Accounting Standards of India | Essay | India | Accounting

In this essay we will discuss about:- 1. Introduction to the Accounting Standards of India 2. Establishment of NACAS 3. Deviation from Accounting Standards.

Essay # 1. Introduction to the Accounting Standards of India:

Accounting standards are the policy documents issued by a recog­nized expert accountancy body relating to various aspects of measure­ment, treatment, presentation and disclosure of accounting transactions and events. The purpose of accounting standards is to standardize diverse accounting policies with a view to eliminate, to the extent possible, incomparability of financial statements information and pro­vide a set of standard accounting policies, valuation norms and disclo­sure requirements to discourage pursuance of accounting policies which are not in conformity with the generally accepted accounting policies.

At the international level, the International Accounting Standards Board (erstwhile International Accounting Standards Committee) so far issued forty one accounting standards of which thirty four are in effect and also five International Financial Reporting Standards. National accounting standard setting bodies generally frame accounting standards in the line of international accounting standards with a view to achieve global harmonization of financial reporting.

In India, the Accounting Standards Board (ASB) was constituted by the ICAI on April 21, 1977 with the function of formulating accounting standards. So far ASB has issued twenty eight accounting standards. These accounting standards are issued under the authority of the Council of the ICAI.

Institute of Chartered Accountants of India has so far issued twenty eight accounting standards and by this Indian financial reporting system is expected to reach a convergence with international financial reporting standards.

Compliance with the accounting standards has been made mandatory Sub-section (3 A) to section 211 (inserted by the Companies Amendment Act, 1999) requires that every profit and loss account and balance sheet shall comply with the accounting standards. Accounting standards means the standards of accounting recommended by the Institute of Chartered Accountants of India (ICAI) and prescribed by the Central Government in consultation with the National Advisory Committee on Accounting Standards (NACAS) constituted under section 210 A(1).

Until the Central Government prescribes accounting standards under this section, accounting standards issued by the ICAI shall be deemed to be the accounting standards.

Essay # 2. Establishment of NACAS:

Section 210A (inserted vide the Compa­nies Amendment Act, 1999) discusses about the establishment of the NACAS. The Central Government is empowered by virtue of the provi­sion of section 210A(1) to establish NACAS to advise the Central Govern­ment on the formulation and laying down of accounting policies and accounting standards for adoption by companies or class of companies under the Act. The NACAS shall give its recommendation to the Central Government on such matters of accounting policies and standards and auditing as may be referred to it for advice from time to time.

The ICAI is free to set accounting standards as it has been doing since 1977. For the purpose of the Companies Act, the Central Government enjoys the authority to prescribe such accounting standards which are recommended by the ICAI. While prescribing any accounting standard, the Central Government may consult the NACAS.

Under section 210 A(2) the NACAS shall consist of the following twelve members:

a) A chairman, who shall be a person of eminence well versed in accountancy, finance, business administration, business law, eco­nomics or similar discipline;

b) One member each nominated by the Institute of Chartered Accoun­tants of India, Institute of Cost and Works Accountants of India and Institute of Company Secretaries of India;

c) One representative of the Central Government to be nominated by it;

d) One representative of the Reserve Bank of India to be nominated by it;

e) One representative of the Comptroller and Auditor General of India to be nominated by him;

f) A person who holds, or has held the office of professor in accoun­tancy, finance or business management in any University or deemed university;

g) The chairman of the Central Board of Direct Taxes, constituted under Central Boards of Revenue Act, 1963, or his nominee;

h) Two members to represent the chambers of commerce and indus­try, to be nominated by the Central Government;

i) One representative of the Securities Exchange Board of India to be nominated by it.

There is a possibility that the NACAS would not be an effective mecha­nism since the ICAI would continue to enjoy the authority of issuing accounting standards. The Central Government would prescribe such standards as recommended by the ICAI in consultation with the NACAS. So it is not like Financial Accounting Standards Board in the USA or Accounting Standard Board in the UK that works under Financial Reporting Council. See the Figure given below which depicts the new standard setting mechanism in India.

Essay # 3. Deviation from Accounting Standards:

Sub-section (3B) to section 211 requires that in case the profit and loss account and balance sheet of a company do not comply the requirements of the accounting standards, disclosure should be made stating –

i. Deviations from the accounting standards;

ii. The reasons for such deviation; and

iii. The financial effect, if any, arising due to such deviation.

The disclosure requirement as stated in section 211(3A) will bring transparency but such deviations may be material enough to affect the truth and fairness of the financial statements. Accordingly, it is neces­sary for the statutory auditors to give negative report in case truth and fairness of the financial statements are violated by virtue of such deviations. This needs a change in the auditors’ reporting norm.

Duties of the statutory auditors as regards mandatory accounting standards:

The statutory auditors are required to make qualification in their report in case any item is treated differently from the prescribed treatment in the relevant accounting standard. However, while qualify­ing they should consider the materiality of the relevant item.

In case of non-disclosure of significant accounting policies the auditors are required to specify the fact in their report.

The ICAI suggests that it should be in the following lines:

The company has disclosed those accounting policies the disclosure of which is required by the Companies Act, 1956. Other significant account­ing policies, viz. those relating to method of accounting followed for recognising revenue of the long term construction contracts and recog­nition of warranty expenses have not been disclosed nor have all the policies been disclosed at one place, which is contrary to Accounting Standard – 1 “Disclosure of Accounting Policies” issued by the ICAI.

Similarly, an auditor is required to specify the fact in case a non ­corporate body prepares financial statements on cash basis. The ICAI suggests that specifying the fact is sufficient and the auditors may state that accounts give true and fair view on the cash basis if it is so. The newly inserted sub-section (3) of section 227 requires the auditors to report whether, in his opinion, the profit and loss account and balance sheet comply with the accounting standards referred to in section 211(3 C).