CHAPTER II ACCOUNTING STANDARDS

INTRODUCTION

CONCEPTUAL FRAMEWORK

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

ACCOUNTING STANDARDS

PROGRESS OF ACCOUNTING STANDARDS

INTERNATIONAL FINANCIAL REPORTING STANDARDS

ACCOUNTING STANDARDS IN INDIA

CONCLUSION

CHAPTER II ACCOUNTING STANDARDS

INTRODUCTION

Accounting is primarily concerned witli recording of economic data of a

business enterprise and communicating the same to tlie interested parties

called users. The needs of the users are better fulfilled if accounting data are

comparable at least across companies in similar business. Such comparable

information could be provided only if companies adopt uniform accounting

policies and disclose adequate information about accounting methods,

principles and procedures used [Verma et. al., 1997:73"/]. Accounting

principles are not like any physical laws; they do not exist in nature awaiting

discovery, rather, people, in the light of what we consider to be most important

objectives of the financial reporting, develop them. The development of

accounting principles worldwide is always an evolutionary process. As

business engages in more complex transactions and understandable

disclosure, accounting principles continually need to be scrutinized and re­

examined [Hargadon et. al., 2003:24].

The role of accounting has changed from measurement process to

information dissemination process. In this regard, Wheeler [1970] divided the

accounting system into four phases viz. (a) recording; (b) summarizing and

organizing data; (c) communication of information to potential users, and (d)

the user and his decision functions (it is usually viewed as outside the

accounting). The impetus for this shift was provided by AAA [1966:7] which

defined accounting as: "...the process of identifying, measuring, and

communicating economic information to permit informed judgment and

decisions of users of the information".

The various dimensions of accounting standards have been analyzed

under: conceptual framework, generally accepted accounting principles,

accounting standards, progress of accounting standards and accounting

standards in India.

21

CONCEPTUAL FRAMEWORK

Conceptual framework is the foundation on which accounting

standards have been developed, promulgated and practiced. The concept of

conceptual framework has been presented under: (i) Meaning; (ii) Need and

Development; and (iii) The Efforts.

(i) Meaning:

In general terms, a conceptual framework is a statement of generally

accepted theoretical principles, which fomri the frame of reference for a

particular field of enquiry. In terms of financial reporting, these theoretical

principles provide the basis for both the development of new reporting

practices and the evaluation of existing ones. [Davies et. al., 1999:53].

However, principles distilled from practice are capable of leading so far and

no further. Hence Storey [1964:60] observes: "A point is reached at which

principles of this type become meaningless unless and until a conceptual

framewori< is developed which gives meaning to the procedures followed, or

points out that the procedures followed do not make sense and should be

replaced by others which do ... a conceptual framework...(provides) at once

both the reasoning underiying procedures and a standard by which

procedures are judged".

The FASB [1976] describes its conceptual framework as a constitution,

a coherent system of interrelated objectives and fundamentals that can lead

to consistent standards and it describes the nature functions, and limits of

financial accounting and financial statements. Because of the shift in the

function of accounting from stewardship to information provisioning to enable

users to take economic decisions, and also corporate governance, the

accounting standard setters also attempted to produce a conceptual

framework for financial reporting. The objectives of the financial statements

are really the functions of financial statements. These functions include the

demonstration of stewardship, the provision of information to aid decision­

making and the means of demonstrating accountability of one group to

another. In reality it is the function of the makers of the accounting standards

to create a strong framework with in which credible financial statements can

be produced. However, there is a conflict between the wishes of various

22

parties (users) for more information and the reluctance of tlie supplier to incur

the cost or inconvenience of supplying the infomriation. Consequently, the

range of information supplied varies from the minimum required by law to

considerably beyond this point; from the simple quantitative financial material

to the qualitative and quantitative material found in the recent annual reports,

which appear to mix accounting and public relations presentations.

Therefore, the conceptual frameworks developed by accounting bodies (and

also accountants) in a number of countries (USA, Canada, UK, Australia, New

Zealand and the International Accounting Standards Committee) report the

functions of financial statements (or objectives) as well as the various conflicts

of interest between the different parties. In this regard, Peasnell [1982]

posits: "what a conceptual framework may do, in fact, is focus attention on the

underlying conflicts of interest, which lead to disputes on individual standards.

In other words the issue involved in the development of a conceptual

framework highlight the controversies in accounting standard setting rather

than remove them". Hence conceptual framework is a statement of generally

accepted theoretical principles, which fonn the frame of reference for the

development of accounting standards and guidance in fomnulating accounting

principles and policies. Objectives of financial statements are concerned with

goals and purposes of accounting. For implementing the goals and purposes,

recognition and measurement concepts are needed. These recognition and

measurement concepts are based on assumptions, principles and constraints.

This whole concept leads to the conceptual framework of financial accounting

and reporting. Further, Wyatt [1990] observes: "The portions on recognition

and measurement need additional thought and development. A framework

should be a living document, one that is revisited from time to time to retain its

relevance. Short comings in the framework provide opportunities for criticism

and tend to produce standards that are inconsistent and less supportable than

desirable". A conceptual framework for external corporate reporting should

relate to ideas about why, what, and how things are to be reported and, these

may radically change overtime and this may require information approaches

and new components. However, Carsberg [1984] remarks: "In essence a

conceptual framework comprises a set of basic principles that command

general support and can be used to help with detailed decisions by increasing

23

the likelihood of consistency and reducing the costs of analysis". A

conceptual framework is not a static one and subject to changes with passage

of time and reporting requirements. Hence PonA/al [2003:29] argues that no

constitution or framework can remain a static document. It has to be a living

one meeting the changing needs. In essence, the paradigm shift in conceptual

framework forming the basis for accounting standards has been summed up

by Higson [2003:^90] and Figure 2.1 presents this shift.

THECH Nature

Stewardship

Decision making

Corporate Communication

FIGURE 2.1 ANGING NATURE OF CORPORATE REPORTING

Emphasis Accountability

User needs

Corporate Governance

Focus Managers of the business

The users of financial statements

The message the directors are trying to communicate about the reporting entity

Orientation Past financial performance

Predictor ability of the data

Past activities (financial and non-financial) and qualitative assessment of the future direction of an enterprise

Source: Higson, [2003:190].

Further, SCRP [1958:63] contended that the concepts would "provide a

meaningful foundation for the formation of principles and the development of

rules or other guides for the application in specific situations". Also the

concepts will provide a frame of reference to the financial statements

prepares and auditors in resolving accounting questions in the essence of

established standards. However, Zeff and Keller [1985:96] argue that the

conceptual framework may well reduce the need for some specific standards.

Further, the framework may also be beneficial to those who use accounting

information to understand better the purpose, content, characteristics and

limitations of the information in a financial report.

Originally, the conceptual framework was seen as a means of

assessing "correctness" of new accounting standards. However, the

conceptual framework has been the object of numerous criticisms both from

the accounting mainstream [Solomons, 1986] and from more critical

approaches [Hines,1988l. Even advocates of a conceptual framework argue

24

that the purposes of a conceptual framework are to facilitate decisions on

controversial issues, to avoid wasted effort in standard setting, and to lessen

the need for a large number of detailed standards, but they also point out that

it cannot eliminate the room for dispute [Taylor and Turley, 1986:79]. It is

evident that the conceptual framework does not provide all the answers to the

accounting questions. Because the concepts themselves being subject to

interpretation, environmental influences may at times affect specific

accounting standards and the concepts themselves may change. Hence

Kitchen [1954] observes: "Given a strong motivation to have an accounting

standards accepted which is favorable to one's interests, it is difficult to devise

an argument as to why a given transaction should be recorded in a certain

way under the currently accepted definitions of accounting terms". The

current conceptual framework, which provides guidance for standards, has

been visualized by FASB as "incomplete, internally inconsistent, and

ambiguous". Hence Zeff and Keller [1985:705] criticize that "No conceptual

framework, however logically concerned, can counter practical issues".

Although there are criticisms as to the practical relevance of the

conceptual framework foundation, it is hoped that a coherent set of objectives

and concepts will provide a direction for setting standards and for solving

current accounting practice questions, and to reduce the influence of personal

biases and political pressures in making accounting judgments. These are

probably the principal long-run benefits of the standard setting agencies

efforts one can also posit that in a changing atmosphere accounting

information should posses a different communication that is expected to go

beyond the traditional responsibility area. What is wanted for this purpose is

to have a conceptual framework which in effect would make financial reports

expressed always in universally accepted norms and hence a full proof

evidence for comparison, understanding, decision making and prediction.

Hence single worldwide framework of common measurement criteria and

comprehensive disclosure is the ideal key to remove the differences due to

business practices, legal and fiscal framework, economics and social

conditions differ in different countries.

25

(ii) Need and Development:

Since the 1970s, the standard setters all around the world have been

attempting to ensure that they have a conceptual basis to underpin the

promulgation of their standards. This has resulted in a quest to develop a

conceptual framework [Higson, 2003:62]. While the dynamism and

complexity of business may result in legal requirements becoming out of date,

there must be a concern when the conceptual framework reporting standards

is inconsistent with legal requirements [Higson, 2003:78].

The need for a conceptual framework emanates from the following

viewpoints: (i) theoretical importance to help standard setters produce

consistent and coherent accounting standards; (ii) practical importance to

assist practitioners in solving accounting problems; (iii) political importance to

maintain control over accounting developments and to present the public face

of accounting to the outside world; (iv) educational importance to under pin

what is taught to accountants, users (of the financial statements) and students

about the nature and limitations of financial statements; (v) importance to

auditors to state imply that the financial statements are fit for the purpose; and

(vi) to highlight future developments providing a lead in the future

development of legal requirements [Higson, 2003:81-82].

Similarly, the FASB has suggested that the following benefits may

manifest themselves as a result of achieving agreements on the conceptual

framework: (i) guiding the body responsible for establishing standards; (ii)

providing a frame of reference for residing accounting questions in the

absence of a specific promulgated standard; (iii) determining bounds for

judgment in preparing financial statements; (iv) increasing financial

statements users understanding of and confidence in financial statements;

and (v) enhancing comparability [Dopuch and Sunder, ^985•.101 & 102]. In

the background of this importance of conceptual framework, the major

developments in the framework have been presented in Figure 2.2.

26

FIGURE 2.2 DEVELOPMENTS IN CONCEPTUAL FRAMEWORK

Raton (1922) Accounting Theory. Sprague (1923) Philosophy of Accounts-Canning (1929) The Economics of Accountancy. AAA (1936) A Tentative Statenfient of Accounting Principles Affecting

Corporate Reports. Sanders, Hatfield and Moore (1938) A statement of Accounting principles. Paton and Littleton (1940) An Introduction to Corporate Accounting

Standards. Moonitz (1961) The Basic Postulates of Accounting. Sprouse and Moonitz (1962) A Tentative Set of Broad Accounting Principles

for Business Enterprises. Grady (1965) Inventory of Generally Accepted Accounting Principles for

Business Enterprises. AAA (1966) A Statement of Basic Accounting Theory. APB (1970) APB Statement No. 4: Basic Concepts and Principles Underlying

Financial Statements of Business Enterprises Trueblood Report (1973) Objectives of Financial Statements. FASB (1974-85) The FASB conceptual framework project. ASSC (1975) The Corporate Report-Stamp Report (1980) Corporate Reporting: Its Future Evolution. AARF (1987-95) The Australian conceptual framework project. CICA (1988-90) The Canadian conceptual framework project. lASC (1988-89) The International Accounting Standards Committee's

conceptual framework. ASB (1991-99) The development of the UK conceptual framework.

Source: Higson [2003] p. 64.

(iii) The Efforts:

The various accounting bodies of the world have made serious

attempts to develop the conceptual framework for financial reporting. The

contributions from (a) United States; (b) United Kingdom; (c) Canada; (d)

Australia; (d) New Zealand; (e) lASB; and (f) India have been delineated

below.

(a) United States:

In US, the FASB has issued seven pronouncements called statements

of Financial Accounting Concepts in a series and they are presented in Figure

2.3. The framework is designed to prescribe the nature, function and limits of

the financial accounting and to be used as a guideline that will lead to

consistent standards. These conceptual statements do not establish

27

FIGURE 2.3 CONCEPTUAL FRAMEWORK IN THE UNITED STATES REPORTING

OBJECTIVES

ACCOUNTING

ELEMENTS

RECOGNITION

REPORTING

FINANCIAL STATEMENT/FINANCIAL

REPORTING

EARNINGS

MEASUREMENT CASH FLOW AND LIQUIDITY

QUALITATIVE CHARACTERISTICS

Source: Epstein et. al., [2005:25]

accounting standards or disclosure practices for particular items. They are

not enforceable under the rules of conduct of the code of professional ethics.

The components to the left are more basic and those to the right depend on

components to their left. Components are closely related to those above and

below them.

