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In professionalism, accounting has no meaning without standards. The use and application of standards to accounting is so vital that it will not be wrong to term it as a legal discipline. In the current scenario, the convergence of accounting standards is an irretrievable trend and hence, a move towards its development is most essential. In emerging economics, the practice of proper accounting standards is more relevant. In India, this disclosure is ineffective because the present inadequate accounting standards give more scope for personal discretion. In view of the Liberalization, Privatization and Globalization (LPG) of the Indian economy, the Formulation, Development and Practice (FDP) of a proper accounting standard needs immediate attention.
The inception of the idea of convergence of Indian GAAP with IFRS was made by the Prime Minister of India Dr. Manmohan Singh by committing in G20 to align Indian accounting standards with IFRS. Thereafter ICAI has decided to converge its Accounting Standards with IFRS for accounting periods commencing on or after 1 April 2011 in a phased manner as envisaged in the Roadmap to IFRS formulated by the Ministry of Corporate Affairs. For smooth transition to IFRS, ICAI has taken up the matter of convergence with the National Advisory Committee on Accounting Standards and various regulators such as the RBI, SEBI and IRDA, CBDT. IASB, the issuer of IFRS, is also supporting the ICAI in its endeavours towards convergence.
It has been decided that there shall be two sets of Accounting Standards under the Companies Act. The new set of standards which has been converged with IFRS are now known as Indian Accounting Standards or Ind AS. The Ministry of Corporate Affairs has notified the 35 Ind AS on 25 February 2011. The text of the 35 Ind AS is now available at the Ministry of Corporate Affairs' portal. At the same time The Ministry of Corporate Affairs haven't specified the date of implementation of the same. This reluctance of The Ministry of Corporate Affairs in notifying the date even when the proposed date is less than a month away is seen as rooted in the strong lobbying by the Corporates in India to defer the implementation. But the president of ICAI. CA.G.Ramaswamy expects that it will be notified soon and there won't be any further deferment.
Key words: -
Generally Accepted Accounting Principles (GAAP),
Financial Accounting Standards Board (FASB),
International Accounting Standards Board (IASB),
International Financial Reporting Standards (IFRS),
Confederation of Indian Industry (CII),
Securities and Exchange Board of India (SEBI).
"Indian Accounting Standards Ind ASs"
Objective of Survey: -
To comparatively study Indian Accounting Standards
To study the effect of IFRS on Ind ASs.
Type of Survey: -
Source and type of data
Secondary data Collected through
Government Documents etcâ€¦
Accounting standards are written, policy documents issued by expert accounting body or by Government or other regulatory authorities covering the aspects of recognition, measurement, treatment, presentation and disclosure of accounting transaction in the financial statement.
The main purpose of formulating accounting standard is to standardize the diverse accounting policies with a view to eliminate to the extent possible the incomparability of information provided in financial statements and add reliability to such financial statements. To discuss on whether such standards are necessary in present days it will be beneficial to go through the advantages and disadvantages which they are said to provide.
Accounting standards codify acceptable accounting practices. They are the primary source of the Generally Accepted Accounting Principles (GAAP) and, therefore, they are at the top in the hierarchy of GAAP. Other sources of GAAP are technical pronouncements issued by various professional bodies, regulating the accounting and auditing profession, that stipulate accounting principles and methods.
Accounting standards are issued by institutions that are authorized to set accounting standards. The standard-setting body that issues accounting standards is constituted by representatives from various stake holders such as the accounting profession, the industry and regulators. The process of formulating standards is a long 'due-diligence' process. The process is somewhat akin to a 'political process' because the objective is to establish accounting standards:
That are practical in the sense that those can be implemented with reasonable costs and efforts; and
That are acceptable to all stake holders.
Most countries have their own accounting standard setting bodies. In USA Statements of Financial Accounting Standards (SFAS) are issued by the Financial Accounting Standards Board (FASB). In India accounting standards are issued by the Institute of Chartered Accountants of India (ICAI). With globalization of capital markets, a trend towards convergence of accounting practices in different territories emerged in 1970s. The International Account Standards Committee (IASC) was formed in 1973 to formulate International Accounting Standards (IAS). In 2001 IASC was restructured and now it is known as International Accounting Standards Board (IASB). Accounting standards issued by IASB are called International Financial Reporting Standards (IFRS). Each territory (a country or a group of countries like European Union) has initiated actions to harmonise its accounting practices with accounting principles and methods stipulated in IAS / IFRS. Many countries use IAS / IFRS without modification.
