Tag: Bangalore University NEP 2021 Syllabus Notes

Customers

When a customer is considering which supplier to select for a major contract, it wants to review their financial statements first, in order to judge the financial ability of a supplier to remain in business long enough to provide the goods or services mandated in the contract.

Company Management

The management team needs to understand the profitability, liquidity, and cash flows of the organization every month, so that it can make operational and financing decisions about the business.

Competitors

Entities competing against a business will attempt to gain access to its financial statements, in order to evaluate its financial condition. The knowledge they gain could alter their competitive strategies.

Governments

A government in whose jurisdiction a company is located will request financial statements in order to determine whether the business paid the appropriate amount of taxes.

Investment Analysts

Outside analysts want to see financial statements in order to decide whether they should recommend the company’s securities to their clients.

Investors

Investors will likely require financial statements to be provided, since they are the owners of the business and want to understand the performance of their investment.

Debenture Holders

The debenture holders are interested in the short-term as well as the long-term solvency position of the company. They have to get their interest payments periodically and at the end the return of the principal amount.

Rating Agencies

A credit rating agency will need to review the financial statements in order to give a credit rating to the company as a whole or to its securities.

Employees

A company may elect to provide its financial statements to employees, along with a detailed explanation of what the documents contain. This can be used to increase the level of employee involvement in and understanding of the business.

Suppliers

Suppliers will require financial statements in order to decide whether it is safe to extend credit to a company.

Prospective Investors

Prospective Investors are interested in the future prospects and financial strength of the company.

Unions

A union needs the financial statements in order to evaluate the ability of a business to pay compensation and benefits to the union members that it represents.

Shareholders

Divorce between ownership and management and broad-based ownership of capital due to dispersal of shareholdings have made shareholders take more interest in the financial statements with a view to ascertaining the profitability and financial strength of the company.

Phase I

Mandatory applicability of IND AS to all companies from 1st April 2016, provided: 

• It is a listed or unlisted company
• Its Net worth is greater than or equal to Rs. 500 crore*

*Net worth shall be checked for the previous three Financial Years (2013-14, 2014-15, and 2015-16). 

Phase II

Mandatory applicability of IND AS to all companies from 1st April 2017, provided:

• It is a listed company or is in the process of being listed (as on 31.03.2016)
• Its Net worth is greater than or equal to Rs. 250 crore but less than Rs. 500 crore (for any of the below mentioned periods).

Net worth shall be checked for the previous four Financial Years (2014-14, 2014-15, 2015-16, and 2016-17)

Phase III

Mandatory applicability of IND AS to all Banks, NBFCs, and Insurance companies from 1st April 2018, whose:

• Net worth is more than or equal to INR 500 crore with effect from 1st April 2018.

IRDA (Insurance Regulatory and Development Authority) of India shall notify the separate set of IND AS for Banks & Insurance Companies with effect from 1st April 2018. NBFCs include core investment companies, stock brokers, venture capitalists, etc. Net Worth shall be checked for the past 3 financial years (2015-16, 2016-17, and 2017-18)

Phase IV

All NBFCs whose Net worth is more than or equal to INR 250 crore but less than INR 500 crore shall have IND AS mandatorily applicable to them with effect from 1st April 2019.

Ind AS Compliances

1) Once the Ind AS becomes applicable, whether due to voluntary adoption or otherwise, the companies shall adhere to the compliances of Ind AS applicable to them. The financial statements under the Companies Act, 2013 are governed by Schedule III. There are 3 divisions in Schedule III:

• Division-I: Applicable to companies to whom accounting standards are applicable.
• Division-II: Applicable to companies to whom Ind AS compliance are applicable
• Division-III: Applicable to Non-Banking Financial Companies to whom Ind AS are applicable.

2) All the companies (excluding banks, NBFCs and insurance companies) preparing financial statements as per Ind AS shall do so in accordance with the Division-II of Schedule-III (also known as the Ind AS Schedule-III) as well as the Guidance Note on Division-II of Schedule-III of the Companies Act, 2013 (also known as Ind AS Guidance Note). In the case of NBFCs, Division-III shall become applicable.

However, companies referred to in Section 129(1) of the Companies Act, 2013 are not required to comply with the requirements of Ind AS Schedule III. This includes an insurance company, banking company, or company engaged in the generation or supply of electricity for which the form for presentation of financial statements has been specified under any other act that governs such class of companies.

However, in the case of companies engaged in the generation and supply of electricity, the Electricity Act, 2003 has not specified any format for the presentation of Financial Statements. Therefore, Ind AS Schedule-III can be followed by such companies till any other format is being prescribed by the relevant act.

3) The listed companies shall follow the guidelines issued by way of a circular by SEBI that prescribes the format for publishing quarterly, half-yearly, and annual financial results that are guided by the provisions of Ind AS and Ind AS Schedule-III. The companies may make suitable modifications.

