Concept of Accounting Standards

We know that Generally Accepted Accounting Principles (GAAP) aims at bringing

uniformity and comparability in the financial statements. It can be seen that at many
places, GAAP permits a variety of alternative accounting treatments for the same item.
For example, different methods for valuation of stock give different results in financial
statements.
Such practices sometimes can misguide intended users in taking decision relating to
their field. Keeping in view the problems faced by many users of accounting, a need for
the development of common accounting standards was aroused.
For this purpose, the Institute of Chartered Accountants of India (ICAI), which is also a
member of International Accounting Standards Committee (IASC), had constituted
Accounting Standard Board (ASB) in the year 1977. ASB identified the areas in which
uniformity in accounting was required. After detailed research and discussions, it
prepared and submitted a draft to the ICAI. After proper examination, ICAI finalized
them and notified for its use in financial statements

Meaning of Accounting Standards

Accounting 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 for other disclosures affecting the different users of
accounting information.

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

How many accounting standards are there?

Financial accounting, as opposed to managerial accounting, strictly follows GAAP.
Managerial accounting follows many standards and procedures in many fields of
business, such as economics, financial management, accounting, and others,
depending on the need of the management.

International Financial Reporting Standards or IFRS are published by the International

Accounting Standards Board, an independent standard-setting organization based in
London. IFRS have been adopted by many countries, in a vision to establish a common
set of accounting standards around the world.
The International Accounting Standards Board (IASB) is formerly known as the
International Accounting Standards Council (IASC) which has developed International
Accounting Standards (IAS) during its existence. The IASB has adopted many of the
IAS and retained their names. New standards are published as IFRS.

IAS has published a compendium of accounting standards as on 1 July 2019, which

includes various relevant Announcements of IAS on the subject.

List of ICAI’s Mandatory Accounting Standards

List of Mandatory Accounting Standards of (as on 1 July 2017 and onwards), is as
under:

AS 1 Disclosure of Accounting Policies:

This Standard deals with the disclosure of significant accounting policies which are
followed in preparing and presenting financial statements.

AS 2 Valuation of Inventories:

This Standard deals with the determination of value at which inventories are carried in
the financial statements, including the ascertainment of cost of inventories and any
write-down thereof to net realisable value.

AS 3 Cash Flow Statements:

This Standard deals with the provision of information about the historical changes in
cash and cash equivalents of an enterprise by means of a Cash Flow Statement which
classifies cash flows during the period from operating, investing and financing activities.

AS 4 Contingencies and Events Occurring After Balance Sheet Date:

This Standard deals with the treatment of 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:
This Standard should be applied by an enterprise in presenting profit or loss from
ordinary activities, extraordinary items and prior period items in the Statement of Profit
and Loss, in accounting for changes in accounting estimates, and in disclosure of
changes in accounting policies.

AS 7 Construction Contracts:
This Standard prescribes the accounting for construction contracts in the financial
statements of contractors.

AS 9 Revenue Recognition:
This Standard deals with the bases for recognition of revenue in the Statement of Profit
and Loss of an enterprise. The Standard is concerned with the recognition of revenue
arising in the course of the ordinary activities of the enterprise from: a) Sale of goods; b)
Rendering of services; and c) Interest, royalties and dividends.

AS 10 Property, Plant and Equipment:

The objective of this Standard is to prescribe the accounting treatment for property,
plant and equipment (PPE).

AS 11 The Effects of Changes in Foreign Exchange Rates:

AS 11 lays down principles of accounting for foreign currency transactions and foreign
operations, i.e., which exchange rate to use and how to recognise in the financial
statements the financial effect of changes in exchange rates.

AS 12 Government Grants:
This Standard deals with accounting for government grants. Government grants are
sometimes called by other names such as subsidies, cash incentives, duty drawbacks,
etc.