International Financial Reporting StandardsÂ (IFRS) are principles-based standards, interpretations and the framework (1989) adopted by the International Accounting Standards BoardÂ (IASB).
Many of the standards forming part of IFRS are known by the older name ofÂ International Accounting StandardsÂ (IAS). IAS were issued between 1973 and 2001 by the Board of theÂ International Accounting Standards CommitteeÂ (IASC). On April 1, 2001, the new IASB took over from the IASC the responsibility for setting International Accounting Standards. During its first meeting the new Board adopted existing IAS and Standing Interpretations Committee standards (SICs). The IASB has continued to develop standards calling the new standards IFRS.
MEANING OF IND ASs
Indian Accounting Standards, abbreviated as Ind AS is a set of accounting standards notified by the Ministry of Corporate Affairs which is converged with International Financial Reporting Standards(IFRS). These accounting standards are formulated by Accounting Standards Board of Institute of Chartered Accountants of India. Now India will have two sets of accounting standards viz. existing accounting standards under Companies (Accounting Standard) Rules, 2006 and IFRS converged Indian Accounting Standards(Ind AS). The Ind AS are named and numbered in the same way as the corresponding IFRS. NACAS recommend these standards to the Ministry of Corporate Affairs. The Ministry of Corporate Affairs has to spell out the accounting standards applicable for companies in India. As on date the Ministry of Corporate Affairs notified 35 Indian Accounting Standards(Ind AS). But it has not notified the date of implementation of the same.
CONVERGENCE WITH IFRS
The inception of the idea of convergence of Indian GAAP with IFRS was made by the Prime Minister of India Dr. Manmohan Singh by committing in G20 to align Indian accounting standards with IFRS. Thereafter ICAI has decided to converge its Accounting Standards with IFRS for accounting periods commencing on or after 1 April 2011 in a phased manner as envisaged the Roadmap to IFRS formulated by the Ministry of Corporate Affairs. For smooth transition to IFRS, ICAI has taken up the matter of convergence with the National Advisory Committee on Accounting Standards and various regulators such as the RBI, SEBI and IRDA, CBDT. IASB, the issuer of IFRS, is also supporting the ICAI in its endeavours towards convergence.
It has been decided that there shall be two sets of Accounting Standards under the Companies Act. The new set of standards which has been converged with IFRS are now known as Indian Accounting Standards or Ind AS. The Ministry of Corporate Affairs has notified the 35 Ind AS on 25 February 2011. The text of the 35 Ind AS are now available at the Ministry of Corporate Affairs portal. At the same time The Ministry of Corporate Affairs hasn't specified the date of implementation of the same. This reluctance of The Ministry of Corporate Affairs to notify the date even when the proposed date is less than a month away is seen as rooted in the strong lobbying by the Corporates in India to defer the implementation. But the president of ICAI. CA.G.Ramaswamy expects that it will be notified soon and there won't be any deferment.
LIST OF IND ASs
Ind AS 101 First-time Adoption of Indian Accounting Standards
Ind AS 102 Share based Payment
Ind AS 103 Business Combinations
Ind AS 104 Insurance Contracts
Ind AS 105 Non current Assets Held for Sale and Discontinued Operations
Ind AS 106 Exploration for and Evaluation of Mineral Resources
Ind AS 107 Financial Instruments: Disclosures
Ind AS 108 Operating Segments
Ind AS 1 Presentation of Financial Statements
Ind AS 2 Inventories
Ind AS 7 Statement of Cash Flows
Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors
Ind AS 10 Events after the Reporting Period
Ind AS 11 Construction Contracts
Ind AS 12 Income Taxes
Ind AS 16 Property, Plant and Equipment
Ind AS 17 Leases
Ind AS 18 Revenue
Ind AS 19 Employee Benefits
Ind AS 20 Accounting for Government Grants and Disclosure of Government Assistance
Ind AS 21 The Effects of Changes in Foreign Exchange Rates
Ind AS 23 Borrowing Costs
Ind AS 24 Related Party Disclosures
Ind AS 27 Consolidated and Separate Financial Statements
Ind AS 28 Investments in Associates
Ind AS 29 Financial Reporting in Hyperinflationary Economies
Ind AS 31 Interests in Joint Ventures
Ind AS 32 Financial Instruments: Presentation
Ind AS 33 Earnings per Share
Ind AS 34 Interim Financial Reporting
Ind AS 36 Impairment of Assets
Ind AS 37 Provisions, Contingent Liabilities and Contingent Assets
Ind AS 38 Intangible Assets
Ind AS 39 Financial Instruments: Recognition and Measurement
Ind AS 40 Investment Property
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 Chatered Accountants of India, recognizing the need to harmonize the diversre accounting policies and practices, constituted at Accounting Standard Board (ASB) on 21st April, 1977.
