Compliance with Accounting Standards

Presented by :CA. Rajeev Bansal

ACA, D.I.S.A.(ICA) B. Com.M/s Rajeev Lakshmi Bansal & Co.

Chartered Accountants

Rationale behind Accounting StandardsRationale behind Accounting Standards

Measurements are within a conceptual framework which Measurements are within a conceptual framework which

emphasises prudence, going concern, cost (not current emphasises prudence, going concern, cost (not current

value), accrual, substance over form, consistency and value), accrual, substance over form, consistency and

materialitymateriality

Test each auditing issue for its capacity for adding Test each auditing issue for its capacity for adding

credibility to given propositions/assertionscredibility to given propositions/assertions

Mandatory documents on accountingMandatory documents on accounting

The standards describe the

─ accounting principles and

─ methods of applying these principles in the preparation and presentation of financial statements

so that they give a true and fair view

Purpose

ReportingIn the event of any deviation from a mandatory standard the auditor

is required to make adequate disclosure in his report

The standards are applicable to general purpose financial statements

and other financial reporting, subject to attest function, issued by Applicability– corporate or co-operative or non-corporate

– commercial, industrial or business enterprises whether profit oriented or not

– charitable or religious organisations, if any proportion (howsoever small) of their activities is commercial, industrial or business in nature

– financial statements prepared on cash basis

Auditor’s duty in relation to a mandatory accounting standard in case of companiesAuditor’s duty in relation to a mandatory accounting standard in case of companies

Ascertain accounting policy followed and disclosure made by the enterprise

Is disclosure as per standard?

Make negative statement under section 227(3)(d)

Is accounting policy as per

standard?

Is effect of deviation material?

Qualify the audit report

Is there a violation of legal requirements?

Is true and fair view affected?

No further action required

Make positive statement under section 227(3)(d)

Make negative statement under section 227(3)(d)

Yes

Yes Yes

Yes

NoNo

No

NoNo

Yes

Standard settingStandard setting

ICAI took up the task of laying down accounting standards in 1977 ICAI took up the task of laying down accounting standards in 1977

accounting standards issued by the ICAI were however accounting standards issued by the ICAI were however

mandatory only for its members mandatory only for its members

Companies (Amendment) Act, 1999 gave recognition to Companies (Amendment) Act, 1999 gave recognition to

accounting standards thereby making it mandatory for companiesaccounting standards thereby making it mandatory for companies

Standards to be formulated by ASB/ICAI CouncilStandards to be formulated by ASB/ICAI Council

Standards to be prescribed by the Central Government in Standards to be prescribed by the Central Government in

consultation with the National Advisory Committee on consultation with the National Advisory Committee on

Accounting Standards (NACAS)Accounting Standards (NACAS)

COMPLIANCE WITH ACCOUNTING STANDARDS IS A LEGAL REQUIREMENT !!

Companies (Accounting Standards) Rules, 2006Companies (Accounting Standards) Rules, 2006

Central Government, in consultation with

NACAS, has issued the Companies

(Accounting Standards) Rules, 2006 notifying

accounting standards 1-7 and 9-29, effective

for COMPANIES for accounting periods

commencing on or after 7 December 2006

ApplicabilityApplicability

The prescribed standards are mandatory for all companies

except as exempted/relaxed for SMCs.

ICAI classifies

enterprises into three

categories

Level I (large),

Level II (medium)

and

Level III (small)

The Rules stipulate only two categories –

(i) Small and Medium Sized Company (SMC) which is entitled to certain exemptions and

(ii) other companies

ICAI RULES

Unlike ICAI, no distinction between small and medium

companies

Level II EnterprisesLevel II Enterprises

Enterprises which are not Level I Enterprises but fall in Enterprises which are not Level I Enterprises but fall in any one or more of the following category :any one or more of the following category :

All commercial, industrial and business reporting All commercial, industrial and business reporting enterprises, whose turnover for the immediately enterprises, whose turnover for the immediately preceding accounting period on the basis of audited preceding accounting period on the basis of audited financial statements financial statements exceeds Rs. 40 lakhsexceeds Rs. 40 lakhs but does not but does not exceeds Rs. 50 crore.exceeds Rs. 50 crore.

