ACCOUNTINGSTANDARDS

(As per the New CBCS Syllabus for 3rd Year, 5th Semester, B.Com. forVarious Universities in Telangana State w.e.f. 2018-19)

CA Dinesh SainiFCA, CS(E), BAF

CA Rajesh SainiCA, B.Com.

Forwarded ByDr. A.L. Saini

Ph.D., FCA, M.Com., LL.B. (G)

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First Edition : 2018

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PREFACE

Accounting Standards is an authoritative pronouncement of code of practice of theregulatory accountancy body to be observed and applied in the preparation andpresentation of financial statements. These standards are intended to apply only tomaterial items.

This book on Indian Accounting Standards has been prepared for studentspreparing for the examinations of the Institute of Chartered Accountants of India (ICAI),Institute of Cost and Works Accountants of India (ICWA), Institute of CompanySecretaries of India (ICS) and B.Com. and M.Com. courses of all Indian Universities.The book attempts to explain and illustrate in the simplest language all the AccountingStandards.

The views expressed in this book are of author’s own.

We have taken help of the various Accounting Standards while explaining thecomparative position. We have also taken a few quotes against which we have givenproper reference.

We may also mention that while considerable care has been taken to ensure thatcontents are accurate, a few errors are inherent in work of this kind, therefore, with allhumility we seek suggestions from the readers.

We are thankful to Shri K.N. Pandey, Director, Mr. S.K. Srivastav and all theeditorial staff of M/s Himalaya Publishing House Pvt. Ltd. for bringing out this firstedition of the book within a very short time.

We will be happy to welcome further suggestions from readers to improve thisbook. The readers may send their suggestions on sainiarjun067@gmail.com

Dated: 07th July 2018

Authors

SYLLABUS

Objectives: To make the students acquire the knowledge of provisions and application of IndianAccounting Standards.

UNIT-I: INTRODUCTION: Introduction to Accounting Standards – Objectives of AccountingStandards – Benefits and Limitations of Accounting Standards – Process of Formulation ofAccounting Standards in India – List of Accounting Standards in India (AS) – Need for Convergencetowards Global Standards – International Financial Reporting Standards as Global Standards –Benefits of Convergence with IFRS – Applicability of Accounting Standards in India.

UNIT-II: AS-1, 2, 3, 4, 5, 7 and 9: AS-1: Disclosure of Accounting Policies – AS-2: Valuationof Inventories – AS-3: Cash Flow Statement – AS-4: Contingencies and Events Occurring afterBalance Sheet Date – AS-5: Net Profit/Loss for the Period, Prior Period, Extraordinary Items andChanges in Accounting Policies – AS-7: Accounting for Construction Contracts – AS-9: RevenueRecognition (including simple problems).

UNIT-III: AS-10, 11, 12, 13, 14, 16 and 17: AS-10: Property, Plant and Equipment – AS-11:Accounting for the Effects of Changes in Foreign Exchange Rates – AS-12: Accounting forGovernment Grants – AS-13: Accounting for Investments – AS-14: Accounting for Amalgamations –AS-16: Accounting for Borrowing Costs – AS-17: Segment Reporting (including simple problems).

UNIT-IV: AS-18, 19, 20, 22, 24, 26 and 29: AS-18: Related Party Disclosures – AS-19:Accounting for Leases – AS-20: Earnings Per Share – AS-22: Accounting for Taxes on Income – AS-24: Discontinuing Operations – AS-26: Accounting for Intangibles – AS-29: Provisions, ContingentLiabilities and Contingent Assets (including simple problems).

UNIT-V: Introduction of Ind AS: Introduction – Development in Ind AS – List of Ind AS –Significance of Ind AS – Carve-outs/ins in Ind AS – AS vs. Ind AS – Roadmap for Implementation ofInd AS.