RECOGNITION OF ELEMENTS OF FINANCIAL STATEMENTS
It is probable that future economic benefit will flow to or from an entity.
The resource can be reliably measured - otherwise the stable measuring unit assumption is applied under the Historical Cost Accounting model: i.e. it is assumed that the monetary unit of account (the functional currency) is perfectly stable (zero inflation or deflation); it is simply assumed that there is no inflation or deflation ever, and items are stated at their original nominal Historical Cost from any prior date: 1 month, 1 year, 10 or 100 or 200 or more years before; i.e. the stable measuring unit assumption is applied to items such as issued share capital, retained earnings, capital reserves, all other items in shareholdersÂ´ equity, all items in the Statement of Comprehensive Income (except salaries, wages, rentals, etc., which are inflation-adjusted annually), etc.
Under the Units of Constant Purchasing Power model, all constant real value non-monetary items are inflation-adjusted during low inflation and deflation; i.e. all items in the Statement of Comprehensive Income, all items in shareholdersÂ´ equity, Accounts Receivables, Accounts Payables, all non-monetary payables, all non-monetary receivables, provisions, etc.
MEASURMENT OF THE ELEMENTS OF FINANCIAL STATEMENT
Measurement is the process of determining the monetary amounts at which the elements of the financial statements are to be recognized and carried in the balance sheet and income statement. This involves the selection of the particular basis of measurement.
A number of different measurement bases are employed to different degrees and in varying combinations in financial statements. They include the following:
(A) Historical cost. Assets are recorded at the amount of cash or cash equivalents paid or the fair value of the consideration given to acquire them at the time of their acquisition. Liabilities are recorded at the amount of proceeds received in exchange for the obligation, or in some circumstances (for example, income taxes), at the amounts of cash or cash equivalents expected to be paid to satisfy the liability in the normal course of business.
(B) Current cost. Assets are carried at the amount of cash or cash equivalents that would have to be paid if the same or an equivalent asset was acquired currently. Liabilities are carried at the undiscounted amount of cash or cash equivalents that would be required to settle the obligation currently.
(C) Realisable (settlement) value. Assets are carried at the amount of cash or cash equivalents that could currently be obtained by selling the asset in an orderly disposal. Assets are carried at the present discounted value of the future net cash inflows that the item is expected to generate in the normal course of business. Liabilities are carried at the present discounted value of the future net cash outflows that are expected to be required to settle the liabilities in the normal course of business.
The measurement basis most commonly adopted by entities in preparing their financial statements is historical cost. This is usually combined with other measurement bases. For example, inventories are usually carried at the lower of cost and net realisable value, marketable securities may be carried at market value and pension liabilities are carried at their present value. Furthermore, some entities use the current cost basis as a response to the inability of the historical cost accounting model to deal with the effects of changing prices of non-monetary assets.
REQUIREMENT OF IFRS
A Statement of Financial Position
A Statement of Comprehensive Income separate statements comprising an Income Statement and separately a Statement of Comprehensive Income, which reconciles Profit or Loss on the Income statement to total comprehensive income
A Statement of Changes in Equity (SOCE)
A Cash Flow Statement or Statement of Cash Flows
Notes, including a summary of the significant accounting policies
Comparative information is required for the prior reporting period (IAS 1.36). An entity preparing IFRS accounts for the first time must apply IFRS in full for the current and comparative period although there are transitional exemptions (IFRS1.7).
On 6 September 2007, the IASB issued a revised IAS 1 Presentation of Financial Statements. The main changes from the previous version are to require that an entity must:
Present all non-owner changes in equity (that is, 'comprehensive income' ) either in one Statement of comprehensive income or in two statements (a separate income statement and a statement of comprehensive income). Components of comprehensive income may not be presented in the Statement of changes in equity.
Present a statement of financial position (balance sheet) as at the beginning of the earliest comparative period in a complete set of financial statements when the entity applies the new standatd.
Present a statement of cash flow.
