ACCOUNTING STANDARD AND THEIR INTERCONNECTION

INTRODUCTION: Accounting standards, based on a meaningful conceptual framework, are a pre-requisite toachieving intra-country and intercountry uniformity in accounting procedure & disclosure practices for accounting items & events.A c c o u n t i n g S t a n d a r d s a r e u s e d a s o n e o f t h e m a i n c o m p u l s o r y r e g u l a t o r y m e c h a n i s m s f o r preparation of general-purpose financial reports and subsequent audit of the same, in almost allcountries of the world. Accounting standards are concerned with the system of measurement anddisclosure rules for preparation and presentation of financials statements. Accounting standardsare devised to furnish useful information to different users of the financial statements, to such asshareholders, creditors, lenders, management, investors, suppliers, competitors, research ers,regulatory bodies and society at large and so on. In fact, such statements are designed and prescribed so as to improve & benchmark the quality of financial reporting.The rapid growth of international trade and internationalization of firms, the Developments of new communication technologies, the emergence of international competitive forces is perturbingthe financial environment to a great extent. Under this global business scenario, the residents of the business community are in badly need of a common accounting language that should be spoken by all of them across the globe. A financial reporting system of global standard is a pre-requisite for attracting foreign as well as present and prospective investors at home alike that should be achieved through harmonization of accounting standards.I n I n d i a , t h e S t a t e m e n t s o n A c c o u n t i n g S t a n d a r d s a r e i s s u e d b y t h e I n s t i t u t e O f C h a r t e r e d Accountants of India (ICAI) to establish standards that have to be complied with to ensure thatfinancial statements are prepared in accordance with generally accepted accounting standards inIndia (India GAAP ). Adopting IAS in India, it is taking average 6.13 years for one accountings t a n d a r d . T h e d e v i a t i o n s o f I n d i a n A c c o u n t i n g S t a n d a r d s f r o m I n t e r n a t i o n a l A c c o u n t i n g Standards are mainly due to the legal and/ or regulatory framework prevailing in the country &state of economic environment in the country. However, to reap the benefits of globalization &l i b e r a l i z a t i o n , i t i s n e c e s s a r y t h e I n d i a n A c c o u n t i n g S t a n d a r d s m a y b e c o n v e r ged withInternational Accounting Standards. Hence, the purpose of present stu d y i s t o a n a l y z e t h e comparison between Indian Accounting Standards with International Accounting Standards. 1. INDIAN ACCOUNTING STANDARDS: In India, the Statements on Accounting Standards are issued by the Institute Of C h a r t e r e d Accountants of India (ICAI) to establish standards that have to be complied with to ensure thatfinancial statements are prepared in accordance with generally accepted accounting standards inIndia (India GAAP ). From 1973 to 2000 the IASC has issued 32 accounting standards. Theses t a n d a r d s , a s a m a t t e r o f f a c t , m o s t o f t h e c o u n t r i e s i n t h e w o r l d , w h i c h a r e i n t e r e s t e d , a n d confidence in adopting these standards may be followed. But it is observed that many countriesare not adopting the standards in the presentation of accounting information. Adopting IAS inIndia, it is taking average 6.13 years for one accounting standard. This points out the poor research work, and development in the accounting field.While formulating Indian Accounting Standards, changes from the corresponding IAS/ IFRS aremade only in those cases where these are unavoidable considering:

Legal and/ or regulatory framework prevailing in the country. (PG 2) To reduce or eliminate the alternatives so as to ensure comparability. State of economic environment in the country Level of preparedness of various interest groups involved in implementing the accountingstandards.One of the major reason for the prevailing divergent accounting practices is the AccountingStandards, the provisions of the Income Tax Act 1961 and Indian Companies Act 1956 do not gotogether. Indian Accounting Standards (ASs) are formulated on the basis of the IFRSs. While formulating ASs, the endeavor of the ICAI remains to converge with the IFRSs. The ICAIhas till date issued 29 ASs corresponding to IFRSs.Some recent ASs, issued by the ICAI, are totally at par with the corresponding IFRSs, e.g., theStandards on Impairment of Assets and Construction Contracts

