DISPOSICIÓN N.º 1349/DGIUR/

The adoption and appreciation of accounting standards ensures uniformity, comparability and qualitative improvement in preparation and presentation of financial statements. So, that they may give true and fair picture. What is the need of adoption of accounting standards in the accounting process? How do the accounting standards help in improving the quality of the financial Statement? The answer of these questions may be explained by an example, suppose a company adopts LIFO method for the valuation of its closing stock and another company adopts FIFO method for the valuation of its closing stock, valuation of the closing stock of both the companies will differ. As a result the profit or loss of both companies will also differ. In order to avoid such situation, AS-2 is made.

Take another example of depreciation, if a company adopts diminishing balancing method for the depreciation and another company adopts the fixed installment method for depreciation, the amount of depreciation of both the companies will differ. As a result profit/loss will also differ and the comparison of these companies will not be possible. For the purpose AS-6 is prepared by ICAI in India. Similarly, AS-1 gives guidelines for the disclosure of accounting policies, so that the users of financial statements may perceive the reported profits in its correct perspective.

Did u know? _{In India, the Accounting Standards are formulated by the Accounting Standard} Board (ASB).

ASB determines the broad area requiring for formulation of AS. At the time of preparation of Accounting Standards, ASB gets help from different groups for this purpose a study group is made. In this group the members of ICAI participates. Then a wide discussion is held. In this discussion, the representatives of Government, Public Sector Units, and other organizations participate. After the discussion an Exposure Draft (ED) for AS is proposed and issued by ICAI. Then it is dispatched to different outside bodies as ICWAI, ICSI, CBDT, SCOPE, etc. This ED comprises the following points:

1. A Statement of concepts and fundamental accounting principles relating to the standard. 2. Definitions of the terms used in the standard.

3. The manner in which the accounting principles have been applied for the formulation of the standard.

Notes 5. Class of enterprises to which the standard will apply.

6. Date from which the standard will be effective.

After the publication of ED, the comments and views are collected from the different corners. Then ASB finalizes the proposed standard and submit it to the council of the Institute of chartered accountant of India for the approval. The council considers the ED and, if found necessary, modifies with the consolation of the Accounting Standard Board. Then final shape of the standard is issued under the authority of the council. In the beginning, this is recommendatory and after some period it becomes mandatory. The board has issued the following standards for adoption worldwide. A number of provisional standards relating to other aspects of accounting are an anvil.

3.1.3 Nature

The Institute of chartered Accountants of India had set up Accounting Standards Board on 22nd April, 1977 to formulate accounting standards on a number of accounting issues, taking into account the accounting standards developed by the International Accounting Standard Committee, prevailing laws in India, business customs usages and conventions etc. The Accounting Standards made were not mandatory in the beginning but after the amendment in the Sec 211(3C) of Companies Act, 1956 Accounting Standards out of 28 have been made mandatory. The Auditor is required to give in his report to the shareholders that accounts are prepared (drawn) in accordance with the provisions relating to Accounting Standards in India. The Purpose of this exercise is to make the financial statements more reliable, comparable, consistent and transparent. These standards are made taking into account the laws of the country, business custom, environments etc. If there is a change in any law of the country or change in business custom or environment, the accounting standards are also changed/altered. This flexibility of Accounting Standards is a special feature which makes them more popular and friendly with the users.

If any enterprise wants to change/modify any business custom/practice the same must be properly disclosed along with its effects. For example—change of depreciation method, must be disclosed along with its effect on profit or loss.

The Institute of Chartered Accountants of India has issued the following accounting standards: AS 1. Disclosure of Accounting policies.

AS 2. Valuation of Inventories. AS 3. Cash Flow Statement.

AS 4. Contingencies and Events occurring after the Balance Sheet Date.

AS 5. Net Profit or loss for the period, prior items and changes in accounting policies. AS 6. Depreciation Accounting.

AS 7. Accounting for Construction Contracts. AS 8. Accounting for research and development. AS 9. Revenue Recognition.

AS 10. Accounting for fixed Assets.

AS 11. Accounting for the effects of changes in foreign Exchange rates. AS 12. Accounting for Government grants.

Notes _{AS 14. Accounting for Amalgamations.}

AS 15. Accounting for Retirement benefits in the financial statements of employers. 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. Contingent Liabilities and Contingent Assets. AS 30. Financial Instruments: Recognition and Measurement AS 31. Financial Instruments: Presentation

AS 32. Financial Instruments: Disclosures and limited revision to AS-19

According to Government of India, there are 31 accounting standards. But 32 are also included in 31st accounting standard (Financial Instrument: Presentation). So we can say that there are 32 accounting standards.

Notes AS-3, AS-6 and AS-24 are desirable but the rest are mandatory.

Self Assessment

Fill in the blanks:

1. The basic objective of ……… is to remove variations in the treatment of several accounting aspects and to bring about standardization in presentation.

2. The ……… are codified by the accounting standards.

3.2 Accounting Standards in India

Statements of Accounting Standards (AS 1) Disclosure of Accounting Policies

The following is the text of the Accounting Standard (AS) 1 issued by the Accounting Standards Board, the Institute of Chartered Accountants of India on ‘Disclosure of Accounting Policies’. The Standard deals with the disclosure of significant accounting policies followed in preparing and presenting financial statements.

Notes In the initial years, this accounting standard will be recommendatory in character. During this

period, this standard is recommended for use by companies listed on a recognised stock exchange and other large commercial, industrial and business enterprises in the public and private sectors. Introduction

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

2. 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.

3. 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.

4. The Institute of Chartered Accountants of India has, in Statements issued by it, recommended the disclosure of certain accounting policies, e.g., translation policies in respect of foreign currency items.

5. 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.

6. 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.

7. 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.

8. The purpose of this Statement 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 between financial statements of different enterprises.

Explanation

Fundamental Accounting Assumptions

9. 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.

10. 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.

Notes _{(b) Consistency: It is assumed that accounting policies are consistent from one period to} another.

(c) Accrual: Revenues and costs are accrued, that is, recognised 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 Statement.)

Task _{Find out the legal status of accounting standards in India.} Nature of Accounting Policies

11. 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.

12. 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 judgment by the management of the enterprise.

13. The various statements 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 in which Differing Accounting Policies are Encountered

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

(a) Methods of depreciation, depletion and amortisation (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

Notes Considerations in the Selection of Accounting Policies

16. 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 the profit or loss for the period ended on that date.

17. 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 recognised only when realised 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

18. 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.

19. Such disclosure should form part of the financial statements.

20. 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. 21. Examples of matters in respect of which disclosure of accounting policies adopted will be

required are contained in paragraph 14. This list of examples is not, however, intended to be exhaustive.

22. 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. 23. Disclosure of accounting policies or of changes therein cannot remedy a wrong or

inappropriate treatment of the item in the accounts. Accounting Standard

(The Accounting Standard comprises paragraphs 24-27 of this Statement. The Standard should be read in the context of paragraphs 1-23 of this Statement and of the ‘Preface to the Statements of Accounting Standards.)

24. All significant accounting policies adopted in the preparation and presentation of financial statements should be disclosed.

Notes _{25. The disclosure of the significant accounting policies as such should form part of the financial}