CONTENTS

UNIT-I: INTRODUCTION:

1. INTRODUCTION TO ACCOUNTING STANDARDS 1 – 8

UNIT-II: AS-1, 2, 3, 4, 5, 7 AND 9

2. DISCLOSURE OF ACCOUNTING POLICIES (AS-1) 9 – 12

3. VALUATION OF INVENTORIES (AS-2) 13 – 22

4. CASH FLOW STATEMENTS (AS-3) 23 – 32

5. CONTINGENCIES AND EVENTS OCCURRING AFTER THEBALANCE SHEET DATE (REVISED) (AS-4)

33 – 39

6. NET PROFIT/LOSS FOR THE PERIOD, PRIOR PERIOD,EXTRAORDINARY ITEMS AND CHANGES IN ACCOUNTINGPOLICIES (AS-5)

40 – 47

7. ACCOUNTING FOR CONSTRUCTION CONTRACTS (AS-7) 48 – 54

8. REVENUE RECOGNITION (AS-9) 55 – 62

UNIT-III: AS-10, 11, 12, 13, 14, 16 AND 17:

9. PROPERTY, PLANT AND EQUIPMENT (AS-10) 63 – 76

10. ACCOUNTING FOR THE EFFECTS OF CHANGES IN FOREIGNEXCHANGE RATES (AS-11)

77 – 89

11. ACCOUNTING FOR GOVERNMENT GRANTS (AS-12) 90 – 99

12. ACCOUNTING FOR INVESTMENTS (AS-13) 100 – 105

13. ACCOUNTING FOR AMALGAMATIONS (AS-14) 106 – 112

14. ACCOUNTING FOR BORROWING COSTS (AS-16) 113 – 120

15. SEGMENT REPORTING (AS-17) 121 – 134

UNIT-IV: AS-18, 19, 20, 22, 24, 26 AND 29

16. RELATED PARTY DISCLOSURES (AS-18) 135 – 144

17. ACCOUNTING FOR LEASES (AS-19) 145 – 157

18. EARNINGS PER SHARE (AS-20) 158 – 165

19. ACCOUNTING FOR TAXES ON INCOME (AS-22) 166 – 177

20. DISCONTINUING OPERATIONS (AS-24) 178 – 184

21. ACCOUNTING FOR INTANGIBLES (AS-26) 185 – 195

22. PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENTASSETS (AS-29)

196 – 205

UNIT-V: INTRODUCTION OF IND AS

23. INDIAN ACCOUNTING STANDARDS – AN INTRODUCTION 206 – 211

UNIT I: INTRODUCTION

1 INTRODUCTION TOACCOUNTING STANDARDS

CHAPTER

Introduction to Accounting StandardsAccounting is the language of business. It may also be stated that accounting is the language of

all other organizations. All financial information (i.e., nature of financial activities, financial position,financial results, present trend and further prospects, etc.) are available through accounting.

The so-called financial information are communicated to the users (both internal as well asexternal) of accounting information by preparing and presenting the financial statements. As such, itbecomes necessary to develop some GAAP (Generally Accepted Accounting Principles) whilepreparing the financial statements by which the language of the business can be communicated to theusers.

In addition, there must not be any ambiguity and uncertainty relating to the facts, figures andterms which are contained in the financial statements and will be presented to the users of accountinginformation. In recent years, due to the growth of multinational corporations, certain internationalstandards are required in order to avoid confusion relating to the financial status and operating results.

Thus, the principles which are formulated or developed in this regard and which are approved bythe specialized bodies are known as “Accounting Standards.” Practically, it will help us to assess theprogress or otherwise of a firm after comparing the actual performances with the standard.

According to some authorities like Yorston, Smyth and Brown, ‘a standard is a performancetarget or goal or an agreed criterion of what is proper practice in a particular situation.’ There are someother authorities who prefer to use the term “Accounting Principles” in place of “AccountingStandards”.

In short, Accounting Standard may be defined as the accounting principles and rules which are tobe followed for various accounting treatments while preparing financial statements on uniform basisand which will reveal the same meaning to all the interested groups who will use the same. Thus, theStandards are considered as a guide for maintaining and preparing accounts.

For this purpose, the Institute of Chartered Accountants of India (ICAI), which is also a memberof International Accounting Standards Committee (IASC), had constituted Accounting StandardsBoard (ASB) in the year 1977. ASB identified the areas in which uniformity in accounting wasrequired. After detailed research and discussions, it prepared and submitted a draft to the ICAI. Afterproper examination, ICAI finalized them and notified for its use in financial statements.

2 ACCOUNTING STANDARDS

Meaning of Accounting StandardsAccounting standards are the written statements consisting of rules and guidelines, issued by the

accounting institutions, for the preparation of uniform and consistent financial statements and also forother disclosures affecting the different users of accounting information.

Accounting standards lay down the terms and conditions of accounting policies and practices byway of codes, guidelines and adjustments for making the interpretation of the items appearing in thefinancial statements easy and even their treatment in the books of account.

