They are written policy documents issued by an expert accounting body or by a government or other regulatory body covering the aspects of recognition, measurement, presentation, and disclosure of accounting transactions in the financial statements.
Needs for Accounting Standards
The needs for accounting standards are:
(i) To facilitate transparent and meaningful reporting of financial information to the users of accounting.
(ii) To reduce accounting alternatives to a reasonable and practical level, so that uniformity in financial information may maintain.
(iii) To enhance the comparability of financial statements in order to attain rational decisions.
(iv) To encourage consistency in accounting practices and principles.
Nature of Accounting Standards
The different point explaining the nature of accounting standards are:
(i) Accounting standards are a framework of practices and guidelines which facilitates reliability and comparability to financial statements.
(ii) Accounting standards bring uniformity in accounting practices of various businesses.
(iii) Accounting standards cannot violate or contravene the prevailing law of the country. In case of disagreement of any accounting standard with the prevailing law in a particular situation, then law will supersede the standards.
Benefits of Accounting Standards
The various benefits of accounting standards are:
(i) Accounting standards help in improving the credibility and reliability of financial statements.
(ii) Accounting standards reduce confusing variations in the accounting treatments used to prepare financial statements.
(iii) Accounting standards facilitate the comparison of financial statements of various enterprises within the nation or outside the nation.
(iv) Accounting standards promote the dissemination of timely and useful financial information to all the users of accounting.
Procedure for Issuing Accounting Standards
Accounting Standard Board (ASB) constituted by the Institute of Chartered Accountants of India on 21st April, 1977, determines the broad areas in which accounting standards need to be formulated and the priority in regard to the selection thereof. ASB will be assisted by study groups constituted to consider specific subjects.
ASB also hold a dialogue with the representatives of the government, public sector undertakings, industry and other organizations for ascertaining their views. After that an exposure draft of the proposed standard will be prepared and issued for comments by members of the institute and the public at large. After takings 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 considers the final draft of the proposed standard, and if found necessary, modify the same in consultation with ASB. The accounting standard on the relevant subject will, then issued under the authority of the council.
Overview of Accounting Standards (AS) in India
List of Accounting Standards in India (AS-1 to AS-32)
AS-1 Disclosure of accounting policies To promote a better understanding of financial statements by establishing the disclosure of significant accounting policies.
AS-2 Valuation of inventories To prescribe, the manner of determination of value of inventories to be carried to the financial statements and the ascertainment of cost of inventories and any writedown thereof to Net Realisable Value (NRV).
AS-3 Cash flow statements Providing desired information about historical changes in cash and cash equivalents of an enterprise classified into operating, investing and financing activities.
AS-4 Contingencies and events occurring after the balance sheet date
To prescribe the statement of:
(i) Contingencies means condition or situation existing on balance sheet date result of which (gain or loss) is not known on the balance sheet date but is made known/determined on the occurrence or non-occurrence of one or more uncertain future events;
(ii) Events occurring after the balance sheet date means significant events (favourable or unfavorable) occurring post balance sheet date but before approval of financial statements by Board of Directors.
AS-5 Net profit or loss for the period, prior period items, changes in accounting policies. To prescribe the criteria for classification and disclosure of certain items such as:
(i) Prior period items means income or expenses that arise in the current period as a result of errors or omissions in the preparation of the financial statements of one or more prior periods.
(ii) Extraordinary items means income or expenses that arise from events or transactions that are clearly distinct from the ordinary activities of the enterprise and, therefore, are not expected to recur frequently or regularly.
(iii) Changes in accounting policies, etc. in profit and loss statements to enhance its comparability.
AS-6 Depreciation accounting To lay down the criteria in accordance with which the various aspects relating to depreciation such as ascertaining the depreciable amount, expected useful lives of the depreciable assets, residual value, deciding on the depreciation method to be used, revision in the depreciable amount, useful lives, etc are to be dealt with so as to bring in maximum possible uniformity in the financial statements of different enterprises and of the same enterprise over a period of time.
AS-7 Construction contracts To establish the ground rules for recognition of revenue and costs, relating to construction contracts, in different accounting periods in which construction work is performed.
AS-8 Accounting for research and development Pursuant to AS-26 becoming mandatory, AS-8 stands withdrawn.
