Theory Base of Accounting, Accounting Standards and International Financial Reporting Standards (IFRS)

 

 

Accountancy (Class-XI) CHAPTER-3

Theory Base of Accounting, Accounting Standards and International Financial Reporting Standards (IFRS)

 

Introduction : We have studied that accounting is concerned with recording, classifying and summarizing of financial transactions and events and interpreting the results thereof. The basic objective of accounting is to provide information about the operating and financial performance of a firm to its various users such as shareholders (owners), debenture holders, bankers, financial institutions, creditors, tax authorities, researchers, employees, etc. Thus, it helps them in taking useful decisions.

For making the accounting information useful and meaningful to its users, it is necessary that such information must be reliable and comparable. The comparability of accounting information is required both for making inter-firm comparisons (i.e., comparison with similar firms) and for making intra-firm comparison (i.e., inter-period comparison of the same firm with the previous years). This is possible only when the financial statements are based on consistent accounting policies, principles and practices. Thus, accounting principles, concept and conventions have been formulated and these are commonly known as ‘Generally Accepted Accounting Principles’ (GAAP). GAAP’s are, thus, the basic rules within which accounting operate and they are the theory base of accounting. Accounting Standards (AS) have been issued by the Institute of Chartered Accountants of India (ICAI) for standardization of accounting policies to be adopted under specific circumstances. The term GAAP is used to describe the rules developed for the preparation of financial statements and these accounting principles are called by various names such as concepts, conventions, axioms, postulates, principles, modifying principles etc. The conceptual framework developed by GAAP and accounting standards are referred to as the theory base of accounting.

Meaning And Nature of Accounting Principles

Meaning :

The accounting profession has developed certain rules or principles to maintain uniformity and consistency in the recording of accounting transactions.

The term ‘principle’ has been defined as, “a general law or rule adopted or professed as a guide to action, a settled ground or basis of conduct or practice.”

— AICPA

Thus, accounting principles better called as Generally Accepted Accounting Principles (GAAP) refer to rules or guidelines adopted for recording of business transactions so as to bring uniformity in the preparation and presentation of financial statements.

The accounting profession has, therefore, evolved and developed certain principles so as to bring out uniformity and consistency in the recording of accounting transactions. These accounting principles are called by various names such as concepts, convention, axioms, assumptions, postulates, modifying principles, etc.

Nature or Features of Accounting Principles

The accounting principles have been developed over a long period of time on the basis of past experience, customs, statements of individuals, professional bodies [like Institute of Chartered Accountants of India (ICAI), American Institute of Certified Public Accountants (AICPA), International Accounting Standard Committee (IASC)], etc. However, these principles are not static in nature and are bound to be influenced by the change in legal, social, economic environment and as per need of users of financial information and professional bodies. The nature of accounting principles becomes clearer from the following point:

1. Accounting principles are not static : The accounting principles have been developed over a long period of time on the basis of past experience, customs, statements of professional bodies and regulations of government agencies. These accounting principles are static in nature and are constantly influenced by the changes in legal, social, economic environment and as per needs of the users of accounting information.
2. Accounting principles are man-made : Accounting principles are man-made based on experience so they are not as exact as principles of natural science which can be tested in laboratory. Further, they are subject to change as per requirements of the users.
3. Accounting principles are generally accepted: Accounting principles are the theory base of accounting. They act as guide for accounting and these are generally accepted by the accounting professionals of the world because they meet the following criteria.

(i)      Objectivity : The accounting information is objective if it is supported by documentary evidence and is verifiable. The accounting information should also be free from personal bias.

(ii)     Relevance : The accounting information is relevant only when it is useful to various end-users of the accounting service.

(iii)    Feasibility : The accounting principles are feasible keeping in view the complexity and cost involved in its application by the accounting professionals.

Need and Types

The accounting information is meaningful and useful to its users when such information is reliable and comparable. Reliability means that information is dependable and free from personal biasness whereas comparability means that financial statements be comparable both with the similar firms and with its period (intra-firm comparison). The accounting principles are, thus, needed to make the financial statements in some standardized form so that they serve the end users of financial statements in a better way.

