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Accounting standards are regarded a major component in the framework of accounting and practitioners to apply those accounting practices regarded as the most suitable for the circumstances covered under different level of enterprises. Accounting standards help in assessing managerial skill in maintaining and improving the profitability of the company. Therefore, there is a strong need for legislation to bring about uniformity, rationalisation, comparability, transparency and adaptability in financial statements and this underlines the need to have stringent norms for preparation and presentation of financial statements. In this paper, a comparative analysis was made through the collected information related to international accounting standards and Indian accounting standards.
Financial statements are prepared to summarize all business activities by an enterprise during an accounting period in monetary terms & report financial outcomes in terms of performance, status of assets, liabilities & flow of cash. These business activities vary from one enterprise to other on one hand and size & volume of business on the other hand. To compare the financial statements of various reporting enterprises poses some difficulties because of the divergence in the methods and principles adopted by these enterprises in preparing their financial statements. In order to make these methods and principles uniform, comparable, transparent, establish accountability and bring true & fair view of Financial Statement - Accounting Standards are evolved.
Accounting standards are essential to the efficient functioning of the economy, which influence allocation of resources, rely heavily on credible, concise and understandable financial information. Ideally, such information should make it possible for investors to evaluate the investment opportunities offered by different firms and allocate or ration scarce resources to the most efficient ones. The public in making various other kinds of decisions also uses financial information about the operation and financial position of individual entities. This process results in the optimal distribution of scarce resources within the economy and maximises, in turn, potential benefits to society.
Accounting standard may be defined as written statements issued form time to time by institutions of the accounting profession or institutions in which it has sufficient involvement and which are established expressly for this purpose. Standards setting or standardization implies the development, definition and promulgation, acceptance, and enforcement of a written and explicit body of rules relating to measurement and disclosure of information in financial statements.
All the member-countries, including India, have taken upon themselves the task of prescribing accounting standards. In 2001, the Government constituted the Accounting Standards Board. The Institute of Chartered Accountants of India, the apex body of accounting and auditing, constituted an Accounting Standards Board on April 21, 1977, to pronounce standards on various items of the financial statements. This Board has been releasing standards from time to time. Certain of the standards have also been revised/deleted/curtailed in the light of new and additional standards as well as the experience of the industry. Till now, 32 Accounting Standards have been issued by the ICAI as against the 41 International Accounting Standards. There are also eight International Financial Statements Reporting Standards (IFRS).
As per Auditing and Assurance Standard 28 issued by the ICAI, the extracted financial statements from the books of account maintained as per the broad framework of accounting report for showing a true and fair view. GAAPs consist of four components: the requirements of law; judgments of various courts of law; pronouncements of the governing body from time to time; and requirements of regulatory Authority SEBI.
In India, since the ASB is not yet functional, the accounting standards as pronounced by the ICAI are adaptable by every entity whose financial statements are subject to audit. Certain of the accounting standards conform to the International Accounting Standards. Effort is on to match Indian standards with the International Accounting Standards. There are significant variations between the Indian and international accounting standards. Prevailing laws of the land significantly contribute to the variances between accounting standards of one country with the other. Perhaps the title of account as well as nomenclature differs from one country to the other.
International Accounting Standards
In this situation, there is a strong need for legislation to bring about uniformity, rationalisation, comparability, transparency and adaptability in financial statements and this underlines the need to have stringent norms for preparation and presentation of financial statements.
The International Accounting Standards Board is an independent, private-sector body that develops and approves International Financial Reporting Standards. The IASB operates under the oversight of the International Accounting Standards Committee Foundation. The IASB was formed in 2001 to replace the International Accounting Standards Committee. IASCF: International Accounting Standards Committee Foundation
The International Accounting Standards Committee Foundation is the independent, non-profit foundation, created in 2000 to oversee the IASB. Click for more information about the IASCF Structure. IASC: International Accounting Standards Committee From 1973 until a comprehensive reorganization in 2000, the structure for setting International Accounting Standards was known as the International Accounting Standards Committee. There was no actual "committee" of that name. The standards setting board was known as the IASC Board. The International Accounting Standards Committee (IASC) was constituted in 1973 to formulate accounting standards. So far 41 standards have been issued by the IASC. Barring Canada, Japan and the US, all countries have accepted these standards. To give proper direction on how to interpret these standards led to the setting up of the Standards Interpretations Committee (SIC) in 1997.