Unlike a statement of Financial Accounting Standards (FAS), a

statement of financial accounting concepts (CON) does not establish GAAP.

Since GAAP may be inconsistent with the principles set forth in the

conceptual framework the FASB expects to re-examine existing accounting

standards. Until that time, a CON does not require a change in existing

GAAP. CON do not amend, modify, or interpret existing GAAP, nor do they

justify a departing from GAAP based upon interpretations derived from them

[Epstein, et. al, 2005:25].

The seven concepts issued by the FASB are: objectives of financial

reporting by business enterprises, qualitative characteristics of accounting

information, elements of financial statements of business enterprises,

objectives of financial reporting by non-business organization, recognition and

28

measurement in financial statements of business enterprises, elements of

financial statements and using of cash flow information and present value in

accounting measurements.

The FASB framework has identified only three main qualities:

relevance, reliabilities and comparability. The relevance consists of

timeliness, predicting value & feed back value. Reliability consists of

verifiability, neutrality and representational faithfulness and comparability

includes consistency and the thresh hold for the recognition is materiality

which incorporates understandability and decision usefulness.

(b) The United Kingdom:

The approach taken by the accounting bodies in the UK to the

objectives of the accounting process was quite different from that of their US

counter part. The corporate report of the accounting standards steering

committee, which is acknowledged by the UK government green paper,

produced in July 1977, has influenced the accounting profession (practice).

The ASC of the UK is the national standard setting body formally to take a

stance on the lASC 'Framework for the preparation and presentation of

financial statements'. In a foreword published to the lASC document, the

ASC stated that it had agreed to recognize the framework as to a set of

guidelines to assist it in its work of proposal for new standards and revision to

existing standards on the basis of the recommendations of the Dearing

Committee, ASB was formed replacing ASC (UK) under the guidance of

Financial Reporting council on 17" August 1990. British accounting

standards have no clear conceptual logic. However, there is a great deal of

commonality between the ASB of UK and the FASB of US [Tweedie

1993: 68--/69].

(c) Canada:

There have been two attempts at producing a Canadian conceptual

framework for accounting and these are the efforts made by CICA in 1980

and the other by ASAC in 1987.

The CICA report provides guidelines for standard setters, suggests

user groups, indicates the purposes of reports and statements and makes

reference to the possible context of such documents. The overall approach

29

seeks to expand the notion of accountability and to add further disclosures to

existing annual reports.

(d) Australia:

In Australia, the Australian Accounting Research Foundation (AARF)

and the Public Sector Accounting Standards Board (PSASB) jointly developed

"Australian Conceptual Framework for Regulated Financial Reporting", in

1987. The definition of "ACFRFR" is set out as follows: "The conceptual

framework is a set of inter-related concepts, which will define the nature,

subject, purpose and broad content of financial reporting. It will be an explicit

rendition of the thinking which is governing the decision-making of the

[standard setters] when they set down requirements, including accounting

standards." It is not expected that the framework will ever be fully completed,

in the sense that Boards [PSASB] expect it to evolve on a continuing basis as

the demands on financial reporting, and capabilities open to such reporting

change [AARF, 1987]. The framework are designated by ED42A-D of AARF,

[1987] and ED46A-D of AARF [1988], in these exposure drafts, the contents

are; objectives to provide infomriation to users to economic decision on the

allocation of scares resources, qualitative characteristics include,

comparability, materiality, relevance, reliability and understanding, definition

and recognition of assets and liabilities; definition of the reporting entity,

definition and recognition of expenses etc. have been outlined.

(e) New Zealand:

The only study of accounting objectives so far has been the New

Zealand committee of inquiry into inflation accounting [1977] known as the

Richardson Report. Prior to the year 1977, the accounting standards issued in

New Zealand were entirely adopted from the UK without any material

amendment and no conceptual framework was established for a long time.

The Richardson report indicated that the objective of accounting is to provide

information to users of financial statements to meet their needs. The users

identified were equity investors, creditors, management, employees, the

government and public. It was considered that general-purpose financial

statements would provide the information required by the users. This

30

information includes a measurement of enterprise's resources, its liabilities,

the owner's equity in the enterprise, operating profit of the enterprise, the

profit attributable to the owners and the cash flow of the enterprise.

However, the study by Naran [1984] considers that the developments

in the area of conceptual frameworks in UK and USA upto 1980 was the basis

to provide an important step to begin the development of a conceptual

framework for financial reporting in New Zealand. In recent years, the

conceptual framework has leaned towards the lASB framework. However,

Naran [1984] observes: "Although no standard-setting body has yet ruled on a

conceptual framework, at least studies have been produced, drafts have been

issued, and discussion and debate have occurred-all overseas; but the New

Zealand requirements are based on the Financial Reporting Act 1993 and

accounting standards issued by the Institute of Chartered Accountants of New

Zealand (ICANZ).

(f) The lASB:

The lASB inherited the lASC's framework for the preparation and

presentation of financial statements (the framework) like the other current

conceptual frameworks among Anglo-Saxon standard setters. The framework

developed in the US has become the basis for the lASB. The framework

states that "The objective of financial statements is to provide information

about the financial position, performance and changes in financial position of

an enterprise that is useful to a wide range of users in making economic

decisions". The information needs of investors are deemed to be of

paramount concern.

The framework holds that users need to evaluate the ability of the

enterprise to generate cash and the timing and certainty of its generation.

The financial position is affected by the economic resources controlled by the

entity, its financial structure, its liquidity and solvency, and its capacity to

adapt to changes in the environment in which it operates. Both FASB and

lASB now intend to analyze solutions to reporting issue in terms of whether

they cause any changes in assets or liabilities and revenue recognition. But

the lASB framework is relatively silent on measurement issues [Epstein and

Mirza [2006:8- 9].

31

FIGURE 2.4 CONCEPTUAL FRAMEWORK OF lASB

OBJECTIVE OF FINANCIAL STATEMENTS

To provide a fair presentation of:

• Financial position

• Financial performance

• Cashflows

TRANSPARENCY AND FAIR PRESENTATION

• Fair presentation achieved through providing useful information (full disclosure)

• Fair presentation equates transparency

SECONDARY OBJECTIVE OF FINANCIAL STATEMENTS

To secure transparency through a fair presentation of useful information (full disclosure)

For decision making purposes

ATTRIBUTES OF USEFUL INFORMATION

• Relevance

= Nature

=Materiality

• Reliability

=Faithful representation

=Substance over form

=Neutrality

=Prudence

=Completeness

• Comparability

• Understandability

Constraints

Timeliness

Benefit vs. Cost

Balancing the

characteristics

qualitative

UNDERLYING ASSUMPTIONS

Accrual basis Going concern

Source: Greuning [2004:91

32

The lASB framework recognizes the constraints on relevant and

reliable information for decision making, namely, the timeliness of the data,

the balance between costs and benefits, and a trade off between the

qualitative characteristics [Higson, 2003:72-73]. However, the lASB

conceptual framework contain elements drawn from both the narrow SFAC of

US and the wider view of the corporate Report of UK, because the lASB

framework deals with: (a) the objectives of financial reporting; (b) qualitative

characteristics of financial statements; (c) the elements of financial reports; (d)

the recognition of the elements of financial statements; (e) Measurements of

the elements of financial statements; and (f) the concept of capital and capital

maintenance. Greuning [2004] argues that the conceptual framework of lASB

focuses on transparency. Figure 2.4 highlights the main features of the lASB

framework.

(g) India:

The Accounting Standards Board (ASB) of the Institute of Chartered

Accountants of India (ICAI) issued framework for the preparation and

presentation of financial statements in 2000. This framework sets out the

concepts that underlie the preparation and presentation of financial

statements for external users. The purposes and scope of the framework is

similar to the conceptual framework of the lASB.

This framework guides the ASB in the development of future standards

and review of existing standards with an aim to reduce the number of

conflicting cases between framework and accounting standards through

times. The ASB's framework also deals with: (a) the objectives of financial

statements; (b) the qualitative characteristics that determine the usefulness of

information provided in financial statements; (c) definition, recognition and

measurement of the elements from which financial statements are

constructed; and (d) concepts of capital and capital maintenance.

The ICAI [2000] has identified (1) understandability, (2) relevance, (3)

materiality, (4) reliability (including faithful representation, substance over

form, neutrality, prudence and completeness) (5) comparability with a

constraint of timeliness, trade-off between benefit and cost, balance between

qualitative characteristics, true and fair value and fair presentation, on

33

relevant and reliable information as fundamental concepts of the framework.

The accounting assumptions include: accrual basis, going concern, and

consistency. Assets, liabilities, equity, income and expenses are the main

elements of financial statements and historical cost, current cost, and

realizable value are the measurement criteria. The additional feature of

qualitative characteristic of the ASB framework is neutrality and prudence.

Objectivity, accuracy and feedback value are not expressed clearly.

The efforts to develop the conceptual framework have been mainly on

qualitative characteristics. Figure 2.5 provides a summary view of the

recommendations in various countries.

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To sum up, conceptual framework is intended to act as a constitution

for the standard setting process concepts set forth the basic accounting

34

fundamentals that will be the basis for the development of financial accounting

and reporting. Standard concepts are the groundwork, the basis, and the

foundation upon which super structure of standards can be created [Porwal,

2002], Even the lASB has not justified its stand on conceptual framework

because it has de -emphasized the measurement process in financial

reporting and this measurement process has not been dealt with adequately

and with justification. In reality, the conceptual framework may be compared

to the search for the Heffalump in vain. However the conceptual framework

has turned out to be a Pandora's box. The more they get into the problem the

more they have been perplexed. The accounting standards are at cross

roads at this stage and the immediate task is to identify a sound conceptual

framework for accounting standards so that the credibility of accounting

standards is enhanced.

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)

For a long period, financial reporting was essentially based on

generally accepted accounting principles, popularly labeled as GAAP. A brief

explanation of this concept is presented under: (i) Meaning of GAAP; (ii)

Nature of GAAP; and (ill) Sources of GAAP.

(i) Meaning of GAAP:

GAAP can be understood as those technical accounting principles,

methods and procedures that are generally applied at a particular point of

time, GAAP are dynamic and they change frequently. According to Meigs and

Meigs [1993:7f], GAAPs are the "ground rules" for financial reporting. These

principles provide general framework determining what information is included

in financial statements and how this information is to be presented. Joshi and

Abdulla [1995:^06] consider these GAAP as standards, assumptions,

conventions, and concepts. However, it is important to note that the phrase

"generally accepted" may have diversified inferences. In this context, Blough

[^937•.31] observes: "A principle in some fields of knowledge is a fundamental

concept universally accepted by persons in the particular field; in others it may

be considered as a rule of action. When we modify principles by the words

35

'generally accepted', there Is an inference that there may be principles not

generally accepted."

(ii) Nature of GAAP:

A good scientist accepts that 'principles' must be regarded as tentative.

A theorists' objection springs from the respect for scientific method. The

theorist's knowledge of history strengthens the view that sooner or later,

principles are likely to be improved on, if not refuted. A corollary Is that

knowledge flourishes best where there is complete freedom of thought. And

this means the absence, not only of crude tyranny, but also of benevolent

authority that makes one to respect some Ideas and discount others.

According AICPA [1953:9] the rules and conventions of accounting are

commonly referred to as "principles". The word "principle" is a general law or

rule adopted or professed as a guide to action; a settled ground or basis of

conduct or practice. In the field of accounting in order to qualify the words as

"generally accepted", it must have "substantial authoritative support."

Principles, standards, and rules set forth by the official rule making bodies of

the accounting profession automatically qualify as 'Generally Accepted

Accounting Principles'. However, many concepts and practices gain

substantial authoritative support from unofficial sources, such as widespread

use or recognition In text books and other unofficial accounting literature.

Bray [1953:2], a reputed British accounting academician, who, opposed to the

indiscriminate use of "accounting principles" expressed his view point relating

to accounting principles this way: "I prefer to think of a principle as a

fundamental concept not a rule to guide conduct, because I believe that as

applied to accounting this will give its tenets which In the long run will secure

its status. Rules, practices, conventions, and procedures may change, but

principles ought to prevail".

The phrase "generally accepted accounting principles" Is a technical

term that encompasses the conventions, rules, and procedures necessary to

define accepted accounting practice at a particular time. It Includes not only

broad guidelines of general application, but also detailed practices and

procedures. These conventions, rules and procedures provide a standard by

which to measure financial presentations.

36

GAAP are concerned with the measurement of economic activity, the

time when such measurements are made and recorded, the disclosure

surrounding these activities, and the preparation and presentation of

summarized economic information in the form of financial statements.

