UNIT V- ACCOUNTING STANDARDS FOR FINANCIAL REPORTING

A financial statement is a formal record of the financial activities and position of a business,
person, or other entity. It is presented in a structured manner and easy to understand.financial
statements of any firm or organization:
⮚ Balance sheet: It shows a statement of financial position, the entity’s assets, liabilities, and
stockholders’ equity as on the report date. However, it does not show information that
covers a span of time as it shows figures of assets and liabilities on a particular date.
⮚ Income statement: It shows a statement of comprehensive income, statement of revenue
and expenses and P/L report. It includes items of revenues, expenses, gains, and losses.
It also provides information on operations carried out by the enterprise.
⮚ Cash flow statement: It helps in showing the changes in the entity’s cash flows including
operating, investing and financing activities during the reporting period.

Uses of a financial statement

⮚ To scrutinize the ability of a business to generate cash and the sources and utilization of
that cash.
⮚ To ascertain whether a business has the capability to pay back its debts.
⮚ To help track financial results on a trend line to spot any looming profitability issues.
⮚ To help derive financial ratios from the statements that can indicate the condition of the
business.
⮚ To investigate the particulars of certain business transactions, as mentioned in the
disclosures that accompany along with the statements.
Financial statements that are being issued to outside parties may be audited to verify their
accuracy.
External users of financial statements
⮚ Creditors: They wish to know the recoverability of their dues.
⮚ Government: the authorities pay heed to the figures of revenue in a financial statement so
that they can calculate the taxes correctly.
⮚ Management: They wish to assess how well their decisions have transformed into useful
outputs and how far have they been able to achieve the targeted results.
⮚ Employees: They wish to create a demand for an extra bonus, based on the revenue earned
by a firm and judge the reasonableness of their pay.

Accounting Standards (AS)

Accounting Standards (AS) are basic policy documents. Their main aim is to ensure transparency,
reliability, consistency, and comparability of the financial statements. .So that the transactions of
all companies will be recorded in a similar manner if they follow these accounting standards. These
In India, the Indian Accounting Standards are issued by the Institute of Chartered Accountants of
India (ICAI).

Need of Accounting Standards

Objectives of Accounting Standards

⮚ Recognition of financial events
⮚ Measurement of financial transactions
⮚ Presentation of financial statements in a fair manner
 ⮚ Disclosure requirement of companies to the stakeholders .
⮚ Reliability of financial statements due to compliance of accounting standards
⮚ Comparability will facilitate inter-firm and intra-firm comparisons to check the progress
of the firm and its position in the market.

Benefits of Accounting Standards

1] Attains Uniformity in Accounting
Accounting Standards provides rules for standard treatment and recording of transactions. They
even have a standard format for financial statements. These are steps in achieving uniformity
in accounting methods.
2] Improves Reliability of Financial Statements
There are many stakeholders of a company and they rely on the financial statements for their
information. Many of these stakeholders base their decisions on the data provided by these
financial statements. Then there are also potential investors who make their investment decisions
based on such financial statements based on accounting standards. So it is essential these
statements present a true and fair picture of the financial situation of the company.
3] Prevents Frauds and Accounting Manipulations
Accounting Standards (AS) lay down the accounting principles and methodologies that all entities
must follow. One outcome of this is that the management of an entity cannot manipulate with
financial data. Following these standards is compulsory. So these standards make it difficult for
the management to misrepresent any financial information. It even makes it harder for them to
commit any frauds.
4] Assists Auditors
Now the accounting standards lay down all the accounting policies, rules, regulations, etc in a
written format. These policies have to be followed. So if an auditor checks that the policies have
been correctly followed he can be assured that the financial statements are true and fair.
5] Comparability
This is another major objective of accounting standards. Since all entities of the country follow
the same set of standards their financial accounts become comparable to some extent. The users
of the financial statements can analyze and compare the financial performances of various
companies before taking any decisions. Also, two statements of the same company from different
years can be compared. This will show the growth curve of the company to the users.
6] Determining Managerial Accountability
The accounting standards help measure the performance of the management of an entity. It can
help measure the management’s ability to increase profitability, maintain the solvency of the firm,
and other such important financial duties of the management.

Limitations of Accounting Standards

1] Difficulty between Choosing Alternatives
There are alternatives for certain accounting treatments or valuations. Like for example, stocks
can be valued by LIFO, FIFO, weighted average method, etc. So choosing between these
alternatives is a tough decision for the management. The AS does not provide guidelines for the
appropriate choice.
2] Restricted Scope
Accounting Standards cannot override the laws or the statutes. They have to be framed within the
confines of the laws prevailing at the time. That can limit their scope to provide the best policies
for the situation.
Development of Accounting standards in India
The Central Government of India issued Indian Accounting Standards in consultation with the
National Advisory Committee on Accounting Standards (NACAS). It did this under the supervision
and control of the Accounting Standards Board (ASB) of ICAI. Indian AS (Ind AS) are IFRS
converged standards.