AS-9 Revenue recognition To lay down the bases for recognition of revenue arising in the course of ordinary activities of an enterprise from the sale of goods, rendering of services and use by others of enterprises resources yielding interest, royalties and dividends.
AS-10 Accounting for fixed assets To prescribe the accounting treatment of fixed assets and the related disclosure requirements in the financial statements.
AS-11 The effect of changes in foreign exchange rates To lay down principles for deciding which exchange rates to be used and how to recognise the financial effect of changes in exchange rates.
AS-12 Accounting for government grants To lay down the accounting treatment and disclosure norms of government grants such as subsidies, cash incentives, duty drawbacks, etc.
AS-13 Accounting for investments To prescribe accounting treatment for investments in the financial statements of an enterprise and related disclosure requirements.
AS-14 Accounting for amalgamation To prescribe accounting treatment for amalgamation (excluding cases of acquiring controlling interest) and any resultant goodwill or reserves.
AS-15 Employee benefits To prescribe the accounting and disclosure for employee benefits such as:
(i) Short-term benefits, i.e. salary, paid leave, bonus, non-monetary benefits, etc. Falling due within 12 months.
(ii) Post employment benefits, i.e. gratuity, pension, medical care, etc.
(iii) Other Long-term benefits, i.e. long service leave, sabbatical leave, etc.
AS-16 Borrowing costs To prescribe the accounting treatment for borrowing costs such as:
(i) Interest and commitment charges.
(ii) Amortisation of discounts/premium on loans.
(iii) Lease finance charges.
(iv) Exchange differences relating to foreign currency borrowings.
AS-17 Segment reporting To establish principles for reporting segment wise financial information to enable users of financial statement to assess risk and returns of a diversified and/or multi locational enterprises.
AS-18 Related party disclosures To establish the disclosure requirements of related party relationships between a reporting enterprise and its related parties.
AS-19 Leases To prescribe appropriate treatment and disclosures in relation to:
(i) Finance lease which means a lease that transfers substantially all the risks and rewards incident to ownership of an asset.
(ii) Operating lease which is a lease other than a financial lease.
AS-20 Earning per share To lay down guidelines for calculation of ‘number of shares’ for finding earning per share so as to maintain uniformity in calculating the earning per share.
AS-21 Consolidated financial statements To lay down the principles and procedures for preparation and presentation of Consolidated Financial Statements (CFS). Consolidated financial statements are the financial statements of a group presented as those of a single enterprise.
AS-22 Accounting for taxes on income To lay down the treatment of timing and permanent differences due to the treatment of different items of financial statements by various statutes and to prescribe accounting treatment for other issues relating to taxes on income.
AS-23 Accounting for investments in associates in consolidated financial statements To lay down principles and procedures for recognising effects of investments in associates on the financial position and operating results of the group. Associate means other than a subsidiary or joint venture in which investor has a significant influence.
AS-24 Discontinuing operations To prescribe principles for reporting information about discontinuing operations of an enterprise.
AS-25 Interim financial reporting To lay down what information should be provided in interim financial reports and to prescribe the recognition and measurement principles.
AS-26 Intangible assets To lay down the criteria for recognition, accounting treatment and ascertaining amount of intangible assets and to provide required disclosures.
AS-27 Financial reporting of interests in joint ventures To prescribe the principles and procedures for accounting for interests in joint ventures and the reporting requirement thereof.
AS-28 Impairment of assets To lay down procedures for identification, recognition and reversal of impairment losses and to prescribe disclosures.
AS-29 Provisions, contingent liabilities and contingent assets The objectives of AS-29 are:
(i) To ensure that appropriate recognition criteria and measurement bases are applied to provisions and contingent liabilities.
(ii) To ensure that sufficient information is disclosed in the notes to the financial statements to enable users to understand the nature, timing and amount of provisions and contingent liabilities.
(iii) To lay down appropriate accounting for contingent assets.
AS-30 Financial instruments: Recognition and measurement To establish principles for recognising and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items.
AS-31 Financial instruments: Presentation To establish principles for presenting financial instruments as liabilities or equity and for offsetting financial assets and liabilities.
AS-32 Financial instruments: Disclosures Entities to provide disclosures in their financial statements that enable users to evaluate
(i) The significance of financial instruments for the entity’s financial position and performance.
(ii) The nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the reporting date and how the entity manages those risks.
Note So far only 31 Accounting Standards are effective, AS-8 had been withdrawn.
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