According to Anthony & Reece [1979:^3], the word 'principle' means "a

general law or rule adopted or professed as a guide to action; a settled

ground or basis of conduct or practice". It may be noted here that this

definition describes a principle as a general law or rule that is to be used as a

guide to action. This means that accounting principles do not prescribe

exactly how each event occurring in an organization should be recorded.

Consequently there are many matters in accounting practice that differ from

one organization to another. In part, these differences are inevitable, because

a single detailed set of rules could not conceivably apply to every

organization. In part, the differences reflect the fact that accountants have

considerable latitude with in "generally accepted accounting principles" in

which to express their own ideas as to the best way of recording and reporting

a specific event. It is up to the user of financial report to analyze by using the

knowledge, which requires the specific situation to get the meaning of the

person/persons preparing the report. Lastly, Anthony and Reece [1979]

observe: "Accounting principles are man made, unlike the principles of

physics, chemistry, and other natural sciences, accounting principles were not

deduced from basic axioms, nor is their validity verifiable by observation and

experiment. Instead, they have evolved. The process of evolution is

essentially as follows: a problem recognized, some one works out a good

solution to this problem; if other people agree that this is a good solution, its

use gradually becomes widespread; and then it becomes an accounting

principle. More over, some hitherto accepted principles fall from favor with the

passage of time. This evolutionary process is going on constantly; accounting

principles are not eternal truths". To sum up, the phrase "generally accepted

accounting principles" includes more of practices found in the "official

literature" on accounting than of the conceptual foundations.

37

(iii) Sources of GAAP:

A cogent presentation of the sources of GAAP has been mainly drawn

from the US GAAP. Hence Figure 2.6 presents the panoramic view of these

GAAP based on US GAAP model.

FIGURE 2.6 GAAP MODEL OF THE UNITED STATES

1. American Institute of Certified Public Accountants (AICPA) - Accounting Principles Board (APB) opinions - Accounting Research Bulletins - Accounting Interpretations - Industry Audits and Research guides - Statements of Position

2. Financial Accounting Standards Board (FASB) - Statements - Interpretations - Technical Bulletins - Implementation guides - Emerging Issues on Task Force Consensus

3. Government Accounting Standards Board (GASB) - Statements - Interpretations - Technical Bulletins - Implementation guides

4. International Accounting Standards (lASs) 5. Pronouncements of the Securities and Exchange Commission (SEC) 6. Statements of Auditing Standards 7. Various publications of Professional organizations 8. Various text books, reference books, accounting articles and

committee reports that contain authoritative expressions of GAAP 9. Industry accounting practices 10. Common business usage

Source: FASB [2004]

It is important to note that US GAAP are used by SEC registered

companies not by all US companies. The phrase "generally accepted

accounting principles" encompasses the basic objectives of financial reporting

as well as numerous board concepts and many detailed rules. Thus, such

terms as objectives, standards, concepts, assumptions, and methods rules

often are used.

The US GAAP essentially take the cook book approach which is to set

all detail accounting rules and contains by far the largest number of

standards, comprising several accounting research bulletins, more than 30

APB's and 144 FASB statements, several accounting guides issued by

38

AICPA. Standard setting in the US is in tlie private sector, altliough the SEC

lias statutory authority to establish standards for public companies and it

issues only interpreting guidance.

To conclude, the accounting profession is officially endorsing the usage

of accounting standards instead of GAAP and the trend is catching up all over

the world with the exception of United States, which still uses the phrase

'Generally Accepted Accounting Principles' which are popularly called US

GAAP.

ACCOUNTING STANDARDS

The accounting information is provided to the varied user groups in

monetary terms, through mainly the financial statements, which are the end

products of financial accounting. The objective of the financial statements is

to provide information about the financial position, performance and changes

in financial position of an entity. These are balance sheet, income statements

(profit and loss a/c) and cash flow statement, which are to be prepared on the

basis of accounting standards alone. In fact, if accounting is a "language of

business", accounting standards can be termed as "grammar" of that

'language'. The various dimensions of accounting standards have been

analyzed under (i) Meaning of Standards; (ii) Principles Vs. Standards; (ill)

Need for Standards; and (iv) Identification of Users; (v) Evolution of

Standards; (vi) Anatomy of Standards; (vii) Types of Accounting Standards;

(viii) Partial Accounting Standards

(i) Meaning of Standards:

The dictionary meaning of the word, 'standard,' is "an acknowledged

measure of comparison for qualitative value; criterion; norm". Ordinarily, the

word is used as a norm for comparing two or more items or things. But an

accounting standard is not a measure of comparison.

The term "Standards" denotes a discipline, which provides both

guidelines and yardsticks for evaluation. As guidelines, they provide uniform

practices and common techniques. As yardsticks, standards are used in

comparative analysis involving more than one subject matter, hence

accounting standard is an authoritative pronouncement of code of practice of

39

the regulatory accounting body to be observed and applied in the preparation

and presentation of financial statements. But the standards are intended to

apply only to material items. According to Benson [1976:197] "Accounting

standards are the clearer definite directions as to how financial statements

should be presented, what should be contained in them and how the

multifarious items, which go to make up financial statements should be dealt

with". Banerjee [1991:^97] defines the term as "the predetermined exemplars

of correctness set with an object of comparing them with accounting

practices". Bromwich [1985:^] observes: "Accounting Standards [are] uniform

rules for financial reporting applicable to all or to certain class of entity

promulgated by what is perceived of as predominantly an element of the

accounting community specially created for this purpose. Standard setters

can be seen as seeking to prescribe a preferred accounting treatment from

available set of methods for treating one or more accounting problems other

policy matters by the profession will be referred to as recommendation,

normally these standards are directed towards the items in the financial

statements of an enterprise."

According to Littleton [1953:^43], "A standard is an agreed upon

criteria of what is proper practice in a given situation, a basis for comparison

and judgment, a point of departure when variation is justifiable by the

circumstances and reported as such. Standards are not designed to confine

to practice with in rigid limits but rather to serve as guideposts to truth,

honesty and fair dealing". The Institute of Chartered Accountants of India

[ICAI 1990:^] defines in these words "Accounting Standards are more than

just a skeleton or a framework defining what should be done in preparing

financial statements. They also draw the boundaries with in which acceptable

conduct lies and in that and may other respects. They are similar in nature to

laws". According to Jain [2006:22-23], "Accounting standards are the policy

documents and authoritative statements of best accounting practices issued

by recognized expert accountancy bodies relating to various aspects of

measurements and disclosure of accounting transactions and events. These

are stated to be the norms of accounting policies and practices by way of

guidelines to direct as to how the items which go to make up the financial

statement, should be dealt and presented." Harvey and Keer [1981:9]

40

explain that a standard in accounting is "a method or an approach to

preparing accounts which has been chosen and established by the bodies

overseeing the profession".

The main aim of setting standards is to bring about uniformity in

financial reporting and to ensure consistency and comparability in the

accounting data published by the organization. Accounting standards are

said to be norms of accounting policies and practices by way of codes or

guidelines to direct how the items, which make up financial statements, are to

be dealt with in accounts, and disclosed in annual reports. In short,

accounting standards are the codified GAAP. To sum up, the term refers to

accounting guidelines to specific issues in financial accounting and reporting.

Accounting standards deal with recognition and measurement and also with

accounting policies.

(ii) Principles Vs. Standards:

The Wheat Committee [1972:f3], formed by the AICPA under the

chairmanship of Francis IVI. Wheat, to study the establishment of accounting

principles was of the view that "principles connotei things basic and

fundamental of a sort which can be expressed in few words, relatively

timeliness in nature; and in no way dependent upon changing fashions in

business or the evolving needs of the investment community. Harvey & Keer

[1981:9] contend that "... the word 'standard' is preferred to principle because

a standard is • pragmatic and it can only do good, because it will remove any

inhibition about its replacement with a better standard, if this becomes

appropriate."

The trend in the present day worid is to take standards as directives

indicating legal compulsion and procedure highlighting the obligation to adopt.

There were 'principles' before the phrase 'standards' became the 'buzz word'

of the accounting worid. One can observe the shift from 'principle' to

'standards,' because principles would generally suggest universality and

certain degree of pert'ormance; which cannot exist in a human service

situation such as accounting. Another dimension of the efforts has been the

adoption of the term 'standards' in place of 'principles' in the preparation of

financial statements may be that principles denote a high level of sanctity and

41

objectivity, which cannot be attained. In view of this, the word 'principles' has

been substituted by the word 'standards'. All the accounting standard setting

bodies in the world now use the word 'standards'

As accounting is described as "language of the business" to be spoken

alike by all the enterprises and be compatible with various interest groups

interacting with the business enterprise both at domestic and international

levels, it needs a common code i.e. some accepted principles, methods and

procedure for accumulating, classifying and reporting financial data [Hussain

and Bharath, 1997]. These generally accepted accounting principles;

methods and procedures are known as the accounting standards. However, it

is important to note that AICPA defines an accounting standard as "a principle

which has been logically derived from the objective of accounting and which

has been awarded the stamp of authority with the information of providing

guidelines for the fomnulation of accounting practices compatible with the

objectives."

(iii) Need for Standards:

In order to facilitate the users, to make better economic decisions,

comparability, consistency, a reasonable level of uniformity is called for.

Hence Wyatt [1990] posits: "Accounting standards are vitally important in

resolving potential conflicts of financial interest among the various external

groups that use and rely upon published financial statements. Such conflicts

are frequent and real. Thus, for example, potential shareholders and existing

shareholders may have opposite interests in assessing the profitability and

value of a company. Potential shareholders are likely to be dismayed if they

buy shares on the strength of published financial reports, which later turn out

to have been 'optimistic'. Present shareholders who sell under such

circumstances are likely to be more satisfied with the outcome, and certainly

more satisfied than if they retain holdings on the strength of unduly optimistic

financial reports."

As a variety of measurements and methods are applied in the

preparation of financial statements, such diversified and multiple adoptions

lead to questioning of the integrity of the data and difficulty in comparison

between business entities. There are divergent accounting practices and at

42

the same time the business entities are facing hassles of complying with

several statutes, regarding the preparation of financial statements. Hence

Fisher [1974:277] observes: "Accounting is utilitarian in purpose and like all

other professions has a basis service to people and the fundamental objective

of financial accounting must be the provision of financial information to assist

decision making." He stresses that the information contained in financial

statements must be such that it can satisfy the needs of such decision makers

and various criteria have in the past been used in evaluating useful

information. Further, he states: "Unfortunately the user's needs for financial

information are not known with any degree of certainty nor has the specific

role of financial statements been identified due to the lack of direct feed back

from the users of financial statements". Although each recipient of financial

statements is connected with the business enterprise, they have very little

formal contact one with another and therefore their ability to reach any degree

of consensus concerning either the enterprise or the language of accounting

is greatly diminished. Greater consideration must therefore be given to an

understanding of these difficulties and to ascertaining the infomnation needs of

the users.

(iv) Identification of Users:

Another dimension of accounting standards is the identification of the

users, who are the targets of information dissemination through annual

reports. In this regard. Watts [1981:28] observes: "We still need to know who

financial statements are for, why they used them and therefore what to put in

them." IVIacve [1981:'/0] argues that it is necessary to identify the users of

financial statements. The practical difficulties in this area are illustrated by the

argument of Anderson [1971:482] that the extent and scope of information to

be disclosed: should be as much as is necessary for the intelligent and

informed reader to draw accurate and valid conclusions as to the state of the

business and its trading results but no more!

(v) Evolution of Standards:

Standards do not develop in vacuum. They are necessarily evolved in

the context of the current legal social and economic environment of the

43

country in which it operates, standards grew from small and in conspicuous

beginnings, the first milestone of note was the statement of accounting

principles published by the American Institute in 1938. This book was the

work of three authors viz. Hatfield, Sanders and Moore. The American

Institute in 1939 charged its committee on Accounting procedure with the task

of issuing research bulletins. The committee stated its aim as: to consider

specific topics, first of all in relation to the existing state of practice, and to

recommend whenever possible, one or more alternative procedures as being

definitely superior to other procedures. Research Bulletin No.1 issued by the

committee stressed the need for good accounts and the consequent 'demand

for a larger degree of uniformity in accounting'. The Bulletin said that its rules

would be subject to exception, but that 'the burden of proof is upon the

accountant clearly to bring out the exceptional procedures and the

circumstances which render it necessary'. After the Second World War,

(before this standards were almost unknown), the ICAE&W took a

comparable step. It announced its venture in mild words that do not herald

momentous change. The two prominent Accounting Institutions in the world,

AICPA and ICAE&W drifted into a new system without clear ideas of where it

would take them, and with few, if necessary, formal motions of content by the

members. A revolution took place with far less fuss than would be needed for

a minor change in the bodies' constitutions. Thus standards have been

evolved over several decades. As Littleton [^953•.1&9] quotes 'standards are

not accidental but intentional in origin'. They are the distillations of what is

really appropriate and are based on objectivity concept. The accounting

standards mainly stem form accounting practices.

