:- If a reliable estimate of the:- If a reliable estimate of the:- If a reliable estimate of the

financial effect cannot be made, this fact is financial effect cannot be made, this fact is financial effect cannot be made, this fact is

financial effect cannot be made, this fact is

disclosed. disclosed. disclosed.

(23)

Events occurring after the balance

sheet date



 Adjustments to assets and liabilities areAdjustments to assets and liabilities areAdjustments to assets and liabilities areAdjustments to assets and liabilities are

required for events occurring after the balance required for events occurring after the balance required for events occurring after the balance

required for events occurring after the balance

sheet date that provide additional information sheet date that provide additional information sheet date that provide additional information

sheet date that provide additional information

materially affecting the determination of the materially affecting the determination of the materially affecting the determination of the

materially affecting the determination of the

amounts relating to conditions existing at the amounts relating to conditions existing at the amounts relating to conditions existing at the

amounts relating to conditions existing at the

balance sheet date. balance sheet date. balance sheet date.

balance sheet date.



 For example, an adjustment may be made for aFor example, an adjustment may be made for aFor example, an adjustment may be made for aFor example, an adjustment may be made for a

loss on a trade receivable account, which is loss on a trade receivable account, which is loss on a trade receivable account, which is

loss on a trade receivable account, which is

confirmed by the insolvency of a customer, confirmed by the insolvency of a customer, confirmed by the insolvency of a customer,

confirmed by the insolvency of a customer,

which occurs after the balance sheet date which occurs after the balance sheet date which occurs after the balance sheet date

(24)

Events occurring after the balance

sheet date



 Adjustments to assets and liabilities are notAdjustments to assets and liabilities are notAdjustments to assets and liabilities are notAdjustments to assets and liabilities are not

appropriate

appropriate for for events events occurring occurring after after thethe appropriate

appropriate for for events events occurring occurring after after thethe

balance sheet date, if such events do not relate balance sheet date, if such events do not relate balance sheet date, if such events do not relate

balance sheet date, if such events do not relate

to conditions existing at the balance sheet date. to conditions existing at the balance sheet date. to conditions existing at the balance sheet date.

to conditions existing at the balance sheet date.



 An example is the decline in market value of An example is the decline in market value of An example is the decline in market value of An example is the decline in market value of

investments between the balance sheet date on investments between the balance sheet date on investments between the balance sheet date on

investments between the balance sheet date on

which the financial statements are approved. which the financial statements are approved. which the financial statements are approved.

(25)

Events occurring after the balance

sheet date



 There are events , which , although they takeThere are events , which , although they takeThere are events , which , although they takeThere are events , which , although they take

place after the balance sheet date, are place after the balance sheet date, are place after the balance sheet date, are

place after the balance sheet date, are

sometimes reflected, in the financial sometimes reflected, in the financial sometimes reflected, in the financial

sometimes reflected, in the financial

statements because of statutory requirements statements because of statutory requirements statements because of statutory requirements

statements because of statutory requirements

or because of their special nature. or because of their special nature. or because of their special nature.

or because of their special nature.



 Such items include the amount of dividendSuch items include the amount of dividendSuch items include the amount of dividendSuch items include the amount of dividend

proposed or declared by the enterprise after the proposed or declared by the enterprise after the proposed or declared by the enterprise after the

proposed or declared by the enterprise after the

balance sheet date in respect of the period balance sheet date in respect of the period balance sheet date in respect of the period

balance sheet date in respect of the period

covered by the financial statements covered by the financial statements covered by the financial statements

(26)

Events occurring after the balance

sheet date



 Events occurring after the balance sheet date mayEvents occurring after the balance sheet date mayEvents occurring after the balance sheet date mayEvents occurring after the balance sheet date may indicate that the enterprise ceases to be a going indicate that the enterprise ceases to be a going indicate that the enterprise ceases to be a going

indicate that the enterprise ceases to be a going

concern. Worsening in operating results

concern. Worsening in operating results and financialand financial concern. Worsening in operating results and

concern. Worsening in operating results and financialfinancial

position, or unusual changes affecting the existence position, or unusual changes affecting the existence position, or unusual changes affecting the existence

position, or unusual changes affecting the existence

or substratum of the enterprise after the

or substratum of the enterprise after the balance sheetbalance sheet or substratum of the enterprise after the balance sheet

or substratum of the enterprise after the balance sheet

date (e.g., destruction of a major production plant by date (e.g., destruction of a major production plant by date (e.g., destruction of a major production plant by

date (e.g., destruction of a major production plant by

a fire after the balance sheet date) may indicate a need a fire after the balance sheet date) may indicate a need a fire after the balance sheet date) may indicate a need

a fire after the balance sheet date) may indicate a need

to consider whether it is proper to use the to consider whether it is proper to use the to consider whether it is proper to use the

to consider whether it is proper to use the

fundamental accounting assumption of going concern fundamental accounting assumption of going concern fundamenta

fundamental accounting assumption of going l accounting assumption of going concernconcern

in the preparation

in the preparation of the financial statementsof the financial statements in the preparation

(27)

Events occurring after the balance

sheet date



 Disclosure Disclosure Disclosure Disclosure :- when the events occurring after :- when the events occurring after :- when the events occurring after :- when the events occurring after

the balance sheet date are disclosed in the the balance sheet date are disclosed in the the balance sheet date are disclosed in the

the balance sheet date are disclosed in the

report of the approving authority, the report of the approving authority, the report of the approving authority, the

report of the approving authority, the

information given comprises the nature of the information given comprises the nature of the information given comprises the nature of the

information given comprises the nature of the

events and an estimate of their effects or a events and an estimate of their effects or a events and an estimate of their effects or a

events and an estimate of their effects or a

statement that such an estimate cannot be statement that such an estimate cannot be statement that such an estimate cannot be