Nature of Accounting StandardsOn the basis of forgoing discussion, we can say that accounting standards are guide, dictator,

service provider and harmonizer in the field of accounting process.

(i) Serve as a guide to the accountants: Accounting standards serve the accountants as aguide in the accounting process. They provide basis on which accounts are prepared. Forexample, they provide the method of valuation of inventories.

(ii) Act as a dictator: Accounting standards act as a dictator in the field of accounting. Like adictator, in some areas, accountants have no choice of their own but to opt for practicesother than those stated in the accounting standards. For example, Cash Flow Statementshould be prepared in the format prescribed by accounting standard.

(iii) Serve as a service provider: Accounting standards comprise the scope of accounting bydefining certain terms, presenting the accounting issues, specifying standards, explainingnumerous disclosures and implementation date. Thus, accounting standards are descriptivein nature and serve as a service provider.

(iv) Act as a harmonizer: Accounting standards are not biased and bring uniformity inaccounting methods. They remove the effect of diverse accounting practices and policies.On many occasions, accounting standards develop and provide solutions to specificaccounting issues. It is thus clear that whenever there is any conflict on accounting issues,accounting standards act as harmonizer and facilitate solutions for accountants.

Objectives of Accounting StandardsIn earlier days, accounting was just used for recording business transactions of financial nature.

Its main emphasis now lies on providing accounting information in the process of decision-making.

For the following purposes, accounting standards are needed:

(i) For bringing uniformity in accounting methods: Accounting standards are required tobring uniformity in accounting methods by proposing standard treatments to the accountingissue. For example, AS-6 (Revised) states the methods for depreciation accounting.

(ii) For improving the reliability of the financial statements: Accounting is a language ofbusiness. There are many users of the information provided by accountants who take variousdecisions relating to their field just on the basis of information contained in financialstatements. In this connection, it is necessary that the financial statements should show trueand fair view of the business concern. Accounting standards when used give a sense of faithand reliability to various users.

INTRODUCTION TO ACCOUNTING STANDARDS 3

They also help the potential users of the information contained in the financial statements bydisclosure norms which make it easy even for a layman to interpret the data. Accountingstandards provide a concrete theory base to the process of accounting. They provideuniformity in accounting which makes the financial statements of different business units,for different years comparable and again facilitate decision-making.

(iii) Simplify the accounting information: Accounting standards prevent the users fromreaching any misleading conclusions and make the financial data simpler for everyone. Forexample, AS-3 (Revised) clearly classifies the flows of cash in terms of ‘operatingactivities’, ‘investing activities’ and ‘financing activities’.

(iv) Prevents frauds and manipulations: Accounting standards prevent manipulation of databy the management and others. By codifying the accounting methods, frauds andmanipulations can be minimized.

(v) Helps auditors: Accounting standards lay down the terms and conditions for accountingpolicies and practices by way of codes, guidelines and adjustments for making andinterpreting the items appearing in the financial statements. Thus, these terms, policies andguidelines, etc. become the basis for auditing the books of accounts.

Formulation of Accounting StandardsFormation of the Accounting Standards Board

The Institute of Chartered Accountants of India, recognizing the need to harmonize the diverseaccounting policies and practices at present in use in India, constituted an Accounting Standards Board(ASB) on 21-04-1977.

Scope and Functions of Accounting Standards BoardThe main function of ASB is to formulate accounting standards so that such standards may be

established by the Council of the Institute in India. While formulating the accounting standards, ASBwill take into consideration the applicable laws, customs, usages and business environment.

The Institute is one of the Members of the International Accounting Standards Committee (IASC)and has agreed to support the objectives of IASC. While formulating the Accounting Standards, ASBwill give due consideration to International Accounting Standards, issued by IASC and try to integratethem, to the extent possible, in the light of the conditions and practices prevailing in India.

The Accounting Standards will be issued under the authority of the Council. ASB has also beenentrusted with the responsibility of propagating the Accounting Standards and of persuading theconcerned parties to adopt them in the preparation and presentation of financial statements.

ASB will issue guidance notes on the Accounting Standards and give clarifications on issuesarising therefrom. ASB will also review the Accounting Standard at periodical intervals

Scope of Accounting StandardsEfforts will be made to issue Accounting Standards which are in conformity with the provisions

of the applicable laws, customs, usages and business environment of our country.

4 ACCOUNTING STANDARDS

However, if due to subsequent amendments in the law, a particular Accounting Standard is foundto be not in conformity with such law, the provisions of the said law will prevail and the financialstatements should be prepared in conformity with such law.

