Accounting Standards

AS- 1 Disclosure of Accounting Policies

AS- 2 Accounting for Inventories
AS- 3 Cash Flow Statement
AS- 4 Contingencies and events after the date of Balance Sheet
AS- 5 Net profit/loss for the period, prior period items and change in accounting policies
AS- 6 Accounting for Depreciation
AS- 7 Construction Contracts
AS- 8 Accounting for Research & Development
AS- 9 Revenue Recognition
AS- 10 Accounting for Fixed Assets
AS- 11 Effects of change in Foreign Exchange
AS- 12 Accounting for Government Grants
AS- 13 Accounting for Investments
AS- 14 Accounting for Amalgamation
AS- 15 Employee Benefits
AS- 16 Borrowing Costs
AS- 17 Segmental Reporting
AS- 18 Related Party Disclosures
AS- 19 Accounting for Leases
AS- 20 EPS
AS- 21 CBS
AS- 22 Accounting for Taxes & Income
AS- 23 Accounting for Investments in Associates in Consolidated Financial Statements
AS- 24 Discontinued Operations
AS- 25 Interim Financial Reporting
AS- 26 Intangible Assets
AS- 27 Financial Reporting of Interest in Joint Ventures
AS- 28 Impairment of Assets
AS- 29 Provisions, Contingent Liabilities & Assets
AS- 30 Financial Instruments

Small and Medium Sized Companies

 Whose equity or debt securities are not listed ao are not in the process of listing on any
stock exchange, whether in India or outside India.
 Which is not a bank, financial institution or an insurance company.
 Whose turnover (excluding other income) does not exceed Rs 250 Crores in the
immediately preceding accounting year.
 Which does not have borrowings (including public deposits) in excess of Rs 50 Crores at
any time during the preceding financial year.
 Which is not a holding or subsidiary company of a company which is not a SMC.
 Applicabilty
of Accounting
Standards

Non-
Company
Company

SMC Non-SMC Level I Level II Lveel III Level IV

Level I – Large Size Entities

 Non-Corporate Entities whose securities are listed on any stock exchange in India or
outside India.
 Non-Corporate Entities whose securities are in the process of listing on any stock
exchange in India or outside India.
 Banks including co-operative banks
 Financial institutions
 Insurance business entities
 An entity engaged in commercial, industrial, or business activities-
If turnover exceeds Rs 250 Crores in the immediately preceding accounting year. (Other
income will not be included)
If borrowing exceeds Rs 50 Crores in the immediately preceding accounting year.
(Public deposits will be included)
 Holding and subsidiary entities of any one of the above.

Level II – Medium-Size Entities

 An entity that does not qualify as a Level I entity.

 An entity engaged in commercial, industrial, or business activities-
If turnover ranges between  Rs 50 – Rs 250 Crores in the immediately preceding
accounting year. (Other income will not be included)
If borrowing ranges between Rs 10 – Rs 50 Crores in the immediately preceding
accounting year. (Public deposits will be included)
 Holding and subsidiary entities of any one of the above.

Level III – Small Size Entities

  An entity that does not qualify as a Level I or Level II entity.
 An entity engaged in commercial, industrial, or business activities-
If turnover ranges between Rs 10 – Rs 50 Crores in the immediately preceding
accounting year. (Other income will not be included)
If borrowing ranges between Rs 2 – Rs 10 Crores in the immediately preceding
accounting year. (Public deposits will be included)
 Holding and subsidiary entities of any one of the above.

Level IV – Micro Size Entities

 An entity that does not qualify as a Level I or Level II or Level III entity.

Accounting Standards Corporates (Other than following Indian Accounting Standards) Non – Corporates Entities (including Level I, Level II & Level III entities )
AS 1 – Disclosure of Accounting Policies Yes Yes
AS 2 – Valuation of Inventories (Revised) Yes Yes
AS 3 – Cash Flow Statements Yes, See Note 1 Yes, except Level II & Level III entities
AS 4 – Contingencies and Events Occurring After the Balance Sheet Date (Revised) Yes Yes
AS 5 – Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies Yes Yes
AS 6- Depreciation (Withdrawn w.e.f. F.Y. 2016-17) – –
AS 7- Construction Contracts Yes Yes
AS 9 – Revenue Recognition Yes Yes
AS 10 – Property, Plant and Equipment (PPE) (Revised) Yes Yes
AS 11 – The Effects of Changes in Foreign Exchange Rates Yes Yes
AS 12 – Accounting for Government Grants Yes Yes
AS 13 – Accounting for Investments (Revised) Yes Yes
AS 14 – Accounting for Amalgamations (Revised) Yes Yes
AS 15 – Employee Benefits Yes Yes
AS 16 – Borrowing Costs Yes Yes
AS 17 – Segment Reporting Yes Yes, except Level II & Level III entities
AS 18 – Related Party Disclosures Yes Yes, except Level III entities
AS 19 – Leases Yes Yes
AS 20 – Earnings Per Share Yes Yes
AS 21 – Consolidated Financial Statements (Revised) Yes See Note 2
AS 22 – Accounting for Taxes on Income Yes Yes
AS 23 – Accounting for Investments in Associates in Consolidated Financial Statements Yes See Note 2
AS 24 – Discontinuing Operations Yes Yes, except Level III entities
AS 25 – Interim Financial Reporting Yes Yes
AS 26 – Intangible Assets Yes Yes
AS 27 – Financial Reporting of Interest in Joint Ventures Yes See Note 2
AS 28 – Impairment of Assets Yes Yes
AS 29 – Provisions, Contingent Liabilities and Contingent Assets (Revised) Yes Yes