AS 13 Accounting for Investments:

This Standard deals with accounting for investments in the financial statements of
enterprises and related disclosure requirements.
AS 14 Accounting for Amalgamations:
This Standard deals with accounting for amalgamations and the treatment of any
resultant goodwill or reserves.

AS 15 Employee Benefits:
The objective of this Standard is to prescribe the accounting treatment and disclosure
for employee benefits in the books of employer except employee share-based
payments. It does not deal with accounting and reporting by employee benefit plans.

AS 16 Borrowing Costs:
This Standard should be applied in accounting for borrowing costs. This Standard does
not deal with the actual or imputed cost of owners’ equity, including preference share
capital not classified as a liability.

AS 17 Segment Reporting:
The objective of this Standard is to establish principles for reporting financial
information, about the different types of segments/ products and services an enterprise
produces and the different geographical areas in which it operates.

AS 18 Related Party Disclosures:

This Standard should be applied in reporting related party relationships and
transactions between a reporting enterprise and its related parties. The requirements of
this Standard apply to the financial statements of each reporting enterprise and also to
consolidated financial statements presented by a holding company.

AS 19 Leases:
The objective of this Standard is to prescribe, for lessees and lessors, the appropriate
accounting policies and disclosures in relation to finance leases and operating leases.

AS 20 Earnings Per Share:

AS 20 prescribes 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.
 AS 21 Consolidated Financial Statements:
The objective of this Standard is to lay down principles and procedures for preparation
and presentation of consolidated financial statements. These statements are intended
to present financial information about a parent and its subsidiary(ies) as a single
economic entity to show the economic resources controlled by the group, obligations of
the group and results the group achieves with its resources.

AS 22 Accounting for Taxes on Income:

The objective of this Standard is to prescribe accounting treatment of taxes on income
since the taxable income may be significantly different from the accounting income due
to many reasons, posing problems in matching of taxes against revenue for a period.

AS 23 Accounting for Investments in Associates:

This Standard should be applied in accounting for investments in associates in the
preparation and presentation of consolidated Financial Statements (CFS) by an
investor.

AS 24 Discontinuing Operations:
The objective of AS 24 is to establish principles for reporting information about
discontinuing operations, thereby enhancing the ability of users of financial statements
to make projections of an enterprise’s cash flows, earnings generating capacity, and
financial position by segregating information about discontinuing operations from
information about continuing operations. AS 24 applies to all discontinuing operations of
an enterprise.

AS 25 Interim Financial Reporting:

This Standard applies if an entity is required or elects to publish an interim financial
report. The objective of AS 25 is to prescribe the minimum content of an interim
financial report and to prescribe the principles for recognition and measurement in
complete or condensed financial statements for an interim period.

AS 26 Intangible Assets:
AS 26 prescribes the accounting treatment for intangible assets (i.e. identifiable non-
monetary asset, without physical substance, held for use in the production or supply of
goods or services, for rental to others, or for administrative purposes).
 AS 27 Financial Reporting of Interests in Joint Ventures:
The objective of AS 27 is to set out principles and procedures for accounting for
interests in joint ventures and reporting of joint venture assets, liabilities, income and
expenses in the financial statements of venturers and investors.

AS 28 Impairment of Assets:
The objective of AS 28 is to prescribe the procedures that an enterprise applies to
ensure that its assets are carried at no more than their recoverable amount. The asset
is described as impaired if its carrying amount exceeds the amount to be recovered
through use or sale of the asset and AS 28 requires the enterprise to recognise an
impairment loss in such cases. It should be noted that AS 28 deals with impairment of
all assets unless specifically excluded from the scope of the Standard.

AS 29 Provisions, Contingent Liabilities and Contingent Assets:

The objective of AS 29 is to ensure that appropriate recognition criteria and
measurement bases are applied to provisions and contingent liabilities and that
sufficient information is disclosed in the notes to the financial statements to enable
users to understand their nature, timing and amount. The objective of this Standard is
also to lay down appropriate accounting for contingent assets.
 Objectives

THE PRIMARY OBJECTIVE OF ACCOUNTING STANDARDS ARE:

 To provide a standard for the diverse accounting policies and principles.

