Accounting Standards

It is Written Documents issued by Government or Regulatory

Body In India, issued by ICAI on 21st April,1977.

Objective of AS:
1. Standardize the diverse Accounting Policies
2. Add the reliability to the Financial Statement
3. Eradicate baffling variation in treatment of accounting aspects
4. Facilitate inter-firm and intra-firm comparison
Example:

A Ltd. B Ltd.

PBD 10 cr 10 cr
Gross Block 10 cr 10 cr
Net block 9 cr 9 cr
Depreciation method SL WDV
Dep rate 10% 10%
Dep amount 1 cr 90 lacs
PAD 9 cr 9.10 cr.
 Procedure for issue of AS in India by ICAI
Determination of broad areas, by ASB, in which AS are required

Preparation of preliminary draft by study groups, containing objectives, scope, definitions,

recognition and measurement principles, presentation and disclosure requirements.

Consideration of preliminary draft by ASB, revision carried out if required

Draft circulated for comments, to council members of ICAI.

Meeting with the representative of specified bodies to ascertain their views, finalization
of exposure draft by ASB
Issue of exposure drafts, for comments, to members of ICAI, specified bodies, SE etc.

Preparation of final draft by ASB in he light of comments received

Submission to the council of ICAI, consideration of the same by Council, modification

carried out (if required)

Issue of Accounting Standards by ICAI

 AS 1 Disclosure of Accounting Policies
• Different entities prepare and present their financial statements by
adopting different policies. The adoption of different accounting policies
may affect profit or loss of enterprise significantly.

• This statement requires to disclose all the significant accounting policies

adopted in preparing and presenting financial statements.

• Disclosure of some accounting policies is required by law in some cases.

• The purpose of this statement is for better understanding of financial

statements and to facilitate meaningful comparison of financial statements
of different enterprises.
 Fundamental Accounting Assumptions.
• There are mainly 3 These assumptions are :
• 1. Going Concern
2. Consistency
3. Accrual
1. Going Concern

It means the enterprise is continuing in operation for foreseeable future

It is assumed that the enterprise has neither intention nor the necessity of
liquidation or of curtailing materially the scale of operations.

2. Consistency
It is assumed that accounting policies are consistent from one period to
another.

3. Accrual
Revenues and costs are recognized when they are earned or incurred and
not when actually money paid or received.
Consideration of selection of accounting policies

• The policy adopted should give true & fair view

And major considerations are

i) Prudence: Provide for all losses but do not recognize unrealized profits.
ii) Substance over form : Accounting treatment and presentation in
financial statements of transaction and events should be governed by
their substance and not merely by legal owner. e.g. AS-19, finance
lease…….lessee should capitalize the asset as, in, substance, lessee is
real owner.
iii) Materiality : An item is material if the knowledge of it influences the
decision of the user of the financial statements.
 Areas where different accounting policies may be adopted by
different enterprise.

1. Method of depreciation : WDV or SL

2. Valuation of inventories: FIFO, Weighted average, standard cost
3. Valuation of investment: cost, lower of cost and fair value.
4. Translation of foreign currency items: average rate, closing rate, rate
prevailing on the date of transaction
5. Valuation of fixed assets: historical cost, revaluation price
6. Treatment of retirement benefits
7. Treatment of goodwill
8. Treatment of expenditure during construction
9. Treatment of contingent liability
10. Recognition of profits on long term contracts, year to year, percentage
completion.
• ABC ltd. Has accounted for its liability towards retirement benefits of its
employees on cash basis. Since it has not followed the fundamental
accounting assumption of accrual, the auditors want to qualify the report.
The management of ABC Ltd. however, contends that AS-1 simply require
a disclosure if a fundamental accounting assumption has not been
followed, hence, the report should not be disqualified since the fact of
accounting for retirement benefits on cash basis has been disclosed by the
way of notes to accounts. Comment.
 A ltd B ltd.

Turnover 50 cr 50 cr

Purchases 25 cr 25 cr

Other direct costs 5 cr 5 cr

OS Nil Nil

CS 10 cr 12 cr

Inventory valuation WA FIFO

method
GP 30 cr 32 cr