NACAS and its role under Companies Act 2013

National Advisory Committee on Accounting Standard-
 To advise the Central Government on the formulation and lying down of accounting
policies and accounting standards for adoption by companies or class of companies under
this Act but at the same time NACAS did not have any regulatory powers to regulate the
above issues.
 The role of NACAS was only restricted to the advisory.
Composition of NACAS under Companies Act 1956

NACAS became NFRA

The concept of having a body such as National Financial Reporting Authority is a modified
concept the bare of which was extracted from Companies Act 2013.
In Companies Act 2013, the new authority is set up named National Financial Reporting
Authority.
It is an advisory body which will also function as the regulatory authority for the accounting
policies for same purposes for which NACAS was set up under Companies act 1956.

Objectives of NFRA
 The first objective is similar to the objective of NACAS i.e., advice the Central
Government on the formulation and laying down of accounting and auditing policies and
standards for adoption by companies or class of companies or their auditors.

 The second objective is of regulatory nature which aims at monitoring and enforcing the
compliance with accounting standards and auditing standards along with the quality of
service provided by professionals, ensuring compliance with standards, and suggest
measures required for improvement in quality of service of the professionals.
Constitution of NFRA

Other Regulatory Powers given to NFRA which was not there with NACAS
 NFRA has the power to investigate, either suo moto or on a reference made to it by the
Central Government, for bodies corporate or persons, into the matters of professional or
other misconduct committed by any member or firm of chartered accountants.

 NFRA has the same powers as are vested in a civil court under the Code of Civil
Procedure, 1908, while trying a suit discovery and production of books of account and
other documents Power to Summon the attendance of persons and examining them on
oath Power of inspection of any books, registers and other documents of any person.

1. discovery and production of books of account and other documents.

2. Power to Summon the attendance of persons and examining them on oath.
3. Power of inspection of any books, registers and other documents of any person.

 Power to impose penalty if misconduct proved.

 NFRA has also the power of debarring the member or the firm from engaging himself or
itself from practice as member of the Institute of Chartered Accountant of India for a
minimum period of six months or for such higher period not exceeding ten years.

Provisions
 There is also a provision for appellate authority where aggrieved person can appeal
against the order of NFRA. The head office of NFRA shall be at New Delhi and it may,
meet at such other places in India, as it deems fit. Its accounts shall be audited by
 Comptroller and Auditor General of India (CAG) and such accounts as certified by CAG,
together with audit report, shall be forwarded annually to the Central Government.

 The intention of the legislatures to bring NFRA to weed out the shortcomings of the
NACAS is laudable yet it may be construed to undermine the powers and authority of the
Institute of Chartered Accountants of India with respect to the matter of professional
misconduct and other allied matters.

Accounting Standard – 1 (Disclosure of Accounting Policies)

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

 The view presented in the financial statements of an enterprise of its state of affairs and
of the profit or loss can be significantly affected by the accounting policies followed in
the preparation and presentation of the financial statements. The accounting policies
followed vary from enterprise to enterprise. Disclosure of significant accounting policies
followed is necessary if the view presented is to be properly appreciated.

 The disclosure of some of the accounting policies followed in the preparation and
presentation of the financial statements is required by law in some cases.

 The Institute of Chartered Accountants of India has, in Standard issued by it,

recommended the disclosure of certain accounting policies, e.g., translation policies in
respect of foreign currency items.

 In recent years, a few enterprises in India have adopted the practice of including in their
annual reports to shareholders a separate statement of accounting policies followed in
preparing and presenting the financial statements.

 In general, however, accounting policies are not at present regularly and fully disclosed
in all financial statements. Many enterprises include in the Notes on the Accounts,
descriptions of some of the significant accounting policies. But the nature and degree of
disclosure vary considerably between the corporate and the non-corporate sectors and
between units in the same sector.

 Even among the few enterprises that presently include in their annual reports a separate
statement of accounting policies, considerable variation exists. The statement of
accounting policies forms part of accounts in some cases while in others it is given as
supplementary information.
  The purpose of this Standard is to promote better understanding of financial statements
by establishing through an accounting standard the disclosure of significant accounting
policies and the manner in which accounting policies are disclosed in the financial
statements. Such disclosure would also facilitate a more meaningful comparison.