4) The components of financial statements prepared in accordance with Ind AS compliance include:

• Balance Sheet
• Statement of Profit & Loss
• Statement of Cash Flows
• Statement of Changes in Equity
• Notes

Benefits of Accounting Standards

Accounting Standards are the ruling authority in the world of accounting. It makes sure that the information provided to potential investors is not misleading in any way. Let us take a look at the benefits of AS.

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.

As described above, there is a set format of the financial statement no one can manipulate or commit fraud in the whole accounting process. Therefore, the accounting standard has already reduced the chances of manipulation and fraud and made the accounting system more effective and reliable.

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 standards. 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.

Disadvantages of Accounting Standards

Compromise the standard: Sometimes, the accounting standard is compromised due to lobbying or government pressure. This is because the government or powerful authority wants to give advantages only to the big powerful companies. Therefore, standards are compromised and cannot be relied on.

Rigid or inflexible: The policies are already made and have to be followed by the entity at any cost; thus, making the financial statement is rigid no one can change it according to their convenience. The format is already set, which has to be followed. Thus, it lacks flexibility.

Cost is high for maintenance: The cost is high for maintaining the books of account according to the format set by the accounting standard. The detailed paperwork and the use of standard equipment also increase the cost of maintaining books of accounts.

Time-consuming process: The whole process of following accounting standards takes time as every note and schedule according to the format must be produced by the user and has to go through a lengthy, time-consuming process.

Scope is restricted: Accounting standard has to be framed according to the rules set presently in the nation. They cannot override the statute. Thus, the scope for providing policies gets restricted.

Difficulty in choosing the alternative: There are many methods to record the transaction in the books of account; thus, it becomes difficult to choose which method to adopt and what not to. And also, sometimes, due to restrictions on the method of choice, the entity has to forgo its best convenient method and adopt the secondary method of recording transactions.

The convergence of accounting standards refers to the goal of establishing a single set of accounting standards that will be used internationally. Convergence in some form has been taking place for several decades, and efforts today include projects that aim to reduce the differences between accounting standards.

Convergence is driven by several factors, including the belief that having a single set of accounting requirements would increase the comparability of different entities’ accounting numbers, which will contribute to the flow of international investment and benefit a variety of stakeholders. Criticisms of convergence include its cost and pace, and the idea that the link between convergence and comparability may not be strong.

Need for Convergence

• To make the financial statements reliable, comparable & transparent.
• To ensure a general understanding of best accounting practices.
• To standardize financial accounting & reporting across the globe.
• To eliminate information barriers for users of financial statements.
• To promote foreign Investment & spur Industrial growth.

Benefits of Convergence

Beneficial to Investors

Convergence is a boon for investors who wish to invest in foreign markets or economies. It makes it much easier for them to study and compare the financial statements of foreign companies. Since the financial statements are made using the same set of standards it is also easier for the investors to understand and analyze them.

Beneficial to the Economy

If the accounting standards are converged it will promote international business and increase the influx of capital into the country. This will help India’s economy grow and expand. International investing will also mean more capital for domestic companies as well.

Beneficial to the Industry

With globally accepted standards the industry can also surge ahead. So convergence is important for the industry as well. It will allow the industry to lower the cost of foreign capital. If companies are not burned by adopting two different sets of standards it will allow them easier entry into the market.

Cost Saving

Firstly it will exempt companies from maintaining separate accounting books according to separate standards. This will save a lot of work hours and money for the finance department. And also planning and executing auditing will also become easier.

It will be especially helpful for those companies that have subsidiaries in many countries. And the cost of capital will also reduce since capital would be more accessible and easily available.

More Transparency

Convergence will benefit the users of the financial statements as well. It will make it easier for them to understand the financial statements. And this will generate better transparency and raise the confidence of the investors to invest funds.

Challenges

Changes in Indian regulation: Current regulations governing the financial regulation would need a complete overhaul to implement the IFRS standards. The Companies Act 1956, SEBI act 1992, IT Act 1962 etc. will have to be amended to bring them in line with IFRS regulations. These legal hurdles is a major constraint in the path of IFRS convergence.

Training & Awareness: Many do not know the IFRS standards & lack of knowledge & awareness makes it a difficult task of implementation. Finance professionals will have to be adequately trained and then the standards can be implemented consistently and uniformly in right spirit.

Fair Value system of measurement: The IFRS considers the fair value system of asset measurement and the Indian GAAP recognizes historical system. This divergence of system would create volatility and subjectivity in financial statements. This would lead to different results for performance & earnings of the Company.

Small & Medium businesses: The SME sector in India is comparatively larger than other Countries. The cost of convergence far outweigh the advantages of convergence for these small businesses. The dearth of resource and skills in financial knowledge adds up to the problem of implementation in this sector. In addition, SME’s cannot be ignored, considering the role they play in the Indian economy.

IT systems: Financial accounting software and tools used for reporting would have to be completely changed resulting in substantial investment in IT infrastructure for Indian Companies. Indian companies are habitually reluctant when any proposal involves cost, time & effort.