(vi) Anatomy of Standards:

The structure of standards is made up of three parts: (a) a description

of the problem to be tackled; (b) a reasoned discussion (possibly exploring

fundamental theory) of ways of solving the problem, then in the light of

decision on theory; and (c) the prescribed solution. According to Baxter

[1981:5], these components highlight the presence of an authority telling how

to think and act.

44

The standards normally deal with different subjects, and vary in quality.

The subject matter of standards are of four types namely, (1) accounting

policies followed in the preparation and presentation of financial statements,

(2) uniformity of layout and presentation of financial statements; (3) disclosure

of specific matters, facilitating the users of financial reports to exercise

judgments, and (4) measurement of all economic phenomena.

(vii) Types of Accounting Standards:

As observed by Wallace [1993], there are three types of accounting

standards: procedural, measurement and disclosure. (a) Procedural

standards are concerned with how accounting records are kept and

transactions and events are recognized. This type of standard features

predominantly in Continental European system; (b) Measurement standards

specify how revenues, expense and balance sheet items can be measured;

and (c) Disclosure standard refers to rules concerning the description,

publication and presentation of information relating to transactions and events

of reporting enterprise in aggregated, segmental and special fomiats.

(viii) Partial Accounting Standards:

Bromwich [1980] describes that the authorities in a number of countries

adopt similar approach in setting accounting standards for financial reporting.

Although some statements of general principles have been issued, the

procedures of standard setting organizations and their published statements

suggest a sequential attack on accounting problems. This approach entails

prescribing a desired treatment for one or more accounting items in isolation

form the procedures adopted for solving other accounting problems. The lists

of problems to be considered by standard setting organizations give some

evidence of the approach. The items on these lists are usually narrowly

defined and the procedures for consultation and research concerning each

problem seem to envisage a partial treatment. Accounting standards

generated using this approach will be labeled "partial standard"/ However,

Bromwich [1980:297] posits: Promise of a solution to some additional

problems of standard setting also may be offered where conditions for the

separability of the individuals utility function obtain in a multiperson setting.

45

Although in such a setting, utility functions may differ between individuals, it is

possible that some of the same items addressed by accounting standards

may be separable from other Items in the utility functions of all, or of a group

of individuals, such common characteristics of utility functions might be

assumed for some of the outcomes which are affected by standards relating

to conventional stewardship problems, especially those concerned with

preventing fairly straight forward frauds. The standard setting organization

could adopt the partial standards approach in a multi-person setting for such

items if this view were supported empirically. Sedgwick [1979:56] considers

that the aim of making financial statements of different companies reasonably

comparable with one another should take a low priority when considering how

best to present a true and fair view. He also contends that compulsory

application of accounting standards to all companies should be scrapped.

The logic of standard setting is based on the necessity of harmonizing

the diverse policies and practices adopted by companies and ensuring

consistency. These accounting standards are formulated by reviewing

present practices and by identifying and recommending the best practices,

and not necessarily by prescribing altogether new accounting principles and

practices. In this backdrop, PonA/al [1989] observes: "Accounting standards

mainly deal with the system of financial measurement and disclosure used in

providing a set of fairly presented financial statements."

PROGRESS OF ACCOUNTING STANDARDS

The world is caught in the whirlwind of accounting standards,

spearheaded lASB on one hand and the United States on the other. The

standards in the United States are still popularly called US GAAP and the

lASB prefers to use the term, 'International Accounting Standards.' In tune

with these developments, different countries have embarked upon

promulgating their own standards taking into consideration the different socio­

economic and cultural features of their respective countries. As a result, India

has also ushered into an era of accounting standards. The progress made by

the United States, lASB and India have presented under Figure 2.7.

46

FIGURE 2.7 PROGRESS OF ACCOUNTING STANDARDS:

THE US, THE lASB AND INDIA

FASs

FAS1

FAS 2

FASS

FAS 4

FASS

FAS 6

FAS 7

FASS

FAS 9

FAS 10

FAS 11

FAS 12

FAS 13

FAS 14

FAS 15

FAS 16

FAS 17

FAS 18

FAS 19

FAS 20

FAS 21

FAS 22

FAS 23

FAS 24

Title

Disclosure of Foreign Currency Translation

Accounting for Research and Development Costs

Reporting Accounting Changes in interim Financial Statements

Reporting Gain and Losses from Extinguishment of Debt

Accounting for Contingencies

Classification of Short temi obligations expected to be re­financed

Accounting and Reporting by Development Stage Enterprises

Accounting for the Translation of Foreign Cun-ency Transactions and Foreign Currency Financial Statements (superceded)

Accounting for Income Taxes-Oil and Gas Producing Companies

Extension of 'Grandfather" Provisions for Business Combinations.

Contingencies - Transition method

Accounting for Certain Marketable Securities (superceded)

Accounting for Leases

Financial Reporting for Segments of a Business Enterprise (superceded)

Accounting by Debtors and Creditors for Troubled Debt Restructurings

Prior Period Adjustments

Accounting for Leases - Initial Direct Costs (superceded)

Financial Reporting for Segments of a Business Enterprise - Interim Financial Statements (superceded)

Financial Accounting and Reporting by Oil and Gas Producing Companies

Accounting Forward Exchange Contracts (superceded)

Suspension of the Reporting of Earnings per Share and Segment Information by Nonpublic Enterprises (superceded)

Changes In the provisions of Lease Agreements Resulting from Refunding of Tax-Exempt Debt

Inception of Lease

Reporting to Segment Infonmation in Financial Statements that are presented in Another Enterprise's Financial Report (superceded)

Con-esponding

Indian GAAP

ASS

AS 25

AS 4

GN

AS 19

AS 5

GN under preparation

AS 19

IAS

IAS3S

IAS 34

IAS 10/ IAS 37

IAS1

IAS 17

lASS

IAS 17

Contd.,

47

FAS 25

FAS 26

FAS 27

FAS 28

FAS 29

FAS 30

FAS 31

FAS 32

FAS 33

FAS 34

FAS 35

FAS 36

FAS 37

FAS 38

FAS 39

FAS 40

FAS 41

FAS42

FAS 43

FAS 44

FAS 45

FAS 46

FAS 47

FAS 48

FAS 49

FAS 50

FAS 51

FAS 52

FAS 53

FAS 54

FAS 55

Suspension of Certain Accounting Requirements for Oil and Gas Producing Companies

Profit Recognition on Sales-Type Leases of Real Estate (superceded)

Classification of Renewals or Extension of Existing Sales-Type or Direct Financing Leases Renewals or Extensions of Existing Sales-Type or Direct Financing Leases

Accounting for Sales with Leasebacks

Determining Contingent Rentals

Disclosure of infonnation about Major Customers (superceded)

Accounting for Tax Benefits Related to U.K. Tax Legislation conceming Stock Relief (superceded)

Specialized Accounting and Reporting Principles and Practices in AICPA SOPs and Audit and Accounting Guides (superceded)

Financial Reporting and Changing Prices (superceded)

Capitalization of Interest Cost

Accounting and Reporting by Defined benefits Pension Plans

Disclosure of Pension Information (superceded)

Balance Sheet Classification of Defen-ed Income Taxes

Accounting for Pre-acquisition Contingencies of Purchased Enterprises

Financial Reporting and Changing Prices: Specialized Assets -Mining and Oil and Gas (superceded)

Financial Reporting and Changing Prices: Specialized Assets - Timberlands and Growing Timber (superceded)

Financial Reporting and Changing Prices: Specialized Assets -Income -Producing Real Estate (superceded)

Determining Materiality for Capitalization of Interest Cost

Accounting for Compensated Absences

Accounting for Intangible Assets of Motor Caniers

Accounting for Franchise Fee Revenue

Financial Reporting and changing Prices: Motion Picture Films (superceded)

Disclosure of Long -Term Obligations

Revenue Recognition When Right of Return Exists

Accounting for Product Financing Arrangements

Financial Reporting in the Record and Music Industry

Financial Reporting by Cable Television Companies

Foreign Currency Translation

Financial Reporting by Producers and Distributors of Motion Picture Films (superceded)

Financial Reporting and Changing Prices: Investment Companies (superceded)

Detenmining whether a Convertible Security Is a Common Stock Equivalent (supercede)

AS 19

AS 19

AS 19

AS 16

GN under preparation

AS 22

AS 16

AS 15

AS 9

AS 11

IAS 17

IAS 17

IAS 17

IAS 17

IAS 23

IAS 26

IAS 12

IAS 23

IAS 18

IAS 21

Contd.,

48

FAS 56

FAS 57

FAS 58

FAS 59

FAS 60

FAS 61

FAS 62

FAS 63

FAS 64

FAS 65

FAS 66

FAS 67

FAS 68

FAS 69

FAS 70

FAS 71

FAS 72

FAS 73

FAS 74

FAS 75

FAS 76

FAS 77

FAS 78

FAS 79

FAS 80

FAS 81

FAS 82

Designation of AICPA Guide and SOP 81-1 and SOP 81-2 as Preferable for Purposes of applying APB Opinion 20 (superceded)

Related Party Disclosures

Capitalization of Interest Cost In Financial Statements Tliat include Investments Accounted for by the Equity Method

Defen-al of the Effective Date of Certain Accounting Requirements for Pension Plans of State and Local Government Units (Superceded)

Accounting and Reporting by Insurance Enterprises

Accounting for Title Plant

Capitalization of Interest Cost in situations Involving Certain Tax-Exempt Bon-owings and Certain Gifts and Grants

Financial Reporting by Broadcasters (amended by FAS 139)

Extinguishments of Debt Made to Satisfy Sinl<ing Fund Requirements

Accounting for Certain Mortgage Banking Activities

Accounting for Sales of Real Estate

Accounting for Costs and Initial Rental Operations of Real Estate Projects

Research and Development Arrangements

Disclosures about Oil and Gas Producing Activities

Financial Reporting and Changing Prices: Foreign Currency Translation (superceded)

Accounting for the Effects of Certain Types of Regulations

Accounting for Certain Acquisitions of Banl^lng or Thrift Institutions

Reporting a Change In Accounting for Railroad Track Structures

Accounting for Special Termination Benefits Paid to Employees (superceded)

Defen-al of the Effective Date of Certain Accounting Requirements of Pension Plans of State and Local Govt. Units (superceded)

Extinguishment of Debt (superceded)

Reporting by Transferors for Transfers of Receivables with Recourse (superceded)

Classification of Obligations That are Callable by the Creditor

Elimination of Certain Disclosures For Business Combinations by Non-public Enterprises

Accounting for Futures Contracts (superceded)

Disclosure of Post-retirement Health Care and Life Insurance Benefits (superceded)

Financial Reporting and Changing Prices: Elimination of Certain Disclosures (superceded)

AS 18

IRDA Reg.

GN under preparation

IAS 24

Contd.

49

FAS 83

FAS 84

FAS 85

FAS 86

FAS 87

FAS 88

FAS 89

FAS 90

FAS 91

FAS 92

FAS 93

FAS 94

FAS 95

FAS 96

FAS 97

FAS 98

FAS 99

FAS 100

FAS 101

FAS 102

FAS 103

FAS 104

FAS 105

FAS 106

FAS 107

FAS 108

FAS 109

Designation of Certain AICPA Guides and Statement of Position as Preferable for Purposes of Applying APB Opinion 20 (superceded)

Induced Conversions of Convertible Debt

Yield Test for Determining whether a Convertible Security is a Common Stock Equivalent (superceded)

Accounting for the Costs of Computer Software to Be Sold, Leased, or OthenA ise Mart<eted

Employers' Accounting for Pensions

Employers' Accounting for Settlements & Curtailments of Defined Benefits Pension Plans and for Tennination Benefits

Financial Reporting and Changing Prices

Regulated Enterprises - Accounting for Abandonment and Disallowances of Plant Costs

Nonrefundable Fees & Costs Associated with Originating or Acquiring Loans and Initial Costs of Leases

Regulated Enterprises - Accounting for Phase-in Plans

Recognition of Depreciation by Not-for-Profit Organizations

Consolidation of All Majority-Owned Subsidiaries

Statement of Cash Flows

Accounting for Income Taxes (superceded)

Accounting by Insurance Cos. For Certain Long-Duration Contracts & Realized Gains & Losses on Investment Sales

Accounting for Leases (an amendment of FAS 13, 66 and 91)

Deferral of the Effects Date of Recognition of Depreciation by Not-for-profit Organizations

Accounting for Income taxes - Defen-al of the Effective Date of FASB Statement No. 96 (superceded)

Regulated Enterprises - Accounting for the Discontinuation of Application of FASB Statement No.71

Statement of Cash Flow - Exemption of Certain Enterprises and Classification of Cash Flows from Certain Securities Acquired for Resale

Accounting for Income Taxes - Defen^al of the Effective Date of FASB Statement No. 96. (superceded)

Statement of Cash Flows - Net Reporting of Certain Cash Receipts and Cash Payments and Classification of Cash Flows from Hedging Transactions

Disclosure of Information about Financial Instruments with Off-Balance Sheet Risk and Concentrations of Credit Risk

Employers' Accounting for Post-retirement Benefits Other Than Pensions

Disclosures about Fair Value of Financial Instruments

Accounting for Income Taxes - Deferral of the Effective Date of FASB Statement No. 96 (superceded)

Accounting for Income Taxes

AS 15

GN

AS 21

AS 3

IRDA Reg.