 

 

Broadly speaking, accounting principles are classified into two categories:

1. Accounting Concepts or Assumptions
2. Accounting Principles

Accounting Concepts or Assumptions

Accounting concepts are the fundamental assumptions and propositions within which the accounting operates. They are generally accepted accounting rules on the basis of which financial transactions are recorded in the books of accounts and financial statements are prepared. These accounting assumptions or concepts must be followed as they provide foundation for the accounting process.

The fundamental accounting assumptions are:

1. Going Concern Assumption
2. Consistency Assumption, and
3. Accrual Assumption
4. Going Concern Assumption: The concept of going concern assumes that business will continue its operations for a long period of time and will not be sold or liquidated in the near future. That is why it is also called as assumption of continuity. On the basis of this concept, fixed assets are recorded at their cost price less estimated depreciation based on useful life of that asset. For example a machine is purchased for ` 50,000 having estimated life span of 5 years. After the expiry of one year, it is assumed that since machine is going to last for 5 years so yearly benefit derived from its use is ` 50,000 ÷ 5 = ` 10,000 p.a. ` 10,000 depreciation be charged as revenue expenditure of the year and machinery will be shown at ` 40,000 (50,000 – 10,000) i.e., the unexpired cost of the machine. If the assumption of continuity is not there, the whole cost of machine ` 50,000 would have been charged in the year of its purchase.

It is pertinent to note that we exhibit fixed assets at their cost price without taking reference to their market price. The market price of the fixed asset is irrelevant as it has not been purchased for selling purpose. We have purchased these assets for operation purpose so assumption of continuity of business allows us to charge a part of the asset which has been consumed in the period during operation.

2. Consistency Assumption : Financial Statements are used by various users for making inter-period (intra-firm) comparison and for making inter-firm (comparison with other similar firms). These comparisons are feasible only when the accounting policies and practices followed by the firms are uniform and these are followed consistently over a period of time.

To make further clarity among readers, let us explain with examples. There are different methods of charging depreciation on fixed assets. Similarly, there are several methods of valuation of closing stock. The change of methods significantly affect the profitability of the enterprise so financial statements will not be useful for making inter-period and inter-firm comparison.

It does not mean that assumption of consistency does not allow a firm to change the accounting policies. If the management feels that change in a method will lead to better disclosure of financial performance of the business, it is free to adopt a change. However, the necessary change of method along with justification of change must be stated in the footnote to enable the users to ascertain effect of the stated change.

3. Accrual Assumption : As per accrual assumption, revenues and expenses are recognized in the period of their occurrence rather than when they are received or paid. Thus, revenue is recorded when sales are made or services are rendered and not when cash is received. Similarly, expenses are recorded in the accounting year in which they have occurred even though cash might have been paid in the next accounting period. Thus, to arrive at the correct profit or loss during an accounting period, all expenses and incomes be recorded on accrual basis and not on cash basis. In real practice, accrual concept is a part of the matching concept.

Accounting Principles

The fundamental accounting principles are:

(i)       Accounting Entity or Business Entity Principle

(ii)      Money Measurement Principle

(iii)     Accounting Period Principle

(iv)     Full Disclosure Principle

(v)      Materiality Principle

(vi)     Prudence or Conservatism Principle

(vii)    Cost Concept or Historical cost Principle

(viii)   Matching Concept or Matching Principle

(ix)     Dual Aspect or Duality Principle

(x)      Revenue Recognition Concept

(xi)     Verifiable Objective Concept

(i)       Accounting Entity or Business Entity Principle : According to business entity principle, business is considered a separate entity distinct from its owner (s). The proprietor of the business is considered as a creditor of the business to the extent of his capital. This capital is considered as liability of the firm similar to borrowing from outsiders. Thus, separate set of books of accounts is kept and maintained for recording business transactions. Transactions are to be recorded from the point of view of the business entity and not from the point of view of the proprietor (owner(s)).