Make necessary disclosure by the way of a note.
The revised IAS 1 is effective for annual periods beginning on or after 1 January 2009. Early adoption is permitted.
ADOPTION OF IFRS
The Institute of Chartered Accountants of India (ICAI) has announced that IFRS will be mandatory in India for financial statements for the periods beginning on or after 1 April 2011. This will be done by revising existing accounting standards to make them compatible with IFRS.
Reserve Bank of India has stated that financial statements of banks need to be IFRS-compliant for periods beginning on or after 1 April 2011.
The ICAI has also stated that IFRS will be applied to companies above Rs.1000 crore from April 2011. Phase wise applicability details for different companies in India:
Phase 1: Opening balance sheet as at 1 April 2011
Companies which are part of NSE Index - Nifty 50
Companies which are part of BSE Sensex - BSE 30
Companies whose shares or other securities are listed on a stock exchange outside India
Companies, whether listed or not, having net worth of more than INR1,000 crore
Phase 2: Opening balance sheet as at 1 April 2012
Companies not covered in phase 1 and having net worth exceeding INR 500 crore
Phase 3: Opening balance sheet as at 1 April 2014
Listed companies not covered in the earlier phases
If the financial year of a company commences at a date other than 1 April, then it shall prepare its opening balance sheet at the commencement of immediately following financial year.
On January 22, 2010 the Ministry of Corporate Affairs issued the road map for transition to IFRS. It is clear that India has deferred transition to IFRS by a year. In the first phase, companies included in Nifty 50 or BSE Sensex, and companies whose securities are listed on stock exchanges outside India and all other companies having net worth of Rs 1,000 crore will prepare and present financial statements using Indian Accounting Standards converged with IFRS. According to the press note issued by the government, those companies will convert their first balance sheet as at April 1, 2011, applying accounting standards convergent with IFRS if the accounting year ends on March 31. This implies that the transition date will be April 1, 2011. According to the earlier plan, the transition date was fixed at April 1, 2010.
The press note does not clarify whether the full set of financial statements for the year 2011-12 will be prepared by applying accounting standards convergent with IFRS. The deferment of the transition may make companies happy, but it will undermine India's position. Presumably, lack of preparedness of Indian companies has led to the decision to defer the adoption of IFRS for a year. This is unfortunate that India, which boasts for its IT and accounting skills, could not prepare itself for the transition to IFRS over last four years. But that might be the ground reality. Transition in phases Companies, whether listed or not, having net worth of more than Rs 500 crore will convert their opening balance sheet as at April 1, 2013. Listed companies having net worth of Rs 500 crore or less will convert their opening balance sheet as at April 1, 2014. Un-listed companies having net worth of Rs 500 crore or less will continue to apply existing accounting standards, which might be modified from time to time. Transition to IFRS in phases is a smart move. The transition cost for smaller companies will be much lower because large companies will bear the initial cost of learning and smaller companies will not be required to reinvent the wheel. However, this will happen only if a significant number of large companies engage Indian accounting firms to provide them support in their transition to IFRS. If, most large companies, which will comply with Indian accounting standards convergent with IFRS in the first phase, choose one of the international firms, Indian accounting firms and smaller companies will not benefit from the learning in the first phase of the transition to IFRS. It is likely that international firms will protect their learning to retain their competitive advantage. Therefore, it is for the benefit of the country that each company makes judicious choice of the accounting firm as its partner without limiting its choice to international accounting firms. Public sector companies should take the lead and the Institute of Chartered Accountants of India (ICAI) should develop a clear strategy to diffuse the learning. Size of companies The government has decided to measure the size of companies in terms of net worth. This is not the ideal unit to measure the size of a company. Net worth in the balance sheet is determined by accounting principles and methods. Therefore, it does not include the value of intangible assets. Moreover, as most assets and liabilities are measured at historical cost, the net worth does not reflect the current value of those assets and liabilities. Market capitalisation is a better measure of the size of a company. But it is difficult to estimate market capitalisation or fundamental value of unlisted companies. This might be the reason that the government has decided to use 'net worth' to measure size of companies. Some companies, which are large in terms of fundamental value or which intend to attract foreign capital, might prefer to use Indian accounting standards convergent with IFRS earlier than required under the road map presented by the government. The government should provide that choice. Conclusion The government will come up with a separate road map for banking and ice companies by February 28, 2010. Let us hope that transition in case of those companies will not be deferred further.