The Accounting Standards by their very nature cannot and do not override the local regulationswhich govern the preparation and presentation of financial statements in our country. However, theInstitute will determine the extent of disclosure to be made in financial statements and the relatedAuditor’s reports.

Such disclosure may be by way of appropriate notes explaining the treatment of particular items.Such explanatory notes will be only in the nature of clarification and therefore, need not be treated asadverse comments on the related financial statements.

The Accounting Standards are intended to apply only to items which are material. Anylimitations with regard to the applicability of a specific Standard will be made clear by the Institutefrom time to time.

The date from which a particular Standard will come into effect, as well as the class of enterprisesto which it will apply, will also be specified by the Institute. However, no standard will haveretroactive application, unless otherwise stated.

The Institute will use its best endeavors to persuade the Government appropriate authoritiesindustrial and business community to adopt these standards in order to achieve uniformity in thepresentation of financial statements.

In carrying out the task of formulation of Accounting Standards, the intention is to concentrate onbasic matters. The endeavor would be to confine Accounting Standards to essentials and not to makethem so complex that they cannot be applied effectively and on a nationwide basis. In the years tocome, it is to be expected that Accounting Standards will undergo revision and a greater degree ofsophistication may then be appropriate.

Procedure for Issuing Accounting StandardsBroadly, the following procedure will be adopted for formulating Accounting Standards:

ASB shall determine the broad areas in which Accounting Standards need to be formulated andthe priority in regard to the selection thereof.

In the preparation of Accounting Standards, ASB will be assisted by Study Groups constituted toconsider specific subjects. In the formation of Study Groups, provision will be made for wideparticipation by the members of the institute and others.

ASB will also hold a dialogue with the representatives of the Government, Public SectorUndertakings, Industry and other Organizations for ascertaining their views.

On the basis of the work of the Study Groups and the dialogue with the organization, an exposuredraft of the proposed standard will be prepared and issued for comments by members of the Instituteand the public at large.

The draft of the proposed standard will include the following basic points:

● A statement of concepts and fundamental accounting principles relating to the Standard.● Definitions of the terms used in the Standard.

INTRODUCTION TO ACCOUNTING STANDARDS 5

● The manner in which the accounting principles have been applied for.● The presentation and disclosure requirements in complying with the Standard.● Class of enterprises to which the Standard will apply.● Date from which the Standard will be effective.

After taking into consideration the comments received, the draft of the proposed Standard will befinalized by ASB and submitted to the Council of the Institute.

The Council of the Institute will consider the final draft of the proposed Standard, and if foundnecessary, modify the same in consultation with ASB. The Accounting Standard on the relevantsubject will then be issued under the authority of the Council.

Compliance with the Accounting StandardsWhile discharging their attest functions, it will be the duty of the members of the Institute to

ensure that the Accounting Standards are implemented in the presentation of financial statementscovered by their audit reports.

In the event of any deviation from the Standards, it will also be their duty to make adequatedisclosures in their reports so that the users of such statements may be aware of such deviations.

In the initial years, the Standards will be recommendatory in character and the Institute will givewide publicity among the users and educate members about the utility of Accounting Standards andthe need for compliance with the above disclosure requirements. Once an awareness about theserequirements is ensured, steps will be taken, in course of time, to enforce compliance with theaccounting standards.

The adoption of Accounting Standards in our country and disclosure of the extent to which theyhave not been observed will, over the years, have an important effect, with consequential improvementin the quality of presentation of financial statements.

List of Accounting Standards in India (AS)AS-1 Disclosure of Accounting Principles

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-7 Construction Contracts (Revised 2002)

AS-9 Revenue Recognition

AS-10 Property Plant and Equipment

AS-11 The Effects of Changes in Foreign Exchange Rates (Revised 2003)

AS-12 Accounting for Government Grants

6 ACCOUNTING STANDARDS

AS-13 Accounting for Investments

AS-14 Accounting for Amalgamations

AS-15 Employee Benefits (Revised 2005)

AS-16 Borrowing Costs

AS-17 Segment Reporting

AS-18 Related Party Disclosures

AS-19 Leases

AS-20 Earnings Per Share

AS-21 Consolidated Financial Statements

AS-22 Accounting for Taxes on Income

AS-23 Accounting for Investments in Associates in Consolidated Financial Statements

AS-24 Discontinuing Operations

AS-25 Interim Financial Reporting

AS-26 Intangible Assets

AS-27 Financial Reporting of Interests in Joint Ventures

AS-28 Impairment of Assets

AS-29 Provisions, Contingent Liabilities and Contingent Assets

Convergence with IFRS (Global Standards)Ind AS are set of accounting standards notified by Ministry of Corporate Affairs (MCA),

converged with International Financial Reporting Standards (IFRS). These accounting standards areformulated by Accounting Standards Board (ASB) of Institute of Chartered Accountants of India(ICAI).