The personal transactions of the owner are kept separate. For example, house, car, investment and personal income and expenditure of the proprietor should be kept separate from the accounts of the business entity. If cash or goods is withdrawn by the proprietor, it is considered as his drawing and firm may charge interest on it. Similarly, if the proprietor has some other business entity, its accounts should be kept separately. If this assumption of separated business entity is not followed, the net profit and financial position of the business entity cannot be determined. Thus, it is clear that business and its owner are considered as separate entity for the purpose of accounting. This assumption applies to all other forms of organization viz. sole proprietorship, partnership or a company.

(ii)      Money Measurement Principle : According to this principle, only those transactions are recorded in the books of accounts which can be measured in terms of money. For example sale of good ` 1000, purchase of goods from Ram ` 5,000, purchase of machinery ` 30,000, payment of salary, receipt of income, etc. are to be recorded in the books of accounts as these are measurable in terms of money. On the other hand, all those transactions which cannot be measured in terms of money, are not recorded and ignored in the books of accounts e.g. appointment of a manager, harmonious employer-employee relations, team of dedicated employees, etc.

It is important to note that money measurement principle requires the recording of transactions in monetary form and not in physical units. For example, a firm has a building consisting of 6 rooms, 10 computers, 40 chairs, 10 tables and stock of 4,000 meters of cloth. These assets are in distinct unit and cannot be added together to exhibit a meaningful information. If all these assets are measured in terms of money, they can be easily recorded in the books of accounts.

Money measurement principle has its own limitations. Value of money does not remain same over a period of time due to change in the price level. Value of money is much less today than 5 years ago. The assets purchased at different point of time are clubbed together in the balance sheet at their historical costs. Thus, accounting data does not reflect a true and fair view about the state of affairs of the business entity in the balance sheet.

(iii)     Accounting Period Principle : As per going concern principle, life of the business is fairly long but the users of financial accounting cannot wait for financial statements till the liquidation of the business. Moreover, this is not a feasible preposition as many users like management, bankers, financial institutions and creditors require accounting information at a regular interval so that they may take appropriate decisions on timely basis. Management requires information at a regular interval to review the operating and financial performance and to exercise corrective actions, if any. Bankers and financial institutions require accounting information to ensure regularity of interest payment and safety of the funded loan. Similarly, government needs accounting information on yearly basis to collect various types of taxes like income tax, sales tax, excise duty, etc.

It is, therefore, thought prudent that all businesses should prepare their financial statements to know the profitability and financial position on a periodic basis, normally on yearly basis. This interval of time is called as accounting period.

The companies Act, 1956 and the income tax act require that financial statements be prepared annually. Generally, businesses adopt their accounting year from 1^st April to 31^st March. However, the companies whose shares are listed on stock exchange are required to publish their accounts on quarterly basis.

(iv)     Full Disclosure Principle : The full disclosure principle requires that financial statements make complete, adequate and fair disclosure of all information which is relevant and significant to the users of accounting service viz investors, lenders, creditors, researchers, government and regulatory agencies.

The principle of full disclosure requires that all the material facts which help in the appraisal of operating and financial performance of an organization must be disclosed in the financial statements and in footnotes. Thus, the users can analyse and interpret the financial statements and in footnotes. Thus, the users can analyse and interpret the financial statements to suit their objectives.

To ensure proper disclosure of material information, Companies Act, 1956 has provided the following:

(a)      Format of Financial Statements (Sec 211)

(b)      Cash Flow Statement as Per Accounting Standard-3;

(c)      Segment Reporting

(d)      Notes to Accounts

(e)      Report by Board of Directors (Sec 217)

1.           Directors Responsibility Statement
2.          Report on Corporate Governance

            iii.      Management Discussion and Analysis

(f)       Auditors’ Report (Sec 216)

This disclosure ensures that financial statements give a true and fair view of profitability and financial performance of the company to its various end users.

(v)      Materiality Principle : The principle of materiality requires the accounting of material facts in the books of accounts and accountants need not present facts which are immaterial while determining the income of the enterprise. According to American Accounting Association (AAA) “an item should be regarded as material if there is reason to believe that knowledge of it would be regarded as decision of an informed investor.” Thus, an item is material to one, may not be material to another. The materiality of an item depends on its nature and on the amount involved. Following examples will illustrate it:

(a)     Money spent on the extension of size of shop is a material fact as it will increase the future earning capacity of the business.