AS 3

AS 15

AS 22

IAS 19

IAS 15

IAS 27

IAS 7

IAS 7

IAS 32

IAS 19

IAS 32

IAS 12

Contd.

50

FAS 110

FAS 111

FAS 112

FAS 113

FAS 114

FAS 115

FAS 116

FAS 117

FAS 118

FAS 119

FAS 120

FAS 121

FAS 122

FAS 123

FAS 124

FAS 125

FAS 126

FAS 127

FAS 128

FAS 129

FAS 130

FAS 131

FAS 132

FAS 133

FAS 134

FAS 135

FAS 136

Reporting by Defined Benefit Pension Plans of Investment Contracts

Rescission of FASB Statement No. 32 and Technical Corrections

Employers' Accounting for Post employment Benefits

Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts

Accounting by Creditors for Impairment of a Loan

Accounting for Certain Investments in Debt and Equity Securities

Accounting for Contributions Received and Contribution Made

Financial Statements of Not-for-profit Organizations

Accounting by Creditors for Impainnent of a Loan-income Recognition and Disclosures

Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments

Accounting and Reporting by Mutual Life Insurance Enterprises and by Insurance Enterprises for Certain Long-Duration Participating Contracts

Accounting for the Impaimrient of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (amended by FAS 139)

Mortgage Servicing Rights (superceded)

Accounting for Stock-Based Compensation

Accounting for Certain Investments Held by Not-for-Profit Organizations

Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (superceded)

Exemption from Certain Required Disclosures about Financial Instmments for Certain Nonpublic Entities

Defen-ai of the Effective Date of Certain Provisions of FASB Statement No. 125

Earnings Per Share

Disclosure of Information about Capital Structure

Reporting Comprehensive Income

Disclosures about Segments of an Enterprise and Related Infonnation

Employers' Disclosures about Pensions and Other Postretirement Benefits

Accounting for Derivative Instmments and Hedging Activities

Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise

Rescission of FASB Statement No. 75 and Technical Corrections

Transfers of Assets to a Not-for Profit Organization or Charitable Trust That Raises or Holds Contributions for Others

AS 15

AS 13

AS 28

SEBI Guidelines

AS 20

Schedule VI

AS 17

AS 15

GN

IAS 19

IAS 32 / IAS 39

IAS1

IAS 32

IAS 36

IAS 19

IAS 33

IAS1

IAS1

IAS 14

IAS 19

IAS 39

Contd.,

51

FAS 137

FAS 138

FAS 139

FAS 140

FAS 141

FAS 142

FAS 143

FAS 144

APB18

APB20

APB21

APB22

APB25

APB26

APB28

APB29

APB30

ARB43

ARB43

ARB43

ARB45

ARB51

Accounting for Derivative Instalments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133 - an amendment of FASB

Accounting for Certain Derivative Instruments and Certain Hedging Activities (an amendment of FAS 133)

Recession of FAS 53 and Amendments to FAS 63, 89 and 121

Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities: A replacement of FAS 125

Business Combinations

Goodwill and other Intangible Assets

Accounting for Asset Retirement Obligations

Accounting for the Impairment or Disposal of Long-Lived Assets

The Equity Method of Accounting for Investments in Common Stock

Accounting Changes

Interest on Receivables and Payables

Disclosure of Accounting Policies

Accounting for Stocl< issued to Employees

Eariy Extinguishment of Debt

Interim Financial Reporting

Accounting for Non-monetary Transaction

Reporting the Results of Operations - Discontinued Events and Extraordinary Items

Depreciation

Property, Plant and Equipment

Inventories

Long Term Construction - Type Contracts

Consolidated Financial Statements

GN under preparation

A S M

AS 26

AS 28

AS 23

AS 5

AS 1

SEBI Guidelines

AS 25

GN, Accounting for Dot-com companies

AS 5 / AS 24

AS 6

AS 10/ AS 12

AS 2 (R)

AST

AS 21

IAS 39 / IAS 32

IAS 22

IAS 38

IAS 36

IAS 28 / IAS 31

IAS 8

IAS1

IAS 19

IAS 34

IAS 8 / IAS 35

IAS 16/ IAS 22 / IAS 38

IAS 16/ IAS 20

IAS 2

IAS 11

IAS 21 Source: Compiled from Various Journals on Accounting.

It is important to note that tlie United States has progressed

substantially in promulgating the standards, as GAAP and both lASB and

India have to go a long way in covering the various issues on financial

reporting under accounting standards.

INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)

The lASB made an announcement in April 2001 that the lASC

Foundation Trustees agreed that accounting standards issued by lASB

designated "International Financial Reporting Standards" in a statement dated

52

23''' April 2001. On May 23'* 2002, lASB issued a press release announcing

publication of the preface to International Financial Reporting Standards,

provided 'a brief description of the purpose and function of the main structure

of the new arrangement for setting global standards'. The IFRS 1, First-time

adoption of International Financial Reporting Standards was published in June

2003. It is important to note here, that the lASs refer to the standards issued

by the lASC, inherited by the present lASB and IFRSs refer to new standards

published by the lASB.

The term International Financial Reporting Standards (IFRSs) has both

a narrow and a broad meaning. Narrowly, IFRSs refer to the new numbered

series of pronouncements that the International Accounting Standards Board

(lASB) is issuing as distinct from the International Accounting Standards

(lASs) series issued by its predecessor International accounting Standards

Committee (lASC). More broadly, IFRS refers to the entire body of lASB

pronouncements, including standards and interpretations approved by lASB

and lASs and SIC interpretations approved by the predecessor lASC.

Between 1973 and 2001, the International Accounting Standards committee

released International Accounting Standards. But between 1997 and 1999,

the lASC restructured their organization, which resulted in formation of

International Accounting Standards Board. These changes came into effect

on 1®' April 2001. Subsequently lASB made a statement about current and

future standards. Now, the lASB publishes its standards in a series of

pronouncements called International Financial Reporting Standards (IFRS).

The lASB has also adopted the lASC standards and those pronouncements

continued to be designated "International Accounting Standards" (lASs). In

the meeting in April 2001, The lASB resolved on lASC standards, which

confirmed the status of lASC standards and SIC interpretations in effect as of

1®' April 2001. Since IFRS are principles based there is tremendous change

in the mindset of the accounting bodies around the world to look for IFRS.

There are countries that require IFRS to be adopted in full and some countries

are converging with IFRS.

53

ACCOUNTING STANDARDS IN INDIA

The Institute of Chartered Accountants of India in fulfillment of its

obligations as a member of the lASC Board constituted the Accounting

Standards Board (ASB) in India on 21®* April 1977. The Accounting

Standards Board is entrusted with the task of formulating accounting

standards but giving due consideration to the Indian customs, usage, and

prevalent accounting practices and applicable laws.

In India, an authority to develop accounting standards rests with the

Institute of Chartered Accountants of India (ICAI), which was founded in 1949

[CA Act of 1949]. Its membership stood at 1,23,546 in July 2005 (both

associated and fellow membership). Now the ICAI is the associate member

of the lASB. The ICAI has (a) participated in lASB steering committees; (b)

suggested new topics for standardization to the lASC Board, and (c)

organized the examination of exposure drafts issued by lASB and

communicated to lASB comments arising from the examination

Section 211 of the Companies Act, 1956, as amended by the

companies (Amendment) Act, 1999, required that every profit and loss

account and balance sheet of the company shall comply with the accounting

standards. For the purpose of section 211, the expression "accounting

standards" means the standards of accounting recommended by the Institute

of Chartered Accountants of India as may be prescribed by the Central

Government in consultation with the National Advisory Committee on

Accounting Standards established under sub-section (1) of section 210A of

the said Act provided that the standards of accounting specified by the

Institute of Chartered Accountants of India shall be deemed to be the

Accounting Standards until the accounting standards are prescribed by the

Central Government under section 211 (3C) of the Act. The Institute will issue

the accounting standards for use in the presentation of general purpose

financial statements issued to the public by such commercial, industrial or

business enterprises as may be specified by the Institute from time to time

and subject to preface to the statement of accounting standards.

54

The various dimensions of accounting standards in India have

been presented under the following: (i) Applicability; (ii) Progress; and

(iii) Description of ASs.

(i) Applicability:

As a general rule, accounting standards are applicable to all reporting

enterprises and are made operative from a date specified in the standard. The

ICAI has framed three-tier classification of the commercial, industrial and

business enterprises into level I, level II and level III.

Level-I-Enterprises:

Enterprises which fall in any one or more of the following categories, at

any time during the accounting period, are classified as Level I enterprises:

(i) Enterprises whose equity or debt securities are listed whether in India or outside India,

(ii) Enterprises, which are in the process of listing their equity or debt securities as evidenced by the board of director's resolution in this regard,

(iii) Banks including Co-operative banks, (iv) Financial institutions, (v) Enterprises carrying on insurance business, (vi) All commercial, industrial and business reporting enterprises,

whose turnover for the immediately preceding accounting period on the basis of audited financial statements exceeds Rs. 50 crore. Turnover does not include 'other income',

(vii) All commercial, industrial and business reporting enterprises having borrowings, including public deposits, in excess of Rs. 10 crore at anytime during the accounting period,

(viii) Holding and subsidiary enterprises of any one of the above at any time during the accounting period.

Level II Enterprises:

Enterprises which are not Level I enterprises but fall in any one or more

of the following categories are classified as Level II enterprises.

(i) All commercial, industrial and business reporting enterprises, whose turnover for the immediately preceding accounting period on the basis of audited financial statements exceeds Rs. 40 lakhs but does not exceed Rs. 50 crore. Turnover does not include 'other income'.

(ii) All commercial industrial and business reporting enterprises having borrowings including public deposits in excess of Rs. 1 crore but not in excess of Rs. 10 crore at any time during accounting period.

55

(iii) Holding and subsidiary enterprises of any one of Xhe above at any time during the accounting period.

Level III Enterprises:

Enterprises, whicli are not covered under Level I and Level II, are

considered as Level III enterprises.

The ASB of ICAI has so far issued 29 Accounting Standards and three

more accounting standards are in the process of issuing. Table 2.10 Depicts

the Accounting standards issued in India.

(II) Progress: The progress of accounting standards in India has been comparatively

lower in the sense that it has issued only twenty-nine standards when

compared to forty-one standards by the IAS. The number of standards

promulgated by the ASB along with the dates of issue and operation are

presented in Figure 2.8.

NO.

AS-1 AS - 2(R) AS - 3(R) A S - 4 ( R )

AS - 5(R)

AS - 6(R) AS - 7(R)

A S - 8

A S - 9 A S - 1 0 AS-11 (R )

A S - 1 2

A S - 1 3 A S - 1 4 A S - 1 5

A S - 1 6

FIGURE 2.8 ACCOUNTING STANDARDS IN INDIA

Title

Disclosure of Accounting Policies Valuation of Inventories Cash Flow Statements

Contingencies and Events Occuning after Balance Sheet Date Net Profit or Loss for the period, Prior Period items and changes in Accounting Policies Depreciation Accounting Constnjctions Contracts

Accounting for Research and Development. But withdrawn with Pursuant to AS- 26 becoming mandatory Revenue Recognition Accounting for Fixed Assets The Effects of Changes in Foreign Exchange Rates. Accounting for Govemments Grants. Accounting for Investments Accounting for Amalgamations. Accounting for Retirement Benefits in the Financial Statements of Employers. Bonrowing Cost

Effective Date

1991/1993 1999 2001 1996

1996

1995 2003

1985

1991-1993 1991/1993 1995

1994

1995 1995 1995

2000

Date of Issue

Nov, 1979 June, 1981 June, 1981. Nov, 1982.

Nov, 1982

Nov, 1982. Dec, 1983

Jan, 1985

Nov, 1985.

Nov, 1985. Jan, 1989.

Apr, 1992.

Apr, 1992. Apr, 1992. Apr, 1995.

2000

Mandatory Date

1-4-1999 1-4-1999 1-4-2001 1-4-1987

1-4-1987

1-4-1995 1-4-2003

1-4-1991

1-4-1991 1-4-1991 1-4-1995

1-4-1994

1-4-1995 1-4-1995 1-4-1995

1-4-2000

Contd.