In 2001, the international fraternity of accountants took stock of the situation and constituted the International Accounting Standards Board (IASB) to evolve and prescribe norms for treatment of several items in the preparation and presentation of financial statements. IASB adopted all the 41 standards issued by the IASC till 2001. These standards were thoroughly revised and updated in view of the changes in industry and the need for rationalisation. The US Financial Accounting Standards Board (FASB) and the IASB are in the process of eliminating the differences in some of the standards. The International Financial Reporting Interpretations Committee (IFRIC) was constituted to replace the SIC. This committee meets periodically to discuss and spell out their interpretations. It deals with mature as well as emerging issues. Some of the other major international bodies in the realm of international accounting are the European Commission (EC), the UN, the International Federation of Accountants (IFAC) and the Organisation for Economic Co-operation and Development (OECD).
TYPES OF ACCOUNTING STANDARDS
Accounting standards may be classified by their subject matter, standards may be as follows:-
Disclosure standards such standards are the minimum uniform rules for external reporting. They require only and explicit disclosure of accounting methods used and assumptions made in preparing financial statements. Such a standard is likely to be controversial or creates conflicts of interest, particularly since it does not constrain the choice of accounting policies or items to be disclosed
Presentation standards- these standards specify the form and type of accounting information to be presented they may specify that certain financial statements be presented or that items be place only a little more constraint upon the choice of accounting policies than disclosure standards and aim to reduce the costs to users of utilizing financial statements.
Content standards - these standards specify only the categories of information that is to be published. There are three aspects to such standards:
Disclosure- content standards specify only the categories of information to be disclosed.
Specific- construct standards which how specific items should be reported in accounts, e.g., a standard which specific that finance leases be capitalised and disclosed in balance sheet.
Conceptually- based standards that specify the accounting treatment of items based upon a coherent and complete and complete framework of accounting.
Another classification of accounting may be based upon their based upon a coherent and compete framework of accounting.
1) Evolutionary and voluntary compliance standards- such standards have evolved as best practices and represent the conventional approach to accounting, as such, their general acceptability implies voluntary compliance by individual companies.
2) Privately set standards- private accountancy bodies may formulate standards and devise means for their enforcement. Other bodies such as trade associations or stock exchanges may set accounting standards for companies as a condition of membership or listing. Enforcement powers are thus more readily available.
3)Governmental standards- there standards may be laws relating to company accounting practices and disclosure, as in the case of the Indian companies acts, or tax rules defining taxable profit. Alternatively, government departments or agencies may regulate accounting practices for certain industries.
It is significant to note that the above two classification are complementary and not competitive.
Objectives of the study
To study the Indian accounting standards applicable at various level enterprises.
To know the difference between the Indian accounting standards and international accounting standards.
To analyse the applicability of accounting standards in respect of their size.
Data used in this study was not of the empirical in nature but the information gathered from the various secondary sources like magazines, journals, books articles and annual report of the enterprises. A comparative analysis have been made through the collected information related to international accounting standards and Indian accounting standards and tries to find out the summarized overview of both types of the accounting standards.
Analysis and Interpretation:
The need for a speedy integration of the Indian accounting standards with the international accounting standards cannot be over-emphasised. India today enjoys a very small share of the international funds earmarked for emerging markets. These funds will increasingly flow a growing realisation to those markets, which are strongly regulated and have an ethical base. Assurance that financial statements are prepared in accordance with internationally accepted accounting standards and audited on a basis comparable with international practice is a key plan in the system of regulation. In all 32 Accounting Standards have been prescribed. However, their applicability is dependent on its size - Level I / II / III Company. The following table lists out the Accounting Standards and its applicability:
Level I Company:
Enterprises, which fall in any one or more of the following categories, at any time during the accounting period, are classified as Level I enterprises:
i) Enterprises whose equity or debt securities are listed whether in India or outside India.
ii) Enterprises, which are in the process of listing their equity or debt securities as evidenced by the board of directors' resolution in this regard.
iii) Banks including co-operative banks.
iv) Financial Institutions
v) Enterprises carrying on insurance business.
vi) All commercial, industrial and business reporting enterprises, whose turnover for the immediately preceding accounting period based on audited financial statements exceeds Rs. 500 million. Turnover does not include 'other income'.
vii) All commercial, industrial and business reporting enterprises having borrowings, including public deposits, in excess of Rs. 100 million at any time during the accounting period.