All commercial, industrial and business reporting All commercial, industrial and business reporting enterprises having borrowings, including public enterprises having borrowings, including public deposit, in excess of Rs. 1 crore but not in excess of deposit, in excess of Rs. 1 crore but not in excess of Rs. 10 crore at any time during the accounting periodRs. 10 crore at any time during the accounting period

Holding and subsidiary enterprises of any of the above Holding and subsidiary enterprises of any of the above at any time during the accounting period at any time during the accounting period

Auditors’ Duty – Mandatory Accounting StandardAuditors’ Duty – Mandatory Accounting Standard

According to Para 6.1 of the “Preface to the statement According to Para 6.1 of the “Preface to the statement of Accounting Standard (Revised 2004)” of Accounting Standard (Revised 2004)”

The Accounting Standards will be mandatory from the The Accounting Standards will be mandatory from the respective date(s) mentioned in the Accounting respective date(s) mentioned in the Accounting Standard(s). The mandatory status of an Accounting Standard(s). The mandatory status of an Accounting Standard implies that while discharging their attest Standard implies that while discharging their attest functions, it will be the duty of the members of the functions, it will be the duty of the members of the Institute to examine whether the Accounting Standard is Institute to examine whether the Accounting Standard is complied with in the presentation of financial statements complied with in the presentation of financial statements covered by their audit. covered by their audit. In the event of any deviation In the event of any deviation from the Accounting Standardfrom the Accounting Standard, it will be their duty to , it will be their duty to make adequate disclosures in their audit reports so that make adequate disclosures in their audit reports so that the users of financial statements may be aware of such the users of financial statements may be aware of such deviation.deviation.

Question - AnswerQuestion - Answer

Do the Accounting Standard issued by ICAI Do the Accounting Standard issued by ICAI apply in respect of Tax Audit under section apply in respect of Tax Audit under section 44AB of the Income Tax Act, 1961 ?44AB of the Income Tax Act, 1961 ?

Do the Accounting Standard issued by ICAI Do the Accounting Standard issued by ICAI apply to co-operative society ?apply to co-operative society ?

Do the Accounting Standard issued by ICAI Do the Accounting Standard issued by ICAI apply to Charitable entities ?apply to Charitable entities ?

Question – AnswerTax - Audit u/s 44ABQuestion – Answer

Tax - Audit u/s 44AB

According to Announcement VI of ANNOUNCEMENTS According to Announcement VI of ANNOUNCEMENTS OF THE COUNCIL REGARDING STATUS OF VARIOUS OF THE COUNCIL REGARDING STATUS OF VARIOUS DOCUMENTS ISSUED BY THE INSTITUTE OF DOCUMENTS ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA :CHARTERED ACCOUNTANTS OF INDIA :

It is hereby clarify that the mandatory Accounting It is hereby clarify that the mandatory Accounting Standard also apply in respect of Financial Statements Standard also apply in respect of Financial Statements audited under section 44AB of the Income Tax Act, audited under section 44AB of the Income Tax Act, 1961. Accordingly, members should examine 1961. Accordingly, members should examine compliance with the mandatory Accounting Standard compliance with the mandatory Accounting Standard when conducting such audit when conducting such audit

Question – Answer Co-operative SocietiesQuestion – Answer

Co-operative SocietiesAccording to Para 3.3 of the “Preface to the statement of According to Para 3.3 of the “Preface to the statement of Accounting Standard (Revised 2004)”Accounting Standard (Revised 2004)”

Accounting Standards are designed to apply to the Accounting Standards are designed to apply to the “general “general purpose financial statements”purpose financial statements” and other financial reporting, and other financial reporting, which are subject to the attest function of the members of the which are subject to the attest function of the members of the ICAI. ICAI.

Accounting Standards apply in respect of any enterprise Accounting Standards apply in respect of any enterprise (whether organised in corporate, co-operative or other forms) (whether organised in corporate, co-operative or other forms) engaged in commercial, industrial or business activities, engaged in commercial, industrial or business activities, irrespective of whether it is profit oriented or it is established irrespective of whether it is profit oriented or it is established for charitable or religious purposes.for charitable or religious purposes.

Further, even if a very small proportion of the activities of a Further, even if a very small proportion of the activities of a co-co-operative societyoperative society is considered to be commercial, industrial or is considered to be commercial, industrial or business in nature, business in nature, then it can not claim exemption from the then it can not claim exemption from the application of Accounting Standard (GC – 12/2002 issued by application of Accounting Standard (GC – 12/2002 issued by ICAI)ICAI)

General Purpose Financial StatementsGeneral Purpose Financial Statements

This would include Balance Sheet , P&L account, Cash This would include Balance Sheet , P&L account, Cash Flow Statement and other statements and explanatory Flow Statement and other statements and explanatory notes which form part thereof, issued for the use of notes which form part thereof, issued for the use of various stakeholders, government and their agencies various stakeholders, government and their agencies and the public.and the public.