AS-1 : Disclosure of Accounting Policies

These concepts, which are fundamental to accounting, are the broad-based assumptions, underlying preparation of financial statements periodically. Financial statements are assumed to be prepared by adhering, among others, to these concepts. Unless any contrary position is unequivocally brought to notice, the user can validly presume that these principles have been followed. Consequently, if any one of these principles is not adhered to, such a fact ought to be disclosed. Selection of appropriate accounting policies Financial statements (e.g., annual accounts) are internationally recognised as a composite whole with, Balance Sheet, Statement of Profit and Loss, Notes on accounts, and cash flow picture, as its constituent elements. Entities governed by the provisions of Companies Act, or other Statutes while complying with the detailed provisions in the relevant statues, should also ensure that the accounts do give a true and fair view of the financial position and performance. A remote possibility of a conflict between compliance with detailed provisions in the Statues and the achievement of truth and fairness cannot perhaps be taken as entirely non-existing. In such a situation, there is an overriding obligation to provide a true and fair view to users of financial statements. It is this overriding obligation that constitutes the major consideration in the determination and selection of accounting policies that are appropriate to an entity, event or transaction. Rightly, therefore, AS-1 lays emphasis on true and fair view being kept in primary focus for adoption of any accounting policy. Consider an entity using projector lights, the useful life of which is governed by the number of hours it is in use. The basis for an appropriate accounting policy for depreciating such an asset would be the actual number of hours such an asset is put to use. Selection of a straight-line method, allowing for a five-year life would apparently be inappropriate. Consider another case of usage of a machinery wear and tear of which is higher in initial years, relative to later years. Selection of written down value method of depreciation would be appropriate in this case, as opposed to a straight-line method. Viewed in this backdrop, true and fair principle would get vitiated if the accounting policy selected is inappropriate. An enterprise has, therefore, to exercise scrupulous care in the selection and application of accounting principles and methods. Such a selection is guided by three major considerations

(a) Prudence

(Pg 3) Prudence is the inclusion of a degree of caution in the exercise of judgements needed in making estimates required under conditions of uncertainty. By exercising prudence, an enterprise does not recognise profits on the basis of anticipation. These are recognised only when realised though not necessarily in cash. However, all known losses are anticipated and provided for. For example, in determining the carrying amount of inventory, the profit margins are ignored and yet, the realisable value if less than cost is taken cognizance of.

(http://www.primeacademy.com/pdfs/asfinalchapter1.pdf) First Lessons in Accounting Standards 4 (b) Substance over form If information is to represent faithfully the transactions or events, it is essential that they are accounted for and presented in accordance with their substance and economic reality and not merely their legal form. For example, where rights and interests in a property stands transferred while legal documentation for the transfer is yet to be completed, the transaction should be recorded as a sale in the books of transferor and acquisition in the books of transferee. While distinguishing an amalgamation in the nature of merger, from one that of purchase, we do look at the substance of the transaction (i.e. whether the shareholders come together in a substantially equal partnership to share risks and benefits), over its form. Under AS-7(R) Construction Contracts, this concept of substance over form has been fittingly adopted in the determination of what constitutes a single contract for recognition of costs and revenues, (c) Materiality The relevance of information is affected by its materiality. Information is material if its misstatement, i.e. omission or erroneous statement, could influence the economic decisions taken by the user, based on such financial statements. Accordingly, financial statements should disclose all material items, i.e., knowledge of which might influence the decision of the user of financial statements. Three major considerations in selecting accounting policies are highlighted in the Standard. Other qualitative characteristics of accounting information, such as (i) relevance, (ii) neutrality, (iii) completeness, and (iv) reliability are equally critical to users in order that financial statements are meaningful. In the selection and adoption of accounting policies these aspects should also be kept in view. (also see Chart at the end of this Chapter)

Disclosure of Accounting Policies (Pg 4) All significant policies adopted in the preparation and presentation of financial statements should be disclosed at one place and should form part of the financial statements. It is customary to furnish a summary of the accounting policies in respect of the following areas: Accounting Convention Basis of Accounting Fixed Assets Depreciation Revaluation of Assets Investments Inventories Revenue Recognition Investment Income Borrowing Cost Proposed Dividend Retirement Benefits Lease Rentals (Lease Income) Research and Development Costs Taxes on income Foreign currency translation Claims Segment Reporting Financial and Management Information Systems

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AS 2 VALUATION OF INVENTORY AS 2 is applicable to all type of inventories held for resale or to be used in production process (including W.I.P.) except for following: ( A ) W.I.P. arising under construction contracts or in the ordinary course of business of service providers; ( B ) Shares, debentures and other securities held as S.I.T. ( C ) Producers inventories of livestock, agricultural and forest products, and mineral oils, ores and gases to the extent that they are measured at NRV in accordance with will established practices in those industries. NOTE: Inventories include consumable and loose tools frequently used in production but they do not include machinery , spares, which can be used only in connection with an item of fixed asset and whose use is expected to be irregular. Inventories should be valued at the lower of the cost and NRV. Cost of Inventories comprises of all cost of purchase, cost of conversion and other costs incurred in bringing the inventories to their present location and condition. 3 cost formulae (1) specific identification method (2) FIFO (3) Weighted Average Method

(Pg 5) Inventory items which are not ordinarily interchangeable and/or segregated for a specific identification method . This method provides specific identification of individual costs attributable to identify items of inventory. When there are large number of inventory items which are interchangeable ordinarily, specific identification method is inappropriate. In such cases, valuation should be done by FIFO or Weighted average method. NRV is estimated at balance sheet date The financial statements should disclose: (a) The accounting policies adopted in measuring inventories, including the cost formula used; and (b) The total carrying amount of inventories and its appropriate classification (viz. Raw materials, WIP, finished goods, loose tools, stores & spares, etc.)

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