 To put an end to the non-comparability of financial statements.
 To increase the reliability of the financial statements.
 To provide standards which are transparent for users.
 To define the standards which are comparable over all periods presented.
 To provide a suitable starting point for accounting.
 It contains high quality information to generate the financial reports. This can be
done at a cost that does not exceed the benefits.
 For the eradication the huge amount of variation in the treatment of accounting
standards.
 To facilitate ease of both inter-firm and intra-firm comparison.

The primary objective of accounting standards is to harmonize the different accounting

policies. The policies are used in the preparation of financial reports. These reports
could be prepared by different enterprises. This would bring about a certain degree of
confusion at the time of comparison.

This is where the accounting standards come in. The objective of accounting standards
is to bring a standard to the policies. This will facilitate easy comparison with respect to
inter-firm and intra-firm reporting.
 Standards in Accounting

There are four major types of standards in accounting given below :-

1. Ideal, Perfect, Maximum Efficiency or Theoretic Standards:

Ideal standards (costs) are the standards which can be
attained under the most favorable conditions possible. The level of performance under

ideal standards would be achieved through the best possible combination of factors —

the most favorable prices for materials and labor, highest output with best equipment

and layout, and maximum efficiency in the utilization of the production resources—in

other words, maximum output at minimum cost. Such standards reflect only goals or

targets without any hope of performance being currently achieved.

These standards are extremely tight and do not provide for waste and inefficiency in any

form; no material is wasted; no units are spoiled; there are no idle hours; operators work

at predetermined speeds; the available capacity is fully utilised. The ideal standard

represents the ultimate goal to strive for, but its attainment is impossible over sustained

periods. It sets its sights on the stars.

2. Normal Standards:
Normal standards are the average standards which (it is

anticipated) can be attained during a future period of time, preferably long enough to

cover one business cycle. Standards are set on a normal capacity basis which

represent a volume that averages out the company’s peak and slack periods. Constant
unit costs are employed throughout the cycle, regardless of changes in current costs or

selling prices.

These standards are not revised until the cycle has run its full course. This generally

results in an incorrect valuation of inventories and consequent errors in the profit

disclosed as the inventories are understated in periods of high prices, and overstated

when prices are low. Since these standards do not reflect the goals to be attained, they

are not often used.

3. Basic Standards:
The Chartered Institute of Management Accountants (UK) defines

a basic standard as the standard which is established for use unaltered for an indefinite

period which may be a long period of time. Basic standards are seldom revised or

updated to reflect current operating costs and price level changes.

Basic standards representing a fixed base are used primarily to measure trends in

operating performance. Although useful, basic standards must be adjusted before they

can be used for performance evaluation purposes. They can be based upon any

capacity level that is selected initially to develop the standards.

4. Currently Attainable or Expected Actual Standards:

Current standards are standards which are established for use

over a short period of time, and are related to current conditions. They represent current

costs to be expected from efficient operations. These standards do not anticipate ideal

performance; they are difficult, but possible to achieve.

Currently attainable standards are formulated after making allowance for the cost of
normal spoilage, cost of idle time due to machine breakdowns, and the cost of other
events which are unavoidable in normal efficient operations. They take the place of

actual cost and are recorded in account books and financial statements. Any deviation

from these standards reflect inefficiencies in the production activities, unless the

variances have occurred due to uncontrollable factors.

Currently attainable standards are revised to reflect changes in methods and prices.

Much effort and costs are involved in developing these standards. Based on

engineering estimates, currently attainable standards are most expensive of the four

types of standards. But these standards are most accurate and very useful to

management in product costing, inventory valuations, estimates, analyses, performance

evaluation, planning, employee motivation, and for managerial decision-making and

external financial reporting.