Accounting Standards Meaning and Scope, Importance, Objectives

In order to ensure transparency consistency, comparability, adequacy and reliability of financial reporting, it is essential to standardize the accounting principles and policies, Accounting Standards provide framework and standard accounting polices so that the financial statements of different enterprises become comparable.

Accounting Standards are selected set of accounting policies or broad guidelines regarding the principles and methods to be chosen out of several alternatives. The Accounting Standards Board (ASB) of the Institute of Chartered Accountants of India (ICAI) formulas Accounting Standards to be established by the Council of the ICAI.

Objective of Accounting Standards:

Objective of Accounting Standards is to standarize the diverse accounting policies and practices with a view to eliminate to the extent possible the non-comparability of financial statements and the reliability to the financial statements.

The institute of Chartered Accountants of India, recognizing the need to harmonize the diverse accounting policies and practices, constituted at Accounting Standard Board (ASB) on 21st April, 1977.

IFRS:

IFRS is a set of international accounting standards stating how particular types of transactions and other events should be reported in financial statements.

IFRS are generally principles-based standards and seek to avoid a rule-book mentality. Application of IFRS requires exercise of judgment by the preparer and the auditor in applying principles of accounting on the basis of the economic substance of transactions.

IFRS are issued by the International Accounting Standards Board (IASB).

The term IFRS comprises IFRS issued by IASB; IAS issued by IASC; and Interpretations issued by the Standing Interpretations Committee (SIC) and the International Financial Reporting Interpretations Committee (IFRIC) of the IASB.

“FOR THE EFFECTIVE STUDY OF ACCOUNTING STANDARDS AND IFRS THERE IS A STRONG NEED TO STUDY THE LINKAGE BETWEEN THESE TWO TERMS THAT MEANS CONVERGENCE.”

The convergence of accounting standards refers to the goal of establishing a single set of accounting standards that will be used internationally, and in particular the effort to reduce the differences between the US generally accepted accounting principles (USGAAP) and the International financial reporting standards (IFRS)

Convergence of Indian accounting standards with International financial reporting standards (IFRS):

Convergence means to achieve harmony with IFRSs; in precise terms convergence can be considered “to design and maintain national accounting standards in a way that financial statements prepared in accordance with national accounting standards draw unreserved statement of compliance with IFRSs”, i.e., when the national accounting standards will comply with all the requirements of IFRS.

But convergence doesn’t mean that IFRS should be adopted word by word, e.g., replacing the term ‘true & fair’ for ‘present fairly’, in IAS 1, ‘Presentation of Financial Statements’. Such changes do not lead to non-convergence with IFRS.

The reason behind convergence is:

As, Availability of essential financial information about a company to its shareholders and other stakeholders in accordance with internationally accepted financial norms is considered as an integral and important part of good corporate governance. To ensure this and to implement the G-20 commitment to achieve a single set of high quality global accounting standards, the Government has taken decision to achieve convergence of Indian accounting standards with International financial reporting standards (IFRS) in a phased manner in accordance with the roadmap suggested by the Government.

Convergence in Indian Scenario:

With regard to India, the Ministry of Corporate Affairs (MCA) has committed to converge the Indian Accounting Standards with the IFRS effective 1st April 2011. The convergence process is picking up momentum with the credit going to the Ministry of Corporate Affairs. The Ministry has extended its unstinted support and guidance to the various regulatory and legal bodies that are spearheading a smooth transition process. Laudably, the highest authorities of the Indian Government have concluded that convergence of Indian Accounting Standards with IFRS is very vital for the country to take a lead role in the global foray.

Entities covered under convergence

Keeping in view the complex nature of IFRSs and the extent of differences between the existing ASs and the corresponding IFRSs and the reasons therefore, the ICAI is of the view that IFRSs should be adopted for the public interest entities from the accounting periods beginning on or after 1st April, 2011.

