Format of Standards
The format of each standard contains:
A statement of concepts and fundamental accounting principles relating to the standard.
Definition of the terms used in the standard.
The manner in which the accounting principles have been applied for formulating the standard.
Presentation and disclosure requirements.
Class of enterprise to which it applies.
Effective date.
Accounting standards apply only to material items.
The Accounting Standard Board (ASB) of the Institute of Chartered Accountants of India has issued the following Accounting Standards that are to be followed by its members.
International Accounting Standards
Accounting Standards are a collection of generally followed accounting principles, policies and practices. These help to ensure a common basis for financial statements of different organizations. This means that people can understand these more easily and make useful comparisons.
Financial statements are at the centre of business reporting. Financial statements usually provide users with essential information that heavily influences their decisions. The US is the leader in financial reporting, and the US Securities and Exchange Commission is respected for its role in formulating and implementing US GAAP despite the general vote of confidence. In India, the Statements on Accounting Standards are issued by the Institute of Chartered Accountants of India (ICAI) to establish standards that have to be complied with to ensure that financial statements are prepared in accordance with generally accepted accounting standards in India (India GAAP)
Indian Accounting Standards
The Council of ICAI constituted the Accounting Standards Board (ASB) in April, 1977 to formulate Accounting Standards. While formulating the Accounting Standards, ASB takes into consideration the applicable laws, customs, usages and business environment.
However, users were strongly critical about certain aspects of financial statements and they offered or supported many substantive ideas for improvement. Standard setters, regulators, and many others devote considerable resources in maintaining and improving the standards.
The new accounting norms are aimed at protecting shareholders’ interest and recommending ways of improving corporate governance.
Accounting Standard - 1 : Disclosure of Accounting Policies
It deals with the disclosure in the financial statements of significant accounting policies followed in the preparation and presentation of such statements. The purpose of this standard is to promote better understanding of financial statements by such disclosure. The major considerations to be followed during the selection of accounting policies by management are prudence, substance over form, and materiality. Certain fundamental assumptions in the preparation of financial statements are going concern concept, consistency and Accrual concept. Compliance of this standard helps in facilitating a more meaningful comparison between financial statements of two different enterprises.
Accounting Standard - 2 : Valuation of Inventories (Revised w.e.f. 1-4-1999)
The standard has been made mandatory for accounting periods commencing from 1-4-1999. The standard deals with the determination of value at which inventories are carried in the financial statements until the related revenues are recognized. The standard also deals with determination of such value, including ascertainment of cost of inventories and any write-down thereof to net realizable value (net realizable value is explained in detail in the standard). It states that inventories are to be valued at lower of cost or net realizable value. Weighed Average Cost or First in First Out (FIFO) methods are permitted in cases where goods are ordinarily interchangeable. Specific identification method is permitted only when goods are not ordinarily interchangeable. The standard does not permit use of direct costing method and states that absorption costing is to be applied to manufactured goods.
Accounting Standard - 3 : Cash Flow Statements (Revised)
The standard deals with preparation of a cash flow statement and its presentation along with financial statements. It states that the cash flow statement should report cash flows during the period of financial statements classified by operating, investing and financing activities. It prescribes a direct and indirect method of reporting cash flows. The Standard requires that a cash flow statement should disclose the components of cash and cash equivalents and should also present a reconciliation of the amounts in the cash flow statement with the equivalent items reported in the balance sheet.
Accounting Standard - 4 : Contingencies and events occurring after the Balance Sheet Date
The standard deals with the treatment in financial statements of contingencies and events occurring after the balance sheet date. Contingencies are events whose outcome will be known only on their occurrence, e.g., a case in High Court, Penalty proceedings under law, etc., are events whose outcome will be known only on their occurrence. Events occurring after the balance sheet date are those significant events that occur between the balance sheet date and the date on which the financial statements are approved at a later date by the Board of Directors of the Company. Let us say, insolvency of a debtor, recovery from whom was considered as doubtful as on the date of balance sheet. The Standard lays down that contingencies must be provided if the loss due to these can be reasonably estimated. The standard also states that assets and liabilities should be adjusted for events occurring after the balance sheet date if they establish the conditions existing on the balance sheet date.
