Accounting Standards (AS) Objectives, Benefits, Process & List

Unit 7 – Accounting Standards: Accounting Standards (AS) are essential guidelines issued by regulatory bodies like ICAI to ensure transparency, consistency, and comparability in financial statements. They standardize accounting policies related to recognition, measurement, presentation, and disclosure of transactions and events.

The main objectives are to eliminate non-comparability and ensure reliable financial reporting. Benefits include improved comparability, standardization, and enhanced disclosures, while limitations involve difficulty in choosing between valid alternatives and statutory constraints. In India, AS are formulated by the Accounting Standards Board (ASB) of ICAI through a detailed consultative process. Different sets of standards—AS, Ind AS, and ASLB—apply to various types of entities based on size and structure.

UNIT 7: ACCOUNTING STANDARDS – SUMMARY NOTES

LEARNING OUTCOMES

• Understand the importance of Accounting Standards (AS).
• Know the objectives, benefits, and limitations of AS.
• Learn how AS are formulated by ICAI.
• Be aware of the list of applicable AS in India.

1. INTRODUCTION

• Accounting = Language of business → Communicates financial results via financial statements.
• Without regulation, financials can be misleading or manipulated.
• Accounting Standards (AS):
  • Framework for recognition, measurement, presentation & disclosure.
  • Ensure transparency, comparability, reliability, and consistency.

2. OBJECTIVES OF AS

1. Eliminate non-comparability of financial statements.
2. Provide uniform accounting policies, valuation norms, and disclosure standards.

3. BENEFITS OF AS

• Standardization of various accounting treatments.
• Enforce additional disclosures (even beyond statutory requirements).
• Enhance comparability of financial statements across companies and countries.

4. LIMITATIONS OF AS

• Difficult to choose between multiple valid accounting treatments.
• Cannot override statutes – must comply with existing laws.

5. FORMULATION OF ACCOUNTING STANDARDS IN INDIA

• Done by the Accounting Standards Board (ASB) of ICAI.
• ASB established in 1977, independent in standard-setting.
• Follows a consultative and transparent process considering IFRS.

Steps in Formulation:

1. Identify area for AS.
2. Form study group.
3. Prepare draft standard.
4. Seek comments from regulators like SEBI, CBDT, etc.
5. Finalize Exposure Draft (E.D.).
6. Receive and consider public comments.
7. Finalize & issue the standard.

Applicability:

• Ind AS: Listed companies, NBFCs, large unlisted cos (Net Worth ≥ ₹250 Cr).
• AS (Companies Act): Other companies not covered under Ind AS.
• AS by ICAI: For non-corporate entities.

6. LIST OF AS IN INDIA (Just a few examples)

7. IND AS (IFRS-Converged Standards) – For advanced knowledge

• Eg: Ind AS 101 – First-time Adoption, Ind AS 115 – Revenue from Contracts
• Focuses on global comparability and transparency.

8. AS FOR LOCAL BODIES (ASLB)

• Designed for entities providing public services, not profit-driven.
• Eg: ASLB 1 – Presentation of Financial Statements, ASLB 5 – Borrowing Costs

EXAM TIPS

• True/False and MCQs from definitions, benefits, limitations.
• Focus on formulation process steps and objectives of AS.
• Know difference between AS, Ind AS, and ASLB.
• Don’t memorize full list unless required – know purpose & structure.

FAQs on Accounting Standards

1. What are Accounting Standards (AS)?
Accounting Standards are official guidelines issued by regulatory bodies like ICAI, aimed at standardizing accounting practices to ensure comparability, transparency, and consistency in financial statements. They govern the recognition, measurement, presentation, and disclosure of transactions in financial statements.

2. What are the key objectives of Accounting Standards?
The main objectives of Accounting Standards are to:

• Eliminate non-comparability in financial statements.
• Provide standardized accounting policies, valuation norms, and disclosure requirements to enhance transparency and reliability.

3. What are the benefits of Accounting Standards?

• Standardization of accounting treatments reduces confusion.
• Additional disclosures beyond statutory requirements.
• Enhances comparability of financial statements both domestically and internationally.

4. What are the limitations of Accounting Standards?

• Difficulties in making choices between alternative treatments.
• Restricted scope: Accounting standards cannot override the law or statutes.

5. Who formulates Accounting Standards in India?
The Institute of Chartered Accountants of India (ICAI) formulates Accounting Standards through its Accounting Standards Board (ASB). The ASB ensures the standards are consistent with international norms and adapted to India’s legal and economic environment.

6. What is the process for formulating Accounting Standards in India?

• Identification of areas for AS.
• Constitution of study groups to draft and circulate preliminary standards.
• Public consultation for comments.
• Finalization and issuance by ICAI, with possible modifications after considering feedback.

7. What are the different sets of Accounting Standards in India?
There are three main sets:

1. Indian Accounting Standards (Ind AS): For listed companies, NBFCs, and large unlisted companies (net worth ≥ ₹250 crores).
2. Accounting Standards (AS): For companies not following Ind AS.
3. Accounting Standards by ICAI: For non-corporate entities.

8. What are some examples of Accounting Standards in India?
Some notable Accounting Standards include:

• AS 1: Disclosure of Accounting Policies
• AS 9: Revenue Recognition
• AS 10: Property, Plant, and Equipment
• AS 18: Related Party Disclosures
• AS 19: Leases

9. How are Accounting Standards related to international standards?
India has converged its accounting standards with International Financial Reporting Standards (IFRS) to improve global comparability and transparency. However, India follows Ind AS, which is IFRS-converged but adapted to the Indian legal and business environment.

10. Can Accounting Standards override the law?
No, Accounting Standards must comply with prevailing statutes. They are designed to work within the framework of existing laws and cannot override statutory requirements.