Fundamental Accounting Assumptions

 Certain fundamental accounting assumptions underlie the preparation and presentation of
financial statements. They are usually not specifically stated because their acceptance and
use are assumed. Disclosure is necessary if they are not followed.

 The following have been generally accepted as fundamental accounting assumptions-

a. Going Concern
The enterprise is normally viewed as a going concern, that is, as continuing in
operation for the foreseeable future. It is assumed that the enterprise has neither
the intention nor the necessity of liquidation or of curtailing materially the scale
of the operations.

b. Consistency
It is assumed that accounting policies are consistent from one period to another.

c. Accrual
Revenues and costs are accrued, that is, recognized as they are earned or incurred
(and not as money is received or paid) and recorded in the financial statements of
the periods to which they relate. (The considerations affecting the process of
matching costs with revenues under the accrual assumption are not dealt with in
this Standard).

Nature of Accounting Policies

 The accounting policies refer to the specific accounting principles and the methods of
applying those principles adopted by the enterprise in the preparation and presentation of
financial statements.

 There is no single list of accounting policies which are applicable to all circumstances.
The differing circumstances in which enterprises operate in a situation of diverse and
complex economic activity make alternative accounting principles and methods of
applying those principles acceptable. The choice of the appropriate accounting principles
and the methods of applying those principles in the specific circumstances of each
enterprise calls for considerable judgement by the management of the enterprise.
  The various Standards of the Institute of Chartered Accountants of India combined with
the efforts of government and other regulatory agencies and progressive managements
have reduced in recent years the number of acceptable alternatives particularly in the case
of corporate enterprises. While continuing efforts in this regard in future are likely to
reduce the number still further, the availability of alternative accounting principles and
methods of applying those principles is not likely to be eliminated altogether in view of
the differing circumstances faced by the enterprises.

Areas where different Accounting Policies are used

 The following are examples of the areas in which different accounting policies may be
adopted by different enterprises.

a. Methods of depreciation, depletion and amortization

b. Treatment of expenditure during construction
c. Conversion or translation of foreign currency items
d. Valuation of inventories
e. Treatment of goodwill
f. Valuation of investments
g. Treatment of retirement benefits
h. Recognition of profit on long-term contracts
i. Valuation of fixed assets
j. Treatment of contingent liabilities.

Consideration in Selection of Accounting Policies

 The primary consideration in the selection of accounting policies by an enterprise is that
the financial statements prepared and presented on the basis of such accounting policies
should represent a true and fair view of the state of affairs of the enterprise as at the
balance sheet date and of the profit or loss for the period ended on that date.

 For this purpose, the major considerations governing the selection and application of
accounting policies are-

a. Prudence
In view of the uncertainty attached to future events, profits are not anticipated but
recognized only when realized though not necessarily in cash. Provision is made
for all known liabilities and losses even though the amount cannot be determined
with certainty and represents only a best estimate in the light of available
information.

b. Substance over Form

 The accounting treatment and presentation in financial statements of transactions
and events should be governed by their substance and not merely by the legal
form.

c. Materiality
Financial statements should disclose all “material” items, i.e., items the
knowledge of which might influence the decisions of the user of the financial
statements.

Disclosure of Accounting Policies

 To ensure proper understanding of financial statements, it is necessary that all significant
accounting policies adopted in the preparation and presentation of financial statements
should be disclosed.

 Such disclosure should form part of the financial statements.

 It would be helpful to the reader of financial statements if they are all disclosed as such in
one place instead of being scattered over several statements, schedules and notes.

 Examples of matters in respect of which disclosure of accounting policies adopted will be

required are contained in paragraph. This list of examples is not, however, intended to be
exhaustive.

 Any change in an accounting policy which has a material effect should be disclosed. The
amount by which any item in the financial statements is affected by such change should
also be disclosed to the extent ascertainable. Where such amount is not ascertainable,
wholly or in part, the fact should be indicated. If a change is made in the accounting
policies which has no material effect on the financial statements for the current period but
which is reasonably expected to have a material effect in later periods, the fact of such
change should be appropriately disclosed in the period in which the change is adopted.

 Disclosure of accounting policies or of changes therein cannot remedy a wrong or

inappropriate treatment of the item in the accounts.

Case 1
On 31.3.2012, the closing stock of Gaurav Ltd. includes 10,000 units costing @₹10 i.e.,
₹1,00,000. But the current market price as on that date was @ ₹9 i.e., ₹90,000.
Solution
As per the given situation, Gaurav Ltd. could record the closing stock at Rs 90,000 in their
financial statements. The principles of AS- 2 states that the stock to be valued at a price which is
lower of the available market price and the cost to the company. Since on the same date the
current market price per unit of stock is Rs 9 lower than their current cost of production per unit,
the value of Rs 90,000 to be recorded in the books. The above principle needs to be adequately
disclosed as per disclosure requirement.