Accounting Standard - 5 : Net Profit or Loss for the period,
Prior Period Items and changes in Accounting Policies
The standard deals with the treatment in the financial statements of prior period and extraordinary items and changes in accounting policies. Prior period items are debits or credits which arise in the accounts of current year as a result of a mistake or omission in the preparation of financial statement of one or more earlier years. Extraordinary items are unusual items distinct from the day-to-day activities of an entity. Nature and significant amount of such items need to be provided in the financial statements. A change in Accounting Policy shall be made only if the change is required by statute, or standard or for appropriate presentation and any such change should be reported and quantified with respect to its impact on the profit or loss of the entity for the period of change/future period.
Accounting Standard - 6 : Depreciation Accounting
The standard deals with the accounting for depreciation and the disclosure requirements in connection therewith. It suggests various methods of depreciation in respect of various types of fixed assets. It states that the depreciation method should be selected carefully, systematically and consistently applied from year to year. It also lists the factors which affect depreciation and the treatment to be given if a method of depreciation is changed. The standard also lays down treatment in case of revaluation of assets.
Accounting Standard - 7
It deals with the accounting for construction contracts. Contract accounting is complicated because the contract period exceeds a single year in most cases. This poses serious accounting problems relating to revenue, treatment of advances received, work-in-progress etc., in the financial statements. The standard recognizes two methods of accounting for construction contract, namely, the percentage of completion method and the completed contract method. The standard explains the relevance of both the methods of accounting and the method which is more appropriate under a given set of circumstances. It states the essential ingredients of these two methods and also deals with the disclosures to be made in this regard.
Accounting Standard - 8
Research and Development has been withdrawn.
Accounting Standard - 9 : Revenue Recognition
It deals with the basis for recognition of revenue, i.e., income and the time when income can be said to have arisen. It also states the quantum of income to be credited to profit and loss account. The statement shows how revenue is to be recognized from the various activities carried on by the enterprise. Let us say, from sale of goods, rendering of services, use by others of enterprise resources yielding interest, royalties, and dividends, etc.
Accounting Standard -10 : Accounting for Fixed Assets
The standard deals with the accounting for fixed assets and specifies the disclosures to be made in the financial statement in relation thereto. It lays down the elements of cost that should form a part of the book value in respect of a particular asset purchased and used by an enterprise. It also states when the fixed assets should be written off and treatment, if any, on revaluation of fixed assets.
Accounting Standard -11 : The effects of changes in Foreign Exchange Rate (Revised 2003)
The Standard deals with accounting for transactions in foreign currencies in the financial statements prepared by an enterprise and with translation of the financial statements of foreign branches prepared in foreign currency into India rupees for the purpose of including them in the financial statements of the Head Office in India. Rule with respect to foreign currency translation (conversion) and difference arising, if an from conversion of foreign currency into Indian rupees is also dealt with by the standard.
Accounting Standard-12: Accounting for Government Grants
The standard deals with accounting for Government grants received by entity and how such grants should be presented in the financial statement. Such grant may be in the form of subsidies, cash incentives or duty drawbacks, etc. the varied approaches to the grant as suggested by the Standard would depend upon the purpose which the grant is received and conditions that have to be fulfilled to obtained and enjoy grant. Treatment of withdrawal of grants is also laid down in the Standard.
Accounting Standard-13: Accounting for Investments
It deals with accounting for investments made by an entity and its presentation in the financial statement. The Standard defines current and long term investments and their basis of classification. To the extent the Standard relates to current investments, it is also applicable to shares, debentures and other securities held as stock-in-trade, with suitable modification as specified in the Standard itself. It lays down the criteria for bifurcation between current and long term investments and how they are to be classified as such.
Accounting Standard-14: Accounting for Amalgamations
It deals with accounting for amalgamation and the treatment of any result goodwill or reserve in the books of account, arising out of such amalgamation transaction. Amalgamation means formation of a new company to take over the existing business of two or more companies. The Standard does not deal with cases of acquisitions whereby the acquired company is not dissolved and its separate entity continues to exist. The standard lays down the methods of amalgamation and the accounting adjustment under each method. The two methods of accounting for Amalgamations are Pooling of interest method and Purchase Method.
Accounting Standard - 15 : Accounting for retirement benefits in the Financial Statement of Employers
It deals with accounting for retirement benefits provided to employees in the financial statements of employers. Retirement benefits would include provident fund, superannuation/pension, gratuity, leave encashment, post retirement health and welfare schemes. This statement does not apply to those retirement benefits for which the employer's obligations cannot be reasonably estimated.