Public interest entities:

With a view to determine which entities should be considered as public interest entities for the purpose of application of IFRSs, the criteria for Level I enterprises as laid down by the Institute of Chartered Accountants of India and the definition of ‘small and mediumsized company’ as per Clause 2(f) of the Companies (Accounting Standards) Rules, 2006, as notified by the Ministry of Company Affairs (now Ministry of Corporate Affairs) in the Official Gazette dated December 7, 2006, were considered. The ICAI is of the view that in view of the complexity of recognition and measurement principles and the extent of disclosures required in various IFRSs, and the fact that about four years have elapsed since the ICAI laid down the criteria for Level I enterprises, as far as the size is concerned, it needs a revision. Accordingly, the ICAI is of the view that a public interest entity should be an entity:

(i) Whose equity or debt securities are listed or are in the process of listing on any stock exchange, whether in India or outside India; or

(ii) Which is a bank (including a cooperative bank), financial institution, a mutual fund, or an insurance entity; or

(iii) Whose turnover (excluding other income) exceeds rupees one hundred crore in the immediately preceding accounting year; or

(iv) Which has public deposits and/or borrowings from banks and financial institutions in excess of rupees twenty five crore at any time during the immediately preceding accounting year; or

(v) which is a holding or a subsidiary of an entity which is covered in (i) to (iv) above.

Scope of Accounting Standards:

Efforts 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.

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

The Accounting Standards by their very nature cannot and do not override the local regulations which govern the preparation and presentation of financial statements in our country. However, the Institute will determine the extent of disclosure to be made in financial statements and the related Auditor’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 as adverse comments on the related financial statements.

The Accounting Standards are intended to apply only to items which are material. Any ‘imitations with regard to the applicability of a specific Standard will be made clear by the Institute from time to time.

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

The institute will use its best endeavors to persuade the Government appropriate authorities industrial and business community to adopt these standards in order to achieve uniformity in the presentation of financial statements.

In carrying out the task of formulation of Accounting Standards, the intention is to concentrate on basic matters. The endeavor would be to confine Accounting Standards to essent.als and not to make them so complex that they cannot be applied effectively and on a nationwide basis. In the years to come, it is to be expected that Accounting Standards will undergo revision and a greater degree of sophistication may then be appropriate.

Objectives of Accounting Standards

Accounting standards are a set of principles, rules, and guidelines established by accounting authorities to guide the preparation and presentation of financial statements. These standards serve various objectives, aiming to enhance transparency, comparability, and reliability of financial reporting.

1. Consistency and Comparability:

Objective: Ensure consistency in financial reporting methods and promote comparability of financial statements across different entities and periods.

Rationale: Consistent application of accounting standards facilitates meaningful comparisons of financial information, both within the same entity over time and between different entities.

• Transparency:

Objective: Enhance the transparency of financial reporting by providing a clear and accurate representation of an entity’s financial position, performance, and cash flows.

Rationale: Transparency helps users of financial statements, including investors, creditors, and other stakeholders, make informed decisions based on a reliable understanding of an entity’s financial health.

• Reliability and Faithful Representation:

Objective: Promote the reliability of financial information by requiring faithful representation of economic transactions and events in financial statements.

Rationale: Reliable financial statements contribute to the credibility of financial reporting, instilling confidence in users that the information accurately reflects the entity’s financial position and performance.

• Relevance:

Objective: Ensure that financial statements are relevant to the needs of users, providing information that is timely and can influence their economic decisions.

Rationale: Relevant financial information assists users in making predictions about an entity’s future performance and helps them evaluate past decisions.

• Understandability:

Objective: Facilitate the understanding of financial statements by users who may not have an in-depth knowledge of accounting.

Rationale: Financial statements should be presented in a clear and concise manner, making it easier for a diverse range of users to comprehend and interpret the information.

• Accounting Policy Consistency:

Objective: Encourage entities to consistently apply accounting policies to similar transactions and events.

