Indian Accounting Standards - Introduction
There is a growing need for global accounting standards and this need has been recognised by the ICAI (Indian Chartered Accountants Institute) in these global times. In collaboration with the Government of India, the ICAI has decided to not accept and adopt the IFRS the way they are. This led to the development of Indian Accounting Standards or Indian AS. Let us understand in detail the development of international and Indian Accounting Standards.
Table of Contents
Indian Accounting Standards - Introduction
Formulation of the Indian Accounting Standards
Significance of Indian Accounting Standards
Applicability of Indian Accounting Standards
Phases of Adoption of Indian Accounting Standards
Key learnings
Frequently asked questions
Inception of Indian Accounting Standards
Accounting Standards were formulated by The Institute of the Chartered Accountants of India (ICAI). The process of migrating towards the International Financial Reporting Standards (IFRS) was initiated by ICAI. The IFRS are issued by the International Accounting Standards Board (IASB). The purpose of this shift was to increase the transparency and acceptability of the financial statements of the Indian corporates on an international level.
For the development of the Indian Accounting Standard, ICAI and the government analysed in detail the requirements of IFRS before deciding to converge the two. The Ind AS were formulated in line with the IFRS by the Accounting Standards Board (ASB).
Formulation of the Indian Accounting Standards
The Indian Accounting Standards were issued by the Central Government of India in consultation with the National Advisory Committee on Accounting Standards (NACAS). This was done under the supervision and control of the Accounting Standards Board (ASB) of ICAI. The Indian AS was recommended by NACAS to the Ministry of Corporate Affairs who is entitled to make Ind AS applicable to the companies in India. The Ind AS are named and numbered in the same way as their corresponding IFRS. Till date, 40 Indian AS have been issued.
Significance of Indian Accounting Standards
The Indian AS helps in the flow of money across borders, facilitate global listing and allow comparability of the financial statement on the international level. This facilitates global investments, thus benefiting the capital market stakeholders. The Indian AS helps the investor in doing a comparison of the investments on a global level. With the Indian AS in place, there is no need for the reinstatement of financial statements of Indian Corporates.
Applicability of Indian Accounting Standards
The Initial implementation year of Indian AS was 2011 but it was postponed due to certain issues by the Ministry of Corporate Affairs. The Companies (Indian Accounting Standards) Rules were issued in February 2015 by the Ministry of Corporate Affairs. This revised roadmap of implementation excluded the Banking companies, Insurance companies, and NBFCs from it.
Ind AS were implemented on a voluntary basis from 1st April 2015, and were made mandatory from 1st April 2016 as per the notification. The later notification issued included the NBFCs, Banking companies, and Insurance companies for the purpose of implementation. A Company may choose to follow Ind AS either voluntarily or mandatorily. But, once it starts following the Ind AS, it cannot revert back to its old method of accounting.
Phases of Adoption of Indian Accounting Standards
The phase-wise adoption of Ind AS as notified by the Ministry of Corporate Affairs is as follows:
(This notification incorporates the specific classes of companies based on their Net worth and listing status)
Phase I
From 1st April 2016, Indian AS mandatorily applicable to every company provided::
It is a listed or unlisted company
The Net worth of the company is ≥ ₹ 500 crores
Net worth to be calculated using figures for the previous three Financial Years (31.03.2014, 31.03.2015 and 31.03.2016).
Phase II
From 1st April 2017, Indian AS mandatorily applicable to every company provided:
It is a listed company or is in the process of being listed
Its Net worth is ≥ ₹ 250 crores but ≤ ₹ 500 crores (on any of the above-mentioned dates).
Net worth to be calculated using figures for the previous four Financial Years (31.03.2014, 31.03.2015, 31.03.2016 and 31.03.2017).
Phase III
From 1st April 2018, Indian AS mandatorily applicable to all Banks, NBFCs and Insurance companies provided;
Net worth is ≥ ₹ 500 crores w.e.f 1st April 2018.
A separate set of Ind AS for Banking and Insurance Companies as notified by the IRDA, with effect from 1st April 2018. Core investment companies, stockbrokers, venture capitalists, etc. included in NBFCS.
