Module: 4
Financial Standards and Codes: Report of Advisory Group on International Accounting and Auditing

Accounting Standards in India

The Existing Standards

In India, the Accounting Standards Board (ASB) of the Institute of Chartered Accountants of India (ICAI) is responsible for setting accounting standards (AS). The ASB comprises members of the Central Council of ICAI as well as certain members from the professional , industry and various other segments and government agencies.

The ASB of ICAI has issued 19 accounting standards so far. The list of accounting standards issued is given hereunder.

So far, a duty was cast by ICAI on its members engaged in discharging their attest function to ensure that these accounting standards are followed in the preparation and presentation of financial statements. The Companies Act, 1956, was amended w.e.f. 31st October, 1998 requiring statement on non-compliance, if any, of the specified accounting standards in the financial statements. The amendment also requires auditors of companies to make a specific statement on the compliance of accounting standards in the audited balance sheet and profit and loss account. If there is any non-compliance of accounting standards, the fact and impact thereof are required to be disclosed.

The amendment to the Companies Act in 1998, envisages the establishment of a National Advisory Committee on Accounting Standards which will advise the Central Government on the formulation and laying down of accounting policies and accounting standards for adoption by companies. The Committee will consist of a Chairperson who is a person of eminence well versed in accountancy, finance, business administration, business law, economics or similar discipline and representatives of the ICAI, the Cost and Works Institute of India and the Institute of Companies Secretaries of India and of the Central Government, the Reserve Bank, the Comptroller and Auditor General of India, educational institutions, Central Board of Direct Taxes, the Apex Chambers of Commerce and the Securities and Exchange Board of India (SEBI). The Central Government has powers to prescribe, in consultation with the National Advisory Committee, accounting standards to be observed by Companies; and until such standards are prescribed, the accounting standards issued by ICAI are deemed to be prescribed standards.

Pursuant to an amendment to the Income Tax Act, 1961 in 1995, it has been provided that the Central Government may notify in the official Gazette from time to time accounting standards to be followed by any class of assesses or in respect of any class of income. Two accounting standards viz., (1) Disclosure of Accounting Policies and (2) Disclosure of Prior Period and Extra-Ordinary Items and Changes in accounting policies have been issued. These standards are more or less in conformity with the parallel standards issued by ICAI. After 1997, no other standards have been issued. The main reason advanced for the necessity for the amendment of the Income Tax Act was the belief that the standards issued by ICAI permitted alternative treatment in various situations. ICAI has, as explained later, already initiated action to reduce the alternatives.

The Reserve Bank of India (RBI) as a regulatory authority also issues directions to banks and financial institutions as also to Non-Banking Finance Companies (NBFCs) on the manner in which certain accounting matters should be dealt with.

Accounting Standards Board of ICAI is engaged in the task of formulating and issuing accounting standards since 1977. The accounting standards issued by ASB of ICAI are primarily based on International Accounting Standards (IAS) issued by International Accounting Standards Committee. Necessary modifications are carried out to suit and adjust to the trade, usage, customs, business and economic conditions and laws prevailing in India. Since several International Accounting Standards (IAS) are revised from time to time particularly on account of "Comparability and Improvement Project" carried out by IASC during 1987 to 1993 to reduce the alternatives granted in IAS, it has become necessary for ASB of ICAI to carry out revisions in Indian Accounting Standards (AS) to conform to the revisions in IAS. This process initiated by ASB of ICAI is required to be speeded up to reduce the gap with IAS and to meet with the challenge thrown open by the globalization of Indian economy for harmonization with International Accounting Standards.

Further, the International Accounting Standards Committee has, as a result of an agreement reached with International Organization of Stock Exchanges (IOSCO) to obtain its recognition for International Accounting Standards, revised a number of standards and brought out new standards.

In view of the above developments, ASB of ICAI has initiated actions by forming study groups and issuing exposure drafts for issue of new standards and revised old standards to cope up with the changes in the scenario of IAS. It is imperative that this process is speeded up, in view of rapidly changing global scene of accounting standards and fast developing globalization of Indian trade and commerce.

The existing procedure for formulating and issuing accounting standards followed by the Accounting Standards Board of the Institute of Chartered Accountants of India (ICAI) is as follows: -

• ASB determines the broad areas in which Accounting Standards need to be formulated and the priority with regard to issuance thereof;

• In the preparation of Accounting Standards, ASB is assisted by Study Groups constituted to consider specific subjects. In the formation of Study Groups, provision is made for wide participation by the members of the Institute and others;

• The Board considers the draft as submitted by the study group and finalises the same for issue to all members of the Council of ICAI as well as to the bodies listed below for their comments: -

  • Associated Chambers of Commerce and Industry.

  • Federation of Indian Chambers of Commerce and Industry.

  • Institute of Cost and Works Accountants of India.

  • Standing Conference of Public Enterprises.

  • Institute of Company Secretaries of India.

  • Central Board of Direct Taxes.

  • Department of Company Affairs.

  • Comptroller and Auditor General of India.

  • Reserve Bank of India.

  • Indian Banks' Association.

  • Securities and Exchange Board of India.

  • Confederation of Indian Industries

• · ASB holds a meeting with the representatives of specified outside bodies listed above to ascertain their views.

• On the basis of the comments received from the Council members as well as the outside bodies the Board finalises the Exposure Draft and exposes it for public comments: -

  • To all members of the profession through the medium of their Journal.

  • To principal Chambers of Commerce and Industry through direct communication.

  • To all recognised Stock Exchanges through direct communication.

  • To the Institute of Cost & Works Accountants of India through direct communication.

  • To the Institute of Company Secretaries of India through direct communication.

  • To the Department of Company Affairs, Central Board of Direct Taxes and the Comptroller & Auditor General by direct communication.

  • To principal Financial Institutions, Reserve Bank of India, Life Insurance Corporation, General Insurance Corporation, Unit Trust of India and Indian Banks' Association by direct communication.

  • To all Regional Councils and Branches of the ICAI by direct communication.

  • To all Council Members.

  • To Securities and Exchange Board of India by direct communication.

• After taking into account the comments received from various quarters, the draft of the proposed standard is finalised by the Board and submitted to the Council for its consideration.

• The Council of the Institute considers the final draft of the proposed Standard, and if necessary, modifies the same in consultation with ASB.

The Accounting Standard on the relevant subject is then issued under the authority of the Council.