Holding and subsidiary enterprises of any one of the above at any time during the accounting period.
Level II Company:
Enterprises that are, not Level I enterprises but fall in any one or more of the following categories are classified as Level II enterprises;
i) All commercial, industrial and business reporting enterprises, whose turnover for the immediately preceding accounting period based on audited financial statements exceeds Rs. 4 million, but does not exceed Rs. 500 million. Turnover does not include 'other income'.
ii) All commercial, industrial and business reporting enterprises having borrowing, including public deposits, in excess of Rs. 10 million but not in excess of Rs. 100 million at any time during the accounting period.
iii) Holding and subsidiary enterprises of any one of the above at any time during the accounting period.
Level III Company:
Enterprises, which are not covered under Level I and Level II, are considered as Level III enterprises.
Level II and Level III enterprises are considered as SMEs . Level I enterprises are required to comply fully with all the accounting standards. No relaxation is given to Level II and Level III enterprises in respect of recognition and measurement principles. Relaxations are provided with regard to disclosure requirements. Accordingly, Level II and Level III enterprises are fully exempted from certain accounting standards, which mainly lay down disclosure requirements. The following table enumerates applicability level, prescriptions & important content of Accounting Standards:
Accounting Standards should be reviewed in the light of new development (technical, financial, legal, and economical) and international practices. The Accounting Standards should harmonize not only with international standards but also with other applicable corporate and taxation legislation. Accounting Standards should narrow the choice of alternative accounting practices that make fair disclosure of accounting and financial information. There is a need for continued improvement in accounting standards and disclosure rules to resolve various accounting aspects and to simplify, to a greater extent, the financial reporting system. Accounting bodies, accountants associations and governmental agencies in different countries of the world have made progress in reducing accounting alternatives and producing standards that, in most cases, reflect objectives of accounting measurements and thus are closer to the user's perception of economic reality. If internationally accepted accounting standards are to be speedily introduced and implemented in this country, what is needed is the voluntary acceptance of such standards by the preparers of financial statement, the users of those statements, the accounting profession, the regulators and the various departments of the government responsible for incorporate and fiscal legislation. In the light of above, it is found that effort is on to match Indian standards with the International Accounting Standards. There are significant variations between the Indian and international accounting standards. Prevailing laws of the land significantly contribute to the variances between accounting standards of one country with the other. Perhaps the title of account as well as nomenclature differs from one country to the other.
References and Notes:
David Solomons, Making Accounting Policy, New York; Oxford University Press,1986,P42
American Institute of Certified Public Accountants, Establishing Financial Accounting Standards: Report of the Study on Establishment of Accounting Principles, New York: AICPA, March 1972.P.19
A.C.Littleton, Structure Of Accounting Theory, American Accounting Association, 1953,P.143.
Michael Bromwich, The Economics F Accounting Standard Setting, Englewood Cliffs: Prentice Hall International,1985.P.1
R.I. Tiker, "Corporate Responsibility, Institutional Governance and the Roles of Accounting Standards,"
Divid Solomons., "The Political Implication of Accounting Standards Setting," Accounting and Business Research (Spring 1983),Pp.107-118.
George J. Benston,"The Establishment and Enforcement of Accounting Standards for Enhancing Corporate Government and Social Responsibility" In Michael Bromwich and Anthony G. Hopwood(Eds.) 'Accounting Standards Setting', London: Pitman Books 1983,P.19.
Institute of Chartered Accountants Of India ,39th Annual Report Of The Council, March 31,1985,The Chartered Accountant (October 1985),P.32
George J. Bentson, Corporate Financial Disclosure in the U.K. and USA,Londin;,ICAEW,1976,Pp.241-253.
Advisory Group on Accounting and Auditing, RBI 2001,Pp 36-41
www.icai.org (the website of institute of chartered accountants of India)