56

A S - 1 7

A S - 1 8

A S - 1 9 A S - 2 0 A S - 2 1 A S - 2 2

A S - 2 3

A S - 2 4

A S - 2 5 A S - 2 6

A S - 2 7

A S - 2 8

A S - 2 9

Sour

Segment Reporting

Related Party Disclosures

Leases Earnings per Share Consolidated Financial Statements Accounting for Taxes on Income

Accounting for Investments in Associates in Consolidated Financial Statements Discounting Operations

Interim Financial Reporting Intangible Assets

Financial Reporting of Interests in Joint Ventures Impairment of Assets

Provisions, Contingent Liabilities and Contingent Assets

ces: (!) ICAI [2005], "Compendium

2001

2001

2001 2001 2001 2001

2002

2004-05

2002 2003-04

2002-04

2004-05

2004

of Accounting

2000

2000

2000 2001 2001 2001

2001

2002

2002. 2002

2002

2002

2003

1-4-2001/1-4-2004 1-4-2001/1^-2004 1-4-2001 1-4-2001 1-4-2001 1-4-2001/1-4-2002/1-4-2006 1-4-2002

1-4-2004/1-4-2005 1^-2002 1-4-2003/1-4-2004 1-4-2002

1-4-2004/1^-2006/1-4-2008

1-4-2004

Standards", New Delhi: ICAI]; and (ii) ICAI "The Chartered Accountant (Various Issues)".

All the 29 Standards Issued by the ICAI have become mandatory from

1-4-2004 (with exception to certain level of enterprises for this date). Figure

2.9 shows the mandatory standards as on July 1, 2005 applicable to different

levels of enterprises.

SI. NO.

1.

2.

3.

4.

5.

ACCOU Accounting

Standard (AS) No.

AS 1

AS 2 (Revised)

AS 3 (Revised)

AS 4 (Revised)

AS 5 (Revised)

FIGURE 2.9 NTING STANDARDS AND THEIR APPLICABILITY

Title of the Accounting Standard

Disclosure of Accounting Policies

Valuation of Inventories

Cash Flow Statements

Contingencies and Events Occumng After the Balance Sheet Date

Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies

Applicability to Level 1 Enterprises Yes

Yes

Yes

Yes

Yes

Applicabiiity to Level II Enterprises Yes

Yes

Not required, but encouraged Yes

Yes

Applicability to Level ill Enterprises Yes

Yes

Not required, but encouraged

Yes

Yes

Contd.

57

6.

7.

8.

9.

10.

11.

12.

13.

14.

15.

16.

17. 18.

19. 20.

21.

22.

23.

24.

25.

26.

27.

28.

29.

AS 6 (Revised)

AS 7 (Revised)

AS 8 (writh-drawn pursuant to AS 26 becoming mandatory) AS 9

AS 10

AS 11 (Revised 2003)

AS 12

AS 13

AS 14

AS 15

AS 16

AS 17 AS 18

AS 19 AS 20

AS 21

AS 22

AS 23

AS 24

AS 25

AS 26

AS 27

AS 28

AS 29

Depreciation Accounting Construction Contracts

Accounting for Researcli and Development

Revenue Recognition

Accounting for Fixed Assets The Effects of Changes in Foreign Exchange Rates Accounting for Government Grants Accounting For Investments Accounting for Amalgamations Accounting for Retirement Benefits in the Financial Statements of Employers Borrowing Costs

Segment Reporting Related Party Disclosures Leases Earnings Per Share

Consolidated Financial Statements Accounting for Taxes on Income Accounting for Investments in Associates in Consolidated Financial Statements

Discontinuing Operations Interim Financial Reporting Intangible Assets

Financial Reporting of Interests in Joint Ventures Impairment of Assets

Provisions, Contingent Liabilities and Contingent Assets

Yes

Yes

N.A.

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes Yes

Yes Yes

Yes (with exception) Yes

Yes

Yes

Yes

Yes

Yes (with exception)

Yes (w.e.f. 1.4.2004) Yes

Yes

Yes

N.A.

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

N.A.

Yes

Yes Yes

Yes (with exception) Yes

Yes

N.A.

N.A.

Yes

Yes (with exception)

Yes(w.e.f. 1.4.2006) Yes (with exception)

Yes

Yes

N.A.

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

N.A. Yes

Yes Yes

Yes (with exception) Yes

Yes

N.A.

N.A.

Yes

Yes (with exception)

Yes (w.e.f. 1.4.2008) Yes (with exception)

Source: ICAI [2005]. Compendium of Accounting Standards.

58

(Mi) Description of ASs

A brief description of tlie 29 accounting standards issued by ICAI is

presented below:

AS-1: Disclosure of Accounting Policies:

This standard deals with the disclosure of significant accounting

policies followed in preparation and presentation of financial statements of an

enterprise. Accounting policies refers to: (a) specific accounting principles,

and (b) methods adopted by enterprises, in applying these principles in the

preparation and presentation of financial statements. Disclosure needs arise

because accounting policies can differ between one enterprise and another in

the areas of recognition, treatment or valuation of assets, or recognition of

transactions or events; examples of disclosure of accounting policies are: (i)

Accounting conventions followed; (ii) Basis of accounting historical or cun-ent;

(ill) Valuation of inventory; (iv) Valuation of investments; (v) Valuation of fixed

assets including revaluation; (vi) Depreciation policy; (vii) Foreign currency

transaction; (viii) Treatment of governments grants; (ix) Treatment of goodwill;

(x) Recognition of profit on long - term contracts; (xi) Recognition of a liability

for retirement benefits; (xii) R & D costs absorption; (xiii) Treatment of

preliminary, or, capital issue expenses; (xiv) Treatment of lease rental income

or lease rental payment; (xv) Treatment of expenditure during construction;

and (xvi) Treatment of contingent liabilities. The disclosure of accounting

policies should nonnally be made in one place. This standard highlights three

fundamental accounting concepts: (a) Going concern; (b) Accrual; and (c)

Consistency. If these assumptions are not followed, the fact should be

disclosed. The section on appropriate accounting policies is guided by three

major considerations: (a) Prudence; (b) Substance Over Form; and (c)

Materiality. However, any change in accounting policy is permitted only if: (a)

Change required by any statute; (b) For compliance with any other AS; and

(c) Results into a more meaningful presentation. But AS-5 requires disclosure

of change, if the impact is material. The impact of change should be reported

in the period of change.

59

AS-2: Valuation of Inventories:

This standard deals with (a) the determination of value at which

inventories are carried until related revenues are recognized, (b)

ascertainment of cost thereof, and (c) the circumstances in which carrying

amount of inventory is written down below cost. The standard define the

inventories are assets: (a) held for sale in the ordinary course of business; (b)

in the process of production for such sale; or (c) in the fonn of materials or

suppliers to be consumed in the production process or in the rendering of

services. The definition implies that "intangible" items of inventory, such as

software held for sale, are also included. The critical operative part of the

standard is that "inventories should be valued at the lower of (a) cost and (b)

net realizable value".

However, this standard also states that disclosures must include

changes if any in the accounting policy with respect to valuation of inventory

and its effect on the financial statements of the current period.

AS-3: Cash Flow Statements:

This standard require that every enterprise [falling with in its scope of

applicability, though others are encouraged] should prepare a cash flow

statement for each accounting period and that the statement should report

cash flows during the period classified by operating, investing and financing

activities. This standard defines the cash flows as: cash in flows and cash

outflows and cash equivalents. According to this standard, an enterprise

should disclose the components of cash and cash equivalents and should

present a reconciliation of the amounts in its cash flow statement with the

equivalent items reported in the balance sheet. Some times balances held

abroad are not available for use because of exchange controls. Therefore,

the management should disclose the amount of significant cash and cash

equivalent balances held by the enterprises that are not available for use.

The standard specifies that, in addition to separate disclosure of items of

financing and investing activities, an enterprise should report cash flows from

operating activities using either: (a) the direct method, wherein major classes

of gross cash receipts and gross cash payments are disclosed under this

method, information about major classes of gross receipts or payments may

60

be obtained either; (i) from accounting records of reporting entity, or (ii) by

adjusting sales, cost of sales, and other items in the statements of profit and

loss or (b) the indirect method, whereby net profit or loss is adjusted for: (i) the

effects of transactions of a non cash nature, (ii)any deferrals or accruals of

past or future operating cash receipts or payments, (iii) changes in current

assets and liabilities (other than cash and cash equivalent), and (iv) items of

income or expense associated with investing or financing cash flows. To

comply with the requirements of SEBI, reporting enterprises generally use the

indirect method but direct method is more useful in estimating future cash

flows.

AS- 4: Contingencies And Events Occurring After Balance Sheet Date:

This standard deals with: (1) Contingencies; and (2) Events occurring

after the balance sheet date; Nevertheless, As 4 has rightly excluded from its

coverage "contingencies" relating to: (a) Liability of life and general assurance

enterprises, attributable to policies issued, (b) obligations under retirement

benefit plans (AS-15 deals with this), and (c) Current commitments arising

from long term lease contracts (AS-19 deals with this). A contingency is a

condition or situation, the ultimate outcome of which, gain or loss, will be

known or determined only on the occurrence, or non-occurrence, of one or

more uncertain future events.

Events occurring after the balance sheet date are those significant

events, both favorable and unfavorable, that occur between the balance sheet

date and date on which the financial statements are approved by the Board of

Directors in the case of a Company, and by the corresponding approving

authority in the case of any other entity.

AS - 5: Net profit or loss for the period, prior period items and changes in Accounting Policies:

This standard covers from distinctly independent aspects: (1) Net profit

or loss for the period, (2) Prior period items, (3) Changes in accounting

estimates and (4) Changes in accounting policies. This standard has the

following significant features:

(A) With regard to the net profit or loss for the period, this standard

indicates that: (a) All items of income and expense which are recognized in a

61

period should be included in the determination of net profit or loss. Also extra

ordinary items and those flowing from changes in accounting estimates

should also be included in income statements. There are two components

that make up the net profit or loss for the period (b) ordinary activities; and (c)

extra ordinary items. The disclosure of these items is sometimes made in the

notes to the financial statements.

(B) As far as prior period items are concerned, the items of income or

expenses, which arise, in the current period as a result of errors or omissions

in the preparation of the financial statements of one or more prior periods.

The nature and amount of prior period items should be separately disclosed in

the statement of profit and loss in a manner that their impact on the current

profit or loss can be perceived.

(C) In relation to the changes in Accounting estimates: the effect of

such a change should be included in the determination of net profit or loss in;

(a) the period of change, if the change affects the period only; or (b) the

period of the change and future periods If the change affects both. The

standard prescribes that the nature and amount of change in an accounting

estimate, which has a material effect in the current period, or which is

expected to have a material effect in subsequent periods, should be

disclosed. If it is impracticable to quantify the amount, this fact should be

disclosed.

(D) In respect of changes in Accounting policies: A change in an

accounting policy should be made only if the adoption of a different

accounting policy is required by statue or for compliance with an accounting

standard or if it is considered that the change would result in a more

appropriate presentation of the financial statements of the enterprise.

AS - 6: Depreciation Accounting:

This standard, while providing conceptual clarity, deals with the

selection and application of appropriate methods of accounting for

depreciation, and related disclosures. It is worth noting that because of

flexibility of accounting principles involved, skill and judgment are required as

to how and when to record the transactions embracing depreciation. This

standard highlights that (a) the depreciation is a measure of wearing out.

62

consumption or other loss of value of a "depreciable asset" arising from use,

efflux of time or obsolescence through technology and market changes, (b)

Depreciation is allocated so as to charge a fair proportion of the depreciable

amount in each accounting period during the expected useful life of the asset,

depreciation includes amortization of assets whose useful life is

predetermined, (c) Depreciable assets are assets which (i) are expected to be

used during more than one accounting period, (ii) have a limited useful life,

and (ill) are held by the enterprise, for use in the production, or supply of

goods and services for rental to others or for administrative purposes and not

for the purpose of sale in the ordinary course of a business, and (d)

Depreciable amount of a depreciable asset is its historical cost, or other

amount substituted for historical cost, less the estimated residual value. This

standard has not explicitly stated the method of depreciation, most commonly

used method are straight-line method or written down value method. The

preferred practice is to adopt a method in line with the provisions of the

Company's Act, even the rates of depreciation also not specified in this

standard. However, AS-6, by implication, enables an entity to adopt the rates

stipulated in schedule XIV of the Companies Act, which is but a bare minimum

that requires to be provided. But section 32 of the Income tax Act stipulates

the WDV method and also specified the rates of depreciation (which is the

maximum rate on block of assets).