Accounting Standard - 16 : Borrowing Costs (w.e.f. 1-4-2000)
The standard is mandatory for accounting periods commencing from 1-4-2000. It deals with accounting for borrowing cost and not with the actual cost of owners equity/preference capital. It states that borrowing costs like interest and other costs that are directly attributable to the acquisition, construction or production of any qualifying asset (assets that take a substantial period of time to get ready for its intended use or sale) should be capitalized. It states the income on the temporary investment of the borrowed funds be deducted from the borrowing costs. It states that capitalization of borrowing cost should be suspended during extended periods in which development is interrupted. Capitalisations should cease when asset is completed substantially or if completed in parts, in respect of that part, all the activities for its intended use or sale are complete. Policy with regard to borrowing cost needs to be disclosed in the financial statements.
Accounting Standard - 17 : Segment Reporting (w.e.f. 1-4-2001)
The standard is mandatory for accounting periods commencing from 1-4-2001. it deals with reporting of information about different types of products and services of a n enterprise and its operations in different geographical areas for assessing risk and returns of a diversified or multi-locational enterprise that is not determinable from the aggregated data. The statement is applicable to general purposes financial statements and consolidated financial statements (a separate accounting standard is presently being formulated on consolidated financial statements) it lays down criteria for identifying a ‘business segment' and ‘geographical segment' and requires reporting of the segments subject to fulfillment of certain criteria specified in the statement. It states that segment information should be prepared in conformity with the accounting policies adopted for preparing and presenting financial statements of the enterprise as a whole.
Accounting Standard -18 : Related Party Disclosures (w.e.f. 1-4-2001)
The standard is mandatory for accounting periods commencing from 1-4-2001. it deals with reporting of related party relationships and transactions between a reporting enterprise and its related parties. The statement is applicable to general purposes financial statements and consolidated financial statements (a separate accounting standard is presently being formulated on consolidated financial statements). The statement applies to related party relationship as described in the statement. It states that the requirement of statement shall not apply in circumstances where providing such disclosures would conflict with the reporting enterprise's duties of confidentiality as specifically required in terms of a statute or by any regulator or similar competent authority. It states that name of the related party and nature of the related party relationship where control exists should be disclosed irrespective of whether or not there have been transactions between the related parties.
Accounting Standard - 19 : Leases (w.e.f. 1-4-2001)
The objective of this standard is to prescribe, for lessors and lessees, the appropriate accounting policies and disclosure in financial statements in relation to finance lease and operating leases. It lays down guidelines for classification of a lease between finance and operating lease. It lays down the treatments to be given to finance and operating leases in the financial statements of the lessor and lessee. It also states that the disclosure requirements apply equally to sale and leaseback transaction.
Accounting Standard - 20 : Earnings per Share (w.e.f. 1-4-2001)
This standard is relevant only for companies with equity share capital. The objective of this statement is to prescribe principles for the determination and presentation of earnings per share, which will improve comparison of performance among different enterprises for the same period and among different accounting periods for the same enterprise. The focus of this statement is on the denominator of eth earnings per share calculation. Even though earnings per share data has limitations because of different accounting policies used for determining ‘earnings', a consistently determined denominator enhances the quality of financial reporting.
Accounting Standard - 21 : Consolidated Financial Statements
The standard is designed for holding companies and group companies and applies only if consolidated statements are prepared by the group or parent company. Some concepts are relevant to consolidation of accounts of NGOs. Consolidated Financial statements are presented by the parent of a group to provide financial details about the economic activities of its groups. This standard lays down principles and procedures for the preparation and presentation of consolidated financial statements.
Accounting Standard - 22 : Accounting for Taxes on Income
The objective of the statement is to prescribe accounting treatment for taxes on income. Taxes on income is one of the significant items in the statement of profit and loss of an enterprise. The standard explains the reasons for divergence between taxable income and accounting income. It states that tax expenses for the period should comprise of current tax and deferred tax, in the determination of net profit for the period. Deferred tax should be recognized for all the timing differences subject to the consideration of prudence in respect of deferred tax assets.
Accounting Standard - 23 : Accounting for Investments in Associates in Consolidated Financial Statements
Accounting Standard 24:
Discontinuing Operations
Accounting Standard 25:
Interim Financial Reporting
Accounting Standard 26:
Intangible Assets
Accounting Standard 27:
Financial Reporting of Interests in Joint Ventures
Accounting Standard 28:
Impairment of Assets
Accounting Standard 29:
Provisions, Contingent Liabilities and Contingent Assets
For the Accounting Standards visit: www.icai.org/common/index.html
Difference between the International Accounting Standards and Indian Accounting Standards
The following are the differences
Reporting Vs. Disclosure: Firstly the accent of the Indian accounting standards is on reporting where as the accent of the US GAAP is on disclosure and transparency.