Need for accounting standards

Globally comparable accounting standards promote transparency, accountability, and efficiency in
financial markets around the world. This enables investors and other market participants to make
informed economic decisions about investment opportunities and risks and improves capital
allocation.

Requirements of Accounting Standards

⮚ A statement of financial position (balance sheet)
⮚ A statement of comprehensive income.
⮚ A statement of changes in equity.
⮚ A statement of cash flows.
⮚ A summary of the significant accounting policies.

Objectives of IFRS
Its principal objectives are to develop, in the public interest, a single set of high quality,
understandable, enforceable and globally accepted international financial reporting standards
(IFRS Standards) based upon clearly articulated principles.

Basic features of IFRS

⮚ Relevance: So that it makes a difference to the decisions about a company made by users
of
the statements.
⮚ Faithful representation : Financial statements are complete and free from bias and error.

Role of IFRS
As a source of globally comparable information, IFRS Standards are also of vital importance to
regulators around the world. IFRS Standards contribute to economic efficiency by helping
investors to identify opportunities and risks across the world, thus improving capital allocation.

Development of IFRS
Proposals for a new Standard or an amendment to a Standard are published in an exposure draft
for public consultation. To gather additional evidence, members of the Board and IFRS Foundation
technical staff consult with a range of stakeholders from all over the world.
Adoption means using IFRS as issued by IASB. Convergence means that the Indian Accounting
standard board and IASB would continue working together to develop high quality, compatible
accounting standard over time.
Convergence means that the U.S. Financial Accounting Standards Board (FASB) and the IASB
would continue working together to develop high quality, compatible accounting standards over
time. More convergence will make adoption easier and less costly and may even make adoption of
IFRS unnecessary.
Implementation of IFRS in India
India has not adopted IFRS Standards for reporting by domestic companies however has issued a
formal roadmap on how it will be implemented. All companies listed or in the process of being
listed with net worth >= INR 500 crores (US$ 72 million approx.) Lack of training facilities and
academic courses on IFRS will also pose challenge in India. There is a need to impart education
and training on IFRS and its application. IFRS uses fair value as a measurement base for valuing
most of the items of financial statements. The use of fair value accounting can bring a lot of
instability and prejudice to the financial statements. It also involves a lot of hard work in arriving
at the fair value and valuation experts have to be used.

Indian Accounting Standard (IAS)

ASB is a committee under Institute of Chartered Accountants of India (ICAI) which consists of
representatives from government department, academicians, other professional bodies viz. ICAI,
representatives from ASSOCHAM, CII, FICCI, etc. ICAI is an independent body formed under an
act of parliament.The Ind AS are named and numbered in the same way as the International
Financial Reporting Standards (IFRS). National Financial Reporting Authority (NFRA) recommend
these standards to the Ministry of Corporate Affairs (MCA). MCA has to spell out the accounting
standards applicable for companies in India. As on date MCA has notified 41 Ind AS. This shall be
applied to the companies of financial year 2015-16 voluntarily and from 2016-17 on a mandatory
basis.

Mandatory Applicability of IAS from Accounting Period beginning on or after 1 April 2018
● Every Listed Company.
● Unlisted Companies with Net worth greater than or equal to Rs. 250crore but less than
Rs. 500 crores (for any of the below mentioned periods).
● MCA has to spell out the accounting standards applicable for companies in India. As on date
MCA has notified 41 Ind AS.

Difference between IFRS and IND AS

IFRS stands for International Financial Reporting Standards, It is prepared by the IASB
(International Accounting Standards Board). It is used in around 144 countries and is regarded as
one of the most popular accounting standards.
IND AS is also known as Indian Accounting Standards or Indian version of IFRS. Indian AS or IND
AS is used in the context of Indian companies.
IFRS IND AS

1.Definition

IFRS stands for International Financial Reporting IND AS stands for Indian Accounting Standards, it is
Standards and it is an internationally recognised also known as India specific version of IFRS
accounting standard

2.Developed by

IASB (International Accounting Standards Board) MCA (Ministry of Corporate Affairs)

3.Followed by

144 countries across the world Followed only in India

4.Disclosure

Companies complying with IFRS have to disclose as Such a disclosure is not mandatory for companies
a note that the financial statements comply with complying with Indian Accounting Standards or IND
IFRS AS

5.Financial Statement Components

It includes the following It includes the following:

1. Statement of financial position 1. Balance Sheet
2. Statement of profit and loss 2. Profit and loss account
3. Statement of changes in equity for the period 3. Cash flow statement
4. Statement of cash flows for the period 4. Statement of changes in equity
5. Notes to financial statements
6. Disclosure of accounting policies

6.Balance Sheet Format

Companies complying with IFRS need have specific Companies complying with IND AS need have no
guidelines for preparing balance sheet with assets such requirements for balance sheet format, but the
and liabilities to be classified as current and non- guidelines are defined for presenting balance sheet
current