AS - 7: Construction Contracts:

This standard requires to be applied in accounting for construction

contracts in the financial statements of contractors. This standard signifies

the appropriate accounting treatment of revenue and a cost associated with

construction contracts and also lays down appropriate criteria for recognition

of these components in the statement of profit and loss since the contract

actively may extend beyond one accounting period. It also provides practical

guidance on the application of such criteria for the benefit of contractors to

prepare financial statements. According to this standard construction contract

is a contract specifically negotiated for the construction of an asset or a

combination of assets that are closely interrelated or interdependent, in terms

of their design, technology and function or their ultimate purpose or use. The

63

construction costs include: (a) Contracts for the rendering of services, wJiich

are directly related to the construction of an asset; and (b) contracts for

destruction or restoration of assets, and the restoration of the environment

following the demolition of assets. Construction contracts are of two types

viz., (a) A fixed price contract, and (b) A cost plus contract. Some construction

costs may be a combination of both (a) & (b). This standard specifies that the

profit on contract is to be ascertained on the basis of percentage of

completion of the contract.

AS - 8: Accounting For Research and Development:

This standard deals with the accounting treatment of costs incurred on

research and development. The terms research and development are not

inter changeable. Research refers to "original and planned investigation

undertaken with the hope of gaining new scientific or technical knowledge and

understanding", and development refers to "translation of research findings or

other knowledge into a plan or design for the production of new or

substantially improved materials, devices, products, processes, systems or

services prior to the commencement of commercial production".

The standard mainly signifies that R & D costs may be deferred if

certain criteria are satisfied such as identification of clearly defined product or

process, demonstration of technical feasibility study, marketability of the

product or service etc.

AS - 9: Revenue Recognition:

This standard highlights a fact that Revenue Recognition is concerned

with the "timing of recognition" in the statement of profit and loss. It lays down

criteria for recognition of revenue most suited to preparers of financial

statements of the enterprises engaged in varied activities. As per this

standard Revenue means the gross inflow of cash, receivable or other

consideration arising in the course of ordinary activities of an enterprise from

sale of goods, from the rendering of services and from the use by others of

the resources of the enterprises yielding interest, royalties and dividends.

There are two common elements, namely measurability and collectibility, to

recognize the revenue.

64

AS - 10: Accounting For Fixed Assets:

This standard deals with recognition of fixed assets, elements that

constitute cost of Fixed Asset items, as also the areas requiring specific

accounting treatment. It is made applicable to financial statements prepared

on historical cost basis. This standard defines the Fixed Asset as "An asset

held with the intention of being used for the purpose of producing or providing

goods or services and is not held for sale in the normal course of business".

The key elements are (i) on-going productive use and (ii) not held for sale in

the normal course. It is by applying these key elements, exercising judgment,

and invoking concept of materiality that one has to determine the classification

of an item under the head Fixed Assets.

The gross book value of a fixed asset should be either historical cost or

revalued amount computed in accordance with the standard. Gross book

value of a fixed asset is defined as its historical cost or other amount

substituted for historical cost. Where this amount is shown net of

accumulated depreciation, it is termed as net book value. Financial

statements are generally prepared on historical cost basis. Often these may

include a part or all of fixed assets at a valuation in substitution for historical

costs and depreciation is calculated accordingly. This is commonly referred to

as revaluation of assets. Recording of fixed assets at revalued amounts is not

tantamount to preparation of FS to reflect the effect of changing prices. A

commonly accepted and preferred method of restating fixed assets through

appraise by competent valuers.

AS - 11: The Effects of Changes in Foreign Exchange Rates:

This standard is concerned with transactions in foreign currencies in

the financial statements of an enterprise and with translation of the financial

statements of foreign branches into Indian currency. This standard addresses

two principal issues; (a) The selection of an appropriate rate to be used for a

transaction; and (b) The manner in which financial effect of change in

exchange rates should be recognized in the separate financial statement of

an enterprise, and in the consolidated financials.

This standards indicates that: (a) The initial recognition of foreign

currency transaction should be recorded by applying the spot exchange rate

65

between the reporting currency and the foreign currency at the date of the

transaction or the average rate as applicable; (b) For the purposes of

reporting as at balance sheet date, items are classified into monetary and

non-monetary items, which are carried at either historical cost, or at fair

values; and (c) The exchange differences should be recognized as income or

expense in the period in which they arise.

According to this standard, financial statements should have the

prescriptions of (i) foreign operation; (ii) integral foreign operation; and (iii)

non-integral foreign operation.

AS-12: Accounting for Government Grants:

This standard deals with grants or assistance in the form of both capital

and revenue, from various government agencies. Government grants related

to fixed assets should be presented in the balance sheet by showing the grant

as a deduction from gross value of the assets concerned in arriving at their

book value.

Government grants related to revenue should be recognized on a

systematic basis in the profit and loss account over periods necessary to

match them with the related costs, which they are intended to compensate.

AS - 13: Accounting For Investments:

These standards deal with the vital accounting aspects concerning

investments. These include classification, determination of cost for initial

recognition, disposal and reclassification of investments. The standard also

prescribes appropriate procedures of valuation of investments in the financial

statements.

Investments are assets held by an enterprise for earning income by

way of dividends, interest, and rentals, for capital appreciation, or other

benefits to the investing enterprise. Assets held as stock-in-trade are,

however, not termed and classified as investments. Investments may be

current and long-tenn investments and cost of investments comprises of

purchase price and any other costs directly attributable to the transaction,

besides finance and borrowing costs can be capitalized and included as an

element of cost of an investment property.

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AS - 14: Accounting For Amalgamations:

This standard deals with accounting for amalgamations and the

treatment of resultant goodwill or reserves. The standard brings the concept

of amalgamation into two categories, namely 'amalgamation in the nature of

Merger' and 'amalgamation in the nature of purchase'. In the first category

there is a genuine pooling not merely the assets and liabilities of the

amalgamating companies but also of the shareholders interests and of the

business of these companies. In the second category one company acquires

another company, as a consequence the vendor company shareholders do

not continue to be the shareholders of the combined company. The standard

suggest 'pooling of interests method' of accounting for amalgamations in the

nature of merger and 'purchase method' of accounting for amalgamation in

the nature of purchase. Under pooling method there will be no goodwill or

capital reserve but the profit or loss of the transferor company consequent of

transfer of assets and liabilities should be transferred to general reserve.

Under the purchase method the difference between consideration and net

value of assets of the transfer or company is recorded as goodwill or capital

reserve in the books of transferee company.

AS - 15: Accounting for Retirement Benefit in the Financial Statements of Employers (Employee Benefits):

This standard deals with accounting treatment for retirement benefits,

in the financial statements of employers. This standard applies to retirement

benefits falling under: (a) defined contribution schemes like provident fund,

superannuation schemes etc; (b) defined benefit schemes like gratuity, and

(c) other varieties, can either be a contribution scheme, a benefit scheme, or

may not be either like leave encashment benefit on retirement, post-

retirement health and welfare schemes or other retirement benefits.

The accounting treatment: (a) for defined contribution scheme; is

charging the contribution to the P & L a/c of the employer, and (b) contribution

to defined benefit schemes is making appropriate charge to the P & L a/c for

the year by way of a provision for the accruing liability as per actuarial

valuation and surplus or shortfall in valuation year (i) either charge to profit

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and loss account entirety, or (ii) spread-forward based on remaining average

tenure of service participating employees.

AS - 16: Borrowing Cost:

This standard prescribes accounting treatment for borrowing costs,

which includes interest and other costs incurred in connection with borrowed

funds. The substance of this standard is that, applying the matching and

accrual concepts, borrowing costs can be capitalized as a part of the cost of a

qualifying asset, with in certain limits. Elements of borrowing costs generally

include interest and commitment charges on bank borrowings; discounts and

premiums on borrowings to the extent amortized; other ancillary costs for

arranging borrowings to the extent amortized; finance charges in respect of

assets under finance lease, hire purchase; and exchange rate differences

relevant to foreign currency borrowings; to the extent that they are regarded

as an adjustment to interest cost.

This standard recognizes the Borrowing cost that are directly

attributable to acquisition, construction or production of a qualifying asset

should be capitalized as part of the cost of that asset, which requires careful

judgment of various aspects.

AS-17: Segment Reporting:

This standard being a reporting standard "Disclosures" constitute its

core element. This standard requires the business entities (falling with its

scope of applicability) to provide such additional information to users of

financial statements, as will help them; (a) Appreciate more thoroughly the

results and financial position of an entity by permitting a better understanding

of its past perfomiance and thus a better assessment of the risks, returns, and

future prospects, and (b) Become aware of the impact that changes in

significant business component may have on the business - and thus make

more infomried judgment about the "enterprise as a whole".

This standard prescribes the principles for reporting financial

information. This standard applies to the presentation of general-purpose

financial statements and also to consolidated financial statements. If a single

financial report contains both consolidated financial statements and separate

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financial statements of tlie parent, segment information need be presented

only on the basis of consolidated financial statements. According to this

standard segments are classified into two: (1) Business segment and (2)

Geographical segment

AS-18: Related Party Disclosures:

This standard is directed at utility of financial information. The core

element in and the critical focus of this standard are therefore

"DISCLOSURES". A part of this can also be narrative disclosure. The

standard is applicable to both independent financial statements of reporting

enterprise and consolidated financial statements (except for inter-group

transactions). The standard prescribes that:

(i) Reporting enterprises should provide additional information pertaining to related parties, who exercise control, or on whom control is exercised, or who fall under a common control - irrespective of whether there were any transactions with such parties

(ii) Reporting enterprises should also provide additional information pertaining to parties, and transactions with such parties involving related party relationship either in the form of control or in the form significant influence. The standard also prescribes certain valid exceptions, where no disclosure is needed (e.g., confidentiality, transactions between public sector undertakings etc).

AS-19: Leases:

This standard prescribes to Lessees/Lessors, appropriate accounting

principles and the methods of applying the principles for preparation of, as

also disclosure in financial statements. This standard also covers accounting

method relevant for manufacture-lessor, and for sale-and-lease-back

transactions. According to this standard there are two types of leases (1)

operating lease and (2) financial lease. This standard indicates that

recognition of the lease as an asset and a liability on the basis of lower of fair

value and present value in the books of lessee. But in the books of lessor this

lease asset should be recognized as receivables and lease income is

transferred to profit and loss account. In case of operating lease it should be

recognized as fixed asset.

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AS-20: Earnings Per Share:

AS-20 is applicable to companies whose equity shares and potential

equity shares are listed in a recognized stock exchanges in India. This

standard prescribes the principles for determination and presentation of

earnings per share. The term "principles" would mean laying down the step-

by-step procedure. "Determination" would refer to the computation of EPS and

"presentation" would mean its "disclosure" in the financial statements. This

standard applies to: (a) companies whose shares or potential equity shares

are listed in a recognized stock exchange in India, (b) unlisted companies

which by some other statute and required to present their earnings per share,

and (c) unlisted companies, which chose to compute earnings per share,

though not othenwise required to do so.

The standard prescribes that distinguishing information of Basic

Earnings per share and Diluted Earnings per share must be presented. Basic

earnings per share should be calculated by dividing the net profit or loss for

the period attributable to equity shareholders by the weighted average

number of equity shares outstanding during the period. For the purpose of

calculating diluted earnings per share, a net profit or loss for the period

attributable to equity shareholders and the weighted average number of

shares outstanding during the period should be adjusted for the effects of all

dilative potential equity shares.

AS-21: Consolidated Financial Statements:

Consolidated Financial Statements (CFS) present the financial

position, operating results and statement of cash flows of a group of

companies even though multiple independent legal entities exist.

Consolidation facilitates reporting as "one single economic entity", the

financial position and performance of a parent and its' subsidiaries. This

standard is applicable to all listed companies that prepare consolidated

financial statements. Consolidated financial statements include: (a) balance

sheet, (b) profit and loss account and notes thereto, (c) cash flow statement, if

parent presents its own cash flow statement, and (d) segment reporting. In

preparing consolidated financial statements, the financial statements of the

parent and its subsidiaries should be combined on a line by line basis by

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adding together similar items of assets, liabilities, income and expenses. At

the risk of repetition, it may be added that consolidated financial statements

will be, to the extent possible, in the same format as that of the parent. The

consolidation procedures and disclosure as per this standard, consists of: (a)

elimination of cost of investment to parent, (b) any excess of cost over

parent's portion in subsidiary's equity on the date of investment to be

recognized as goodwill. However, no specific guidance is available at present

to treat this goodwill, but impairment test is necessary, (c) negative goodwill to

be treated as capital reserves in the consolidated accounts (d) In case of

step-acquisition, the CFS are prepared form the date when the investee

becomes subsidiary, (e) showing parent's portion of equity in a subsidiary, (f)

in case of cessation of a subsidiary, investment to be accounted for as per

AS-13 unless it becomes an associate, results of operations to be disclosed in

CFSs until the date of cessation, (g) in parent's separate financial statements,

investment in subsidiary to be accounted for as per AS-13, (h) minority

interest should be disclosed, and (i) uniform accounting policies to be followed

to the extent possible or else the fact that different policies followed to be

stated.