For example in India it is not necessary to disclose the portion of long-term debt which has an unexpired term of maturity of less than one year. This gives an erroneous picture of the potential short-term liabilities of the company and the liquidity risk that the company could face in such an eventuality. The US GAAP on the contrary insists on the disclosing the portion of long-term debt separately which has an un expired term to maturity of less than one year.
Form vs. Substance: The accent of the Indian Accounting standards is on form where as the accent of the US GAAP is on the substance of the transaction. For example, while accounting of a lease in India the depreciation benefit is available to the lessor because in structure or form a lease deal is not a sale. On the contrary, in the US GAAP a lease deal confers the depreciation benefit on the lessee since the benefits of the productive use of the asset rests with the lessee
Accounting vs. Analysis The accent of the Indian accounting standards is on abiding by accounting principles whereas the accent on the US GAAP is on presenting a true and fair picture of the financial position of the company to the analysts. For example, under the US GAAP the companies are required to disclose the sales, operating profits and the assets that can be identified with each product division enabling analysts to get a true and unbiased picture of the performance and profitability of each division. According to the Indian accounting standards it is not necessary.
Globalization vs. Localization The other difference between the Indian Accounting Standards and the US GAAP is that the accent of Indian accounting standards is on localization of the business while the accent of the US GAAP is on globalization of the business. The US GAAP stipulates that companies consolidate their subsidiary accounts and show the results as a part of the parent company accounts. This has provided an incentive to US corporates to expand offshore through subsidiaries and ensure its good performance.
Changes in Indian Accounting standards and their impact:
Like any other listed firms, Satyam Computers is now required to consolidate its accounts of its subsidiaries into its balance sheet. Satyam reported a net profit of around 119 crore in the quarter ending December 2001. But, its 52.5 subsidiary, Satyam Infoway, reported a net loss of around Rs.391.96 crore as per US GAAP. Under the new norms, Satyam Computers would be required to add the losses of its subsidiary as it’s bottom-line after subtracting the minority interest i.e. after subtracting 47.5 percent of net losses.
If Satyam Infoway’s losses are not taken into account, the situation is very bright. However, one cannot be happy once Satyam Infoway’s losses are taken into account.
How ever, new accounting norms do not necessarily mean losses to the companies. Some companies are going to see a jump in their net profits. For example, Reliance is likely to see a jump in net profit after consolidating the accounts of Reliance Petroleum. Similarly, there is going to be a jump in the profits of State Bank of India by 20 percent after it consolidates the accounts of its subsidiaries.
Criticism of US Accounting Standards
The current standard setting process is too cumbersome and slow
Much of the recent FASB guidance is rule based and inhibits transparency
Much of the recent FASB guidance is too complex
Accounting Standards Should Change
It is widely believed that rather than enforcing standards based on specific rules, if it were on intent, there is a possibility of avoiding the loopholes exploited by many companies. The International Accounting bodies like the International Accounting Standards Board and the Financial Accounting Standards Boards are trying their best to change the accounting rules to benefit both the companies and the investing companies and the investing community by way of better and informed financial statements.
Capital markets all over the world, particularly the US capital markets are plagued by murky accounting standards. Enron is the best example for this. All this has resulted in the lack of confidence in the US financial reporting standards. It may result in deterring the foreign investors’ trust on the most revered and feared US GAAP.
Many fear that the situation in US may result in many mangers around the world withdrawing their investments from US. The reason for US not to ensue with accounting standards is its negative networth against the world. Consider these figures: World assets in the US amount to $7.3 tn, Us investment outside its borders is $5.2 tn.
To understand the amusing aspect of the US accounting standards, consider this example. A company that owns an asset, say an aircraft, and finances this asset with debt, reports it as an asset and liability. Under the existing accounting standards, if the company acquires the asset under a lease structured as an operating lease, it will neither report the asset nor the liability. So this makes the situation where it is possible for a company to operate an airline without reporting any of its principle assets on the balance sheet. Thus a Balance Sheet that presents an airline without showing it on the sheet is not a faithful representation of economic reality. All these make a case to harmonize global accounting standards for the benefit of both global and US investors.