Convergence means alignment of the standards of different standard setters with a certain rate ofcompromise, by adopting the requirements of the standards either fully or partially.

Indian Accounting Standards are almost similar to IFRS but with few carve-outs so as to makethem suitable for Indian environment.

Need for ChangeThe only thing which will be received from such transition is common set of accounting

standards. The benefits of having the common standards for financial reporting are the reasons whichattract this transition.

These are as follows:

(a) Better comparability: By following a common set of standards, will help the stakeholdersto compare the organizations globally, i.e., to create an apple to apple comparison.

INTRODUCTION TO ACCOUNTING STANDARDS 7

(b) Better transparency: The users of accounts will be benefited by this, as same accountingstandards will help to them understand the fundamentals of the organization which willgenerate better transparency.

(c) Many companies having subsidiary or holding company in different countries are requiredto follow dual set of accounting standards, local standards on one hand and global standardson the other hand. The transition will be helpful in saving time and cost on the financedepartment. For example, Swiss pharmaceutical giant ROCHE Group, which operates inmore than 100 countries, likely to save more than $100 million through convergence.

(d) Attract Foreign Investment: Since the investors can compare with other organizationsglobally, it will help them to take investment decision. At the same time, it will help theorganization to present their financial position in more efficient way to the world, in alanguage that all can understand.

(e) Due to transition, many companies will be attracted towards India, for investing, for settingup subsidiary, etc., which will result in increase in employment opportunities.

(f) Globalization: Globalization can be understand at three levels:(i) World Trade: Smooth trade can be achieved.

(ii) Listing, Securities Markets etc.: Listing of securities on international stock exchangeswill be eased. Cross-border flow of investment will lead to economic growth.

(iii) Stakeholders: Stakeholder can easily take the decision in regards to the organization.(g) Cost Saving: Saving of time and money in planning and executing of accounting and

auditing. Costs involved in the access to the capital market are expected to reduce.(h) Labour Cost: In developing countries, the labour cost is cheap, but capital availability is

difficult. By convergence, the cost of capital will reduce and its availability will also beeased.

Adoption or ConvergenceFrom the above discussion, one may wonder why to introduce Ind AS instead of following IFRS

as it is. Some countries had accepted the IFRS as it is instead of convergence, Question is why notIndia?

One of the main reason is any changes in the IFRS would have impact on books of Indiancompanies. It would be hard for companies to adopt or cope up with the IFRS as and when amended.

At the same time, India is multi-regulator nation. In India, there are many regulators likeCompanies Act, Income Tax Act, Securities Exchange Board of India (SEBI), Insurance Regulatory &Development Authority (IRDA), Reserve Bank of India (RBI), etc.

To welcome the change in IFRS, the respective Rules and Regulations must be amendedaccordingly, which can be time-consuming. If the changes in IFRS are not in consensus with the rulesand regulations, then there will be chaos in the corporate reporting. So, introduction of Ind AS isa way to buy some time to analyse the situation or the change with a view to take necessary action byMCA as it thinks fit.

Hence, substantially similar to the IFRSs, the Ind AS have some carve-outs to ensure that thesestandards are suitable for application in the Indian environment.

8 ACCOUNTING STANDARDS

Challenges(a) Rules and regulations: Since there are many rules and regulations in India for

implementation of Ind AS, the appropriate amendment must be done in the rules andregulations.

(b) Technological aspect: Right now, bookkeeping and accounting is done through softwarelike Tally, Miracle, Busy, SAP, etc. These accounting software are based on Indian GAAPand AS. There will be a huge cost to invest in such upgraded software.

(c) Personnel: There is lack of efficient personnel. However, it can be avoided by training andawareness programmes.

The newly Converged Indian Accounting Standards are described in the last chapter.

Review Questions1. What are accounting standards? Who issues accounting standards and what is the procedure

for the same?2. Explain the importance or benefits of accounting standards.3. What is the need for convergence of Accounting Standards?