AS-22: Accounting For Taxes on Income:

This standard prescribes the accounting treatment for taxes on income,

with a focus on the need to adhere to the fundamental principle of matching

concept. More specifically, the standard specifies the manner in which the

related item of expenses or savings (of income tax) is to be determined and

disclosed. The basic premise from which the rationale of the standard

emerges is that "accounting income differs from taxable income", which can

be divided into permanent difference and timing difference. The differences,

which originate in one period and do not reverse subsequently is considered

permanent difference, which requires no special accounting treatment. The

differences which originate in one period and are capable of reversal in one or

more subsequent periods is called timing difference, representing items or

amounts which lead to either saving in tax or payment of tax in the current

year, in a manner that such saving at payment is nullified in later years.

Because of the timing difference, if the tax of initial years being higher and

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subsequent years being lower, resulting in creation of deferred tax asset

(DTA) and if tax of initial years being lower and subsequent years being

higher resulting in deferred tax liabilities (DTL). However, the tax effect of

timing differences is defined as deferred tax. The recognition and

measurement is: (i) providing current tax in books, based on current tax laws

(ii) where the tax liability is postponed an amount equivalent to such tax

liability should be set apart a charge on revenue (debit P & L account and

credit DTL account); (ill) when the tax liability assumed and discharged in

advance, an amount equivalent to this liability is credited to P & L account by

creating an asset called Deferred Tax Asset Account.

AS-23: Accounting for Investments in Associates in Consolidated Financial Statements:

This standard sets out principles and procedures for recognizing, in the

CFS, the effect of investment in associates on the operations and results of a

group. The standard applies only for preparation of CFSs. This standard

defines: (i) An "Associate" is an enterprise, other than a subsidiary or joint

venture, where the investor (or, investing entity) has a significant influence

and (ii) "significant influence" is the power to participate in the financial and/or

operating policy decision of the investee but not control over those policies.

As per this standard, equity method of accounting is recommended

where by initial recognition needs: (a) investment is to be recorded at cost in

the consolidated financial statement of investor (b) difference between cost of

investment and investor's share of equity (being residual interest in the

assets, less liabilities) on the date of acquisition, would represent either

goodwill or capital reserve (c) once goodwill or capital reserve arising at the

time of acquisition is identified, this should be included in the carrying amount

and disclosed separately.

This standard signifies the applying of equity method for consolidation:

(a) by adjusting carrying amount of investment, (b) It should be adjusted only

to the extent of investor's share, (c) recognition in post acquisition change in

"net asset value of investee" (d) other principles in AS-21 will apply here also,

(e) recognizing losses in associates only to the extent of value of investment

and following corresponding rule for subsequent recovery of losses, (f)

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discontinue equity metliod, wlien significant influence ceases, or when other

restrictions on funds transfer apply.

AS-24: Discontinuing Operations:

This standard prescribes appropriate recognition, nneasurement and

reporting requirements, when an entity is discontinuing a part of its

operations. It deals with one pertinent area of disclosure i.e., in respect of

discontinuing operations of an enterprise alongside the activities, which are

continuing. A discontinuing operation is a component of an enterprise that (a)

a well-coordinated plan leading to, a single sale, piecemeal sale, termination

or abandonment and (b) can be a response to market forces resulting in

downsizing of business segment or geographic segment, and (c) the

component is distinguishable (i) operationally and for financial reporting

purposes, (ii) has a specific link to assets, liabilities, income or major share of

expenses, and (iii) yet, does not vitiate the assumption of going concern.

AS-25: Interim Financial Reporting (IFR):

An interim financial report is defined to mean a financial report

consisting, either a set of complete financial statements or a set of condensed

financial statements for an interim period. Having regard to timeliness of

submission of infomriation, the preparers of IFR are required to present, at a

minimum, a set of condensed financial statements. The standard does not

prescribe the "periodicity" or intervals at which the enterprises may elect to

present the interim reports. Compliance with IFR is essential only for those

entities who elect to present interim reports, or who are otherwise required by

a regulator (SEBI) to do so. A complete set of IFR conforms to requirements

as applicable to annual accounts where as Minimum component of the

condensed set consists of condensed Balance sheet, condensed statement of

profit and loss, condensed cash flow statement, and selected explanatory

notes in order to impart clarity.

AS- 26: Intangible Assets:

This standard prescribes the accounting treatment for intangible assets

and defines an asset is a resource, controlled by an enterprise as a result of

past events, and from which future economic benefits are expected to flow to

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the enterprise. An intangible asset is defined as an identifiable non-monetary

asset, without physical substance, held for use in the production or supply of

goods or services, for rental to others, or for administrative purposes.

The presentation contents of the standard cover: (a) identification of

what is an intangible asset, with a closer focus on certain items not covered

by the standard, (b) recognizing intangible assets in the financial statements,

including principles for measurement, and recognition of an item of

expenditure, (c) periodic review and amortization, (d) impairment losses,

retirements and disposals and (e) disclosure aspects.

AS-27: Financial Reporting of Interests in Joint Ventures:

This standard lays down principles and procedures for accounting for

interests in Joint ventures and reporting of joint venture assets, liabilities,

income and expenses in the financial statement of ventures and investors,

regardless of the structures or forms under which the joint venture activities

takes place. Joint venture is a contractual arrangement where by two or more

parties undertake an economic activity, which is subject to joint control.

Accounting for joint venture under this standard, depends upon whether

underlying investment represent interests in; (i) jointly controlled operations

(JCO); (ii) jointly controlled assets (JCA); or (ill) jointly controlled entities

(JCE); with a common characteristics of contractual agreement and

contractual arrangement. The standard indicates (i) identifications and

detemriination of the structure and form of joint venture and (ii) adopting

suitable accounting methods relevant to such form. Incase of jointly controlled

operations, a venture should recognize, in both its own separate financial

statement, and consolidated financial statements; (i) assets that it controls

and the liabilities it incurs and (ii) expenses it incurs, and income that it earns

from the sale of goods or services through this operation.

For accounting of jointly controlled assets, a venturer should recognize,

in both its own separate financial statement, and consolidated financial

statements; (i) share of assets that it owns and controls, (ii) direct liabilities in

relation to share of assets owned, (iii) share of joint liabilities if any incurred,

(iv) expenses it incurs (for its share of ownership and control), and (v) "share

of income" that it earns from the sale of its share of goods or services through

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the jointly controlled assets. A jointly controlled entity maintains its own

accounting records, prepares and presents its own financial statement in

accordance with laws applicable to that legal form and proportionate

consolidate method adopted in the venture's consolidated financial

statements.

AS - 28: Impairment of Assets:

The objective of this standard is: (a) To prescribe procedures to be

followed, to ensure that an asset is carried at no more than its carrying

amount, and flowing there from the procedures as to when to recognize an

asset as impaired, (b) To specify conditions governing reversal of impairment

loss in an asset, and (c) To prescribe appropriate disclosures. The standard

is applicable in accounting or impairment of all assets (i) carried at cost, as

also (ii) to assets that are carried at revalued amounts, subject to exclusions

of: (a) inventories (b) assets under construction contracts, (c) investments, (d)

deferred tax assets, and (e) certain other financial assets. The essence of the

standard states that: (i) If recoverable amount is less than the carrying amount

of an assets, the reduction is recognized as impairment loss and charged to P

& L account. If impairment loss is greater than carrying amount itself, the

difference is recognized as a liability if and where the standard so warrants,

depreciation charge is computed on the basis of revised carrying amount,

recoverable value and useful life, (ii) when recoverable amount cannot be

estimated for an individual asset, it should be estimated for a "cash generating

unit" to which the asset belongs, by applying bottom up and top down tests

where necessary. Goodwill and allocable corporate assets, if any, should also

be considered, (iii) impairment loss is recognized for cash generating unit, if

and only if recoverable amount is less than carrying amount where goodwill

exists and can be allocated to the cash generating unit, impairment loss will

first be applied to such goodwill, (iv) impairment loss is reviewed annually (on

Balance sheet date) having regard to external sources of information, if

impairment loss has ceased to exist or has decreased suitable reversals can

be made where appropriate, (v) where the operations are being discontinued,

recoverable amount is estimated, and impairment loss is recognized, based

on the occurrence of initial disclosure event, where warranted, a previously

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recognized impairment loss can also be reversed, and (vi) appropriate

discloses should be made.

AS-29: Provisions, Contingent Liabilities and Contingent Assets:

This standard incorporates measurement bases for measurement and

recognition criteria in three areas, namely, provisions, contingent liabilities and

contingent Assets. The standard states: (A) A provision is a liability, which

can be measured only by using substantial degree of estimation. The

recognition of the provision is based on present obligation, outflows of

resources to settle the obligation, and reliable estimation, (B) The Contingent

liability is defined to include two separate situations: (i) present obligation,

where existence of an obligation on Balance sheet date is probable and (ii)

possible obligation, where existence of obligation on the Balance sheet date is

not probable. A contingent Liability is to be disclosed only as a footnote, and

(c) A contingent asset is a possible asset that arises from past events the

existence of which will be confirmed only by the occurrence or non­

occurrence of one or more uncertain future events not wholly with in the

control of the enterprise. The contingent assets are to be disclosed in

director's report.

CONCLUSION

The promulgation of accounting standards has been tremendous at

national, regional, or international levels as per the specific circumstances of

the country and region, in particular and international sphere in general. The

basic idea behind this change in promulgation of accounting standards is to

make financial statements more comparable so that competitive inferences

may be drawn which may help to make the managerial performance more

efficient and effective. In India the standards are framed on the basis of

International Accounting Standards, but with modifications and improvements

in relevant areas to suit domestic needs. The relentless effort of the ASB of

ICAI in issuing more than 15 standards after 2000, in addition to 14 standards

issued since 1979 is really remarkable. The number of standards so far

issued (total 29 ASs) has not been unreasonable. The ASB (ICAI) took the

easiest subject first with the benefit of hindsight, one can see that, as the ASB

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proceeded with its programme, it started to tread in more sensitive areas, at a

time wlien the whole economic background was becoming more volatile. As

has been seen in the development of accounting standards by the lASB,

FASB in USA and ASB in India, the process of setting standards is entirely in

the hands of accountants, it is high time to take the views of users and

accounting researchers since accounting standards are vital and too

important. PonA/al, (1999) viewed "Accounting standards should aim at

reducing diversity in all accounting and reporting practices in different

countries or zones". Of course, the ultimate aim should be the fomnulation of

a single set of unifonn world accounting standards. Turning to the differences

between national and international standards, it is an obvious question to

what extent the ASs are different from the lASs and also IFRs. It is claimed

that lASs are modified before adoption, in practice the standards are adopted

with minor modifications in India. Ghosh, [2000], suggested that the

differences, if they exist, would be minimal, since; the ASs in India give

recognition to all sound accounting practices and are not limited to

recognizing only one practice. Joshi & Abdulla [1995:707] and Nobes [2000]

however, found that there are significant differences or in consistencies

between ASs and lASs.

However, almost all the standard setting bodies across the globe follow

the problem oriented approach rather than fundamental objects and concepts

in standard setting thereby undermining the objectivity principles of

accounting. This may be due to the very domination of the professional

accounting bodies in the standard setting process. The 'due process'

followed in USA involves mainly the research, while lASB's due process

operate in open, these carry more weightage and strength to the standards

when promulgated and operationally they are more efficient and effective but

in the Indian context, the meetings of the ASB are held in camera. It is not

known the responses to various EDs or processed and incorporated in

standards and these responses are not open to public inspection. Hence the

process of standard setting lacks research base, openness and appropriate

'due process' [Joshi et al, 1999:707].

It has been observed from the reports of the ASIC, and Review

Committee that the management of companies became increasingly of the

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view that the criteria, by which the measurement of their profits was to be

decided were set by a body over which they had little control. These groups

(mgt.) are started to take a keen interest in the accounting standard

programme, when difficult problems arose, the attempted standard had to be

suspended or withdrawn. It is believed that the ASB of ICAI has become

increasingly unsure of itself in recent years as it has got involved in the more

controversial areas of accounting and is reluctant to say anything definitive.

The resistance from the preparers (i.e., the management of the enterprises)

virtually started lobbying against the new standards issued by the ICAI to

reconsider to reverse the decision to issue the standards relating to the

particular accounting issue. Hence the ICAI may not take controversial stand

against the wishes of industry and auditing profession but domination of the

accounting profession is still pervades in the standard setting function.

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