Rationale: Consistency in the application of accounting policies over time ensures that financial statements reflect the entity’s economic activities in a uniform and reliable manner.

• Reliability and Materiality:

Objective: Emphasize the importance of materiality in financial reporting decisions, ensuring that financial statements are free from material misstatements.

Rationale: Materiality helps in focusing on information that is significant to users, allowing them to distinguish between material and immaterial information in financial statements.

• Disclosure of Accounting Policies:

Objective: Require entities to disclose their significant accounting policies, providing transparency about the methods used in preparing financial statements.

Rationale: Disclosure of accounting policies enables users to understand the basis of accounting and the principles applied by the entity, promoting transparency and accountability.

• Enhancement of Credibility and Accountability:

Objective: Enhance the credibility of financial reporting and hold entities accountable for the accuracy and fairness of their financial statements.

Rationale: Accounting standards contribute to the reliability and integrity of financial reporting, fostering trust among stakeholders and promoting accountability.

• Global Comparisons:

Objective: Facilitate global comparisons of financial statements by promoting the convergence of accounting standards.

Rationale: Standardized accounting practices allow for easier comparisons between entities operate.

Procedure for Issuing Accounting Standards:

Broadly, the following procedure will be adopted for formulating Accounting Standards:

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

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

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

On the basis of the work of the Study Groups and the dialogue with the organisation, an exposure draft of the proposed standard will be prepared and issued for comments by members of the Institute and 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.

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 be finalized 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 it found necessary, modify the same in consultation with ASB. The Accounting Standard on the relevant subject will then be issued under the authority of the Council.

Compliance with the Accounting Standards:

While discharging their attest functions, it will be duty of the members of the Institute to ensure that the Accounting Standards are implemented in the presentation of financial statements covered by their audit reports.

In the event of any deviation from the Standards, it will also be their duty to make adequate disclosures 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 give wide publicity among the users and educate members about the utility of Accounting Standards and the need for compliance with the above disclosure requirements. Once an awareness about these requirements Is ensured, steps will be taken, in course of time, to enforce compliance with the accounting standards.

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

Accounting Standards Importance

• Improves Reliability of Financial Statements

There are many stakeholders of a company and they rely on the financial statements for their information. Many of these stakeholders base their decisions on the data provided by these financial statements. Then there are also potential investors who make their investment decisions based on such financial statements.

So, it is essential these statements present a true and fair picture of the financial situation of the company. The Accounting Standards (AS) ensure this. They make sure the statements are reliable and trustworthy.

• Attains Uniformity in Accounting

Accounting Standards provides rules for standard treatment and recording of transactions. They even have a standard format for financial statements. These are steps in achieving uniformity in accounting methods.

• Prevents Frauds and Accounting Manipulations

Accounting Standards (AS) lay down the accounting principles and methodologies that all entities must follow. One outcome of this is that the management of an entity cannot manipulate with financial data. Following these standards is not optional, it is compulsory.

So, these standards make it difficult for the management to misrepresent any financial information. It even makes it harder for them to commit any frauds.

• Comparability

This is another major objective of accounting standard. Since all entities of the country follow the same set of standards their financial accounts become comparable to some extent. The users of the financial statements can analyze and compare the financial performances of various companies before taking any decisions.

Also, two statements of the same company from different years can be compared. This will show the growth curve of the company to the users.

• Assists Auditors

Now the accounting standards lay down all the accounting policies, rules, regulations, etc in a written format. These policies have to be followed. So if an auditor checks that the policies have been correctly followed he can be assured that the financial statements are true and fair.

• Determining Managerial Accountability

The accounting standards help measure the performance of the management of an entity. It can help measure the management’s ability to increase profitability, maintain the solvency of the firm, and other such important financial duties of the management.

Management also must wisely choose their accounting policies. Constant changes in the accounting policies lead to confusion for the user of these financial statements. Also, the principle of consistency and comparability are lost.