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Accounting standards:
Introduction:Accounting Standards (ASs) are written policy documents issued by expert accounting body or
by government or other regulatory body covering the aspects of recognition, measurement,
presentation and disclosure of accounting transactions in the financial statements
...
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
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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
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The standard-setting procedure of Accounting Standards Board (ASB) can be briefly outlined as
follows:
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Identification of broad areas by ASB for formulation of AS
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The draft normally includes objective and scope of
the standard, definitions of the terms used in the standard, recognition and measurement
principles wherever applicable and presentation and disclosure requirements
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Circulation of draft of accounting standard (after revision by ASB) to the Council members of
the ICAI and specified outside bodies such as Department of Company Affairs (DCA), Securities
and Exchange Board of India (SEBI), Comptroller and Auditor General of India (C&AG), Central
Board of Direct Taxes (CBDT), Standing Conference of Public Enterprises (SCOPE), etc
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Meeting with the representatives of the specified outside bodies to ascertain their views on the
draft of the proposed accounting standard
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Consideration of comments received on the exposure draft and finalization of the draft
accounting standard by the ASB for submission to the Council of the ICAI for its consideration
and approval for issuance
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Benefits and Limitations:
Accounting standards seek to describe the accounting principles, the valuation techniques and
the methods of applying the accounting principles in the preparation and presentation of
financial statements so that they may give a true and fair view
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Standardisation of alternative accounting treatments: Standards reduce to a reasonable
extent or eliminate altogether confusing variations in the accounting treatments used to
prepare financial statements
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Requirements for additional disclosures: There are certain areas where important information
are not statutorily required to be disclosed
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3
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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
different countries
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Difficulties in making choice between different treatments: Alternative solutions to certain
accounting problems may each have arguments to recommend them
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2
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3
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The standards are
required to be framed within the ambit of prevailing statutes
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International Financial Reporting Standards (IFRSs) are considered a "principles-based" set of
standards
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Every
major nation is moving toward adopting them to some extent
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So over the next few years, thousands of companies will adopt the international
standards
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The increased use of IFRS is not limited to publiccompany listing requirements or statutory reporting
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Adoption of IFRS in India
Increasingly, Indian accountants and businessmen feel the need for convergence with IFRS
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Some Indian companies are
already listed on overseas stock exchanges and many more will list in the future
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Also, the recent stream of overseas acquisitions by Indian companies makes a compelling case
for adoption of high quality standards to convince foreign enterprises about the financial
standing as also the disclosure and governance standards of Indian acquirers
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In India, the Institute of Chartered Accountants of India (ICAI) is on the way towards
convergence of its Standards with Global Standards
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Recognizing the
growing need of full convergence of Indian Accounting Standards with IFRSs, ICAI constituted a
Task Force to examine various issues involved
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While formulating the Accounting Standards, ICAI
recognizes the legal and other conditions prevailing in India and makes deviations from the
corresponding IFRSs
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However, at
present, the Accounting Standard Board in consultation with the Core Group, constituted by

the Ministry of Corporate Affairs (MCA) for convergence of Indian Accounting Standards with
International Financial Reporting Standards (IFRS), has decided that there will be two separate
sets of Accounting Standards viz
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These are the standards which are being converged by eliminating the
differences of the Indian Accounting Standards vis-à-vis IFRS
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AS-1: (Disclosure of accounting policies):
The objectives of issuing this standard are to promote a better understanding of the financial
statement by proper disclosure of the significant accounting policies
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Accounting policies refer to specific accounting principles and the methods of
applying those principles in the preparation and presentation of financial statements
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The choice of accounting policies
depends on the judgment of the management
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First, accounting standards cannot and do not cover all possible areas of accounting
and enterprises have the freedom of adopting any reasonable accounting policy in areas not
covered by a standard
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The accounting standards therefore permit more than one policy even in areas covered by it
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The qualitative characteristic of comparability of financial statements
therefore suffers due to diversity of accounting policies
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For these reasons, accounting standard 1 requires
enterprises to disclose accounting policies actually adopted by them in preparation of their
financial statements
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The purpose of Accounting Standard 1, Disclosure of Accounting Policies, is to promote better
understanding of financial statements by requiring disclosure of significant accounting policies
in orderly manner
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The standard also requires disclosure of changes in accounting policies such
that the users can compare financial statements of same enterprise for different accounting
periods
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1
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Methods of depreciation
3
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Treatment of goodwill
5
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Treatment of expenditure during construction
7
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Valuation of fixed assets
9
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Valuations of investments
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As
per definition of AS-2, inventories mean the assets which are:
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Held for sale in the ordinary course of business

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In the process of production for sale

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Held in form of materials or supplies to be consumed in the process of production
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Depreciable Assets Depreciable assets are assets which
I
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Dies and blocks are written
off on first year itself as their useful life ends within one year
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Have a limited useful life
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III
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Depreciation is not charged on assets purchased for the purpose of resale but could
not be sold till the end of the accounting year
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Depreciable Amount = Historical Cost – Residual Value
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Amount of Depreciation
The quantum of depreciation to be provided in an accounting period involves the exercise of
judgment by management in the light of technical, commercial, accounting and legal
requirements and accordingly may need periodical review
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Methods of Depreciation
There are several methods of allocating depreciation over the useful life of the assets
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The management of a business selects the most
appropriate method(s) A combination of more than one method is sometimes used
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g
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(a) Straight Line Method: An equal amount is written off every year during the working life on
an asset so as to reduce the cost of the asset to NIL or to its residual value at the end of its
useful life
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(b) Reducing Balance/Written down Value Method: A fixed percentage of the diminishing
value of the asset is written off each year so as to reduce the asset to its salvage value at the
end of its life
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AS-9 (Income Recognition & Accrual Income):
The objective of issuing AS-9 is to provide a basis for recognition of revenue in the books of
accounts of an enterprise
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1
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So it can be assumed tha

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