Net worth to be calculated using figures for the previous three Financial Years (31.03.2016, 31.03.2017 and 31.03.2018)
Phase IV
From 1st April 2019, Indian AS are mandatorily applicable to all NBFCs provided:
Net worth is ≥ ₹ 250 crores but ≤ ₹ 500 crores
When the Ind AS becomes applicable to a company, it shall by default apply to:
All its subsidiaries
Holding companies
Associated companies and
Joint ventures (irrespective of individual qualification of such companies)
Key Learning from The Article
IFRS is the global accounting standard on the basis of which an Indian standard GAAP has been formulated.
ICAI is the authority to regulate, control and monitor the accounting standards in India.
The Indian Accounting Board formulated the standards on the basis of IFRS.
The AS is incorporated under the Companies Act of 1956 and further modifications are done under the Companies Act 2013.
The Ministry of corporate affairs is the responsible ministry.
The accounting standards were adopted in four different phases.
FAQs on Development of Indian Accounting Standards
1. What are the key objectives behind the formation of accounting standards?
Some of the key objectives of the formation of accounting standards are as follows -
To have a set standard for the diversified accounting policies
To match the international standard of accounting
To attract more foreign investment by providing ease of doing business
To improve the reliability of financial standards
To maintain uniformity in the accounting practices
To control malfunctioning and domination of professionals like CAs
To bring transparency in the system safeguarding the interest of the users
To bridge the trust deficit between people and the system
To set accountability of the CA professionals
To make compatibility of financial statements possible
Apart from these objectives, there are other objectives as well behind the formation of accounting standards.
2. How many accounting standards are there in total?
In total there are 32 AS ranging from AS-1 to AS-32. All the AS are formulated for different accounting purposes. For example, AS - 7 is related to construction contracts, A-7 related to the effect of changes in foreign exchange rates.
You don't have to memorize all the AS and their associated fields. But the students should have a fair idea about the field for which accounting standards are present and some basic information on each of these standards.
3. What are the principles of IFRS on the basis of which the financial statements are prepared?
The IFRS requires the financial statements to be formed on the basis of four principles that are -
Clarity means the financial statement should be easy to read and understand.
Relevance means the data used in the financial statements are relevant to the business and the period
Reliability means the information and the data presented to the public should be free from any form of manipulation, distortion, or biases.
Compatibility means there should be a common standard thereby, making it possible for various companies and firms to compare their statements
4. What is the difference between an IFRS and GAAP?
IFRS which stands for International Financial Reporting Standards is an international accounting standard, providing guidance on how different transactions should be reported by the company in their financial statements. Whereas, GAAP stands for Generally Accepted Accounting Principles commonly-followed accounting rules and standards only in India and is given by the ministry of corporate affairs.
IFRS is used in 110 countries, while GAAP is used only in India
If a company follows IFRS they need to give a note of disclaimer of their statement while a company following GAAP need not give any disclosures in written notes.
5. What are the accounting principles of GAAP?
Some of the common accounting principles of GAAP are -
The Accrual principle means all transactions should be included in the periods during which they actually take place rather than following their cash flow
Conservatism principle means all liabilities and expenses should be recorded as soon as possible
Consistency principle means continuation in the usage of the existing and adopted methods and principles for accounting until a better method or principle comes into the industry
Full disclosure principle means disclosure of all the relevant data and information without manipulation
There are more accounting principles of GAAP, you can read them in detail in the article related to GAAP.
6. What Changes have been made in IFRS during the Development of Accounting Standards in India?
During the development of accounting standards in India, ICAI has tried to keep them in line with the IFRS as far as possible. The changes made were only those that were deemed absolutely essential. Some of the changes made were:
Change in the AS terminology to make them consistent with the terminology used in law
Changes in cohesion with the economic conditions of the country
7. How is Net Worth to be calculated in the Indian Accounting Standards?
Net Worth = Total Paid-up share capital + all reserves out of profits and securities premium – accumulated losses – deferred expenditure and miscellaneous expenditure not written off
Net worth should include only the capital reserve arising out of Promoters Contribution and any government grant received.
Net Worth should not include reserves created out of revaluation of assets and written off depreciation in Capital Reserves