Thus, it is concluded that accounts prepared solely for Thus, it is concluded that accounts prepared solely for Tax purpose and/or for use by lendersTax purpose and/or for use by lenders would be would be considered to be “ General Purpose Financial considered to be “ General Purpose Financial Statements”Statements”

Question – Answer Charitable Entities

Question – Answer Charitable Entities

No, Accounting Standard of ICAI do not apply to No, Accounting Standard of ICAI do not apply to charitable entities. charitable entities. For example,For example, collecting donations collecting donations and distributing them to flood affected peopleand distributing them to flood affected people

However, if a charitable entity is also engaged in the However, if a charitable entity is also engaged in the activities of a commercial, industrial or business activities of a commercial, industrial or business nature(very small in proportion), then the accounting nature(very small in proportion), then the accounting standard would apply to all its activities including standard would apply to all its activities including those which are not commercial, industrial or business those which are not commercial, industrial or business in nature. in nature.

Relaxations/Exemptions available to SMCsRelaxations/Exemptions available to SMCs

AS 3, Cash flow

statements

AS 17, Segment

reporting

AS 19, Leases

AS 20, Earnings per share

AS 28, Impairment of assets

AS 29, Provisions, contingent liabilities and

contingent assets

Full exemption

Limited exemptions

AS 21, AS 23,AS 25, AS 27

AS 18, RelatedParty Disclosures

Issues to be resolvedIssues to be resolved

It seems that till such time that the central government prescribes the revised standard, companies would be required to continue to apply the notified (i.e. pre-revised) standard

What happens if ICAI revises an accounting standard??

What standards are applicable to enterprises other than companies??

ICAI’s existing standards, unless ICAI decides to announce that such enterprises should also follow Government notified standards

Issues to be resolvedIssues to be resolved

What happens if ICAI issues an accounting standard on a topic not covered by any of the notified accounting standards?

?

The prudent view would be that until an accounting standard

on a new topic issued by ICAI is prescribed by the Central

Government, it will be deemed to be an accounting standard

The four “AXIOMS”The four “AXIOMS”

Incomplete information creates UNCERTAINTYIncomplete information creates UNCERTAINTY

Uncertainty creates RISK for Investors & CreditorsUncertainty creates RISK for Investors & Creditors

Risk makes investors & creditors demand a higher Rate of Return Risk makes investors & creditors demand a higher Rate of Return (ROR)(ROR)

Higher ROR means higher cost of capital for the company and Higher ROR means higher cost of capital for the company and produces LOWER market values of company’s securitiesproduces LOWER market values of company’s securities

Quality financial reportingQuality financial reporting

More complete information that will reduce uncertainty

Less uncertainty will reduce risk for investors and creditors

Reduced risk makes investors and creditors satisfied with a lower Rate of Return (“ROR”)

Lower “ROR” means lower “cost of capital” for the company which produces higher stock market values

QueryQuery

ABC Ltd. Was set up in a notified area so that it could ABC Ltd. Was set up in a notified area so that it could avail the sales tax deferral benefit, under which it avail the sales tax deferral benefit, under which it would pay sales tax collected to the government after would pay sales tax collected to the government after 7 years. The sales tax collected, which will be paid to 7 years. The sales tax collected, which will be paid to the government after 7 years, is reflected as the government after 7 years, is reflected as unsecured loan in the Balance-Sheet or will this unsecured loan in the Balance-Sheet or will this borrowing be included for the purposes of determining borrowing be included for the purposes of determining Level 1, 2 ,3 enterprise Level 1, 2 ,3 enterprise

??

ResponseResponse

Though borrowing are not defined, the use of Though borrowing are not defined, the use of term “Including Public Deposit” in the term “Including Public Deposit” in the threshold criteria suggests that the amount threshold criteria suggests that the amount has to be actually borrowed from some entity.has to be actually borrowed from some entity.

Therefore, liabilities relating to sales tax deferral Therefore, liabilities relating to sales tax deferral or provision or creditors, etc would not be or provision or creditors, etc would not be borrowings for the above purposes.borrowings for the above purposes.

Thank youThank you