(b)     A variation in the value of closing stock by ` 200 is not significant but a variation in the cash balance of the same amount is a significant and material fact.

(c)      Similarly, stock of pencils, erasers, inkpots are not shown as an asset rather they are shown as revenue expenditure under the head stationery as the amount is not significant and hence not material.

(vi)     Principle of Conservatism or Prudence : According to principle of conservatism, if the management anticipate loss, provision should be made for loss but if it anticipates profit, it should not be recorded in the book of accounts unless and until it is realized. The principle states that management should be conscious while ascertaining income, failing which profit will be over stated and it will mean declaration of dividend out of capital. It will amount to reduction of share capital which is against the provisions of law. This principle is used in the following circumstances:

(a)     Valuation of closing stock at cost or market price whichever is less.

(b)     Creation of provision for Doubtful Debt.

(c)      Creation of provision for discount on debtors.

(d)     Writing off the intangible assets like goodwill, patent, trade mark, etc.

(e)      Joint life policy be stated in the balance sheet only at its surrender value against the actual amount paid.

Thus, principle of conservatism requires that profit should be recorded in the books of accounts only when it is realized but provision of loss should be made even if it is anticipated.

This reflects a pessimistic attitude of the management while ascertaining profit. However, any deliberate attempt of the management to under-estimate the profit will underestimate the value of assets and lead to generation of hidden profit or the secret profit in the books of accounts.

(vii)    Cost Concept or Historical Cost Principle : According to cost concept, assets are recorded in the books of accounts at their purchase price which includes cost of purchase, transportation, installation and for making the asset ready to use. For example, a machinery is purchased at a cost of ` 40,00,000, ` 20,000 is paid as transportation cost and ` 10,000 as installation cost. The amount of machinery recorded in the books of accounts will be ` 40,30,000. Thus, all costs incurred on the asset till installation forms the basis for accounting for that asset.

It is also called as historical cost as it is the cost of the asset that has been paid for its acquisition and it does not change year after year despite the change in its market price due to price level change. In real practice, historical cost does not mean that asset will continue to be shown in the balance sheet of several years at its acquisition cost. It will be reduced year after year by charging depreciation based on the useful life of the asset. Thus, the asset is shown in the balance sheet at its book value (i.e., cost less depreciation).

          Justification for the historical cost concept:

(a)     The cost price paid for the asset is verifiable from the cost records.

(b)     The information stated in the balance sheet is not influenced by the personal biasness of the accountant.

(c)      It is difficult to determine the market price of an asset. The valuation of asset will vary from person to person.

(d)     The concept of historical cost is stable and static while concept of market price is variable in nature.

(e)      Moreover, it is very difficult to keep a track record of market price of various assets on yearly basis.

          Drawbacks of historical cost principle:

(a)     It does not show true worth of the business and it may lead to hidden profit during inflationary period.

(b)     Assets are recorded in the books of accounts if money is paid for it. If a firm has paid nothing for acquiring an asset, it will not be recorded at all. For example, Goodwill is recorded in the books only when it is purchased and not otherwise.

(c)      The profit disclosed by the income statement will be completely distorted during inflationary period as depreciation charged will be inadequate in relation to market price of the asset.

(d)     The historical cost of various assets are not comparable if these are purchased over a period of time. Thus, they are not of much use to management and other end users of the accounting service.

(viii)   Matching Concept or Matching Principle : According to Matching Concept, expenses incurred in an accounting period should be matched with revenues earned during that period. Thus, the expenses and revenues must belong to same accounting period to determine the correct profit of the accounting period. Since the accounts are prepared on accrual basis so expenses incurred in an accounting period are matched with the revenue recognized in that period. Following points should be taken care of:

(a)     We know that revenue is recognized when sales is made or service is rendered rather than when cash is received. Similarly, expense is recognized when goods or services have been used to generate the revenue irrespective of the fact whether expense is paid or not.

(b)     The expenses such as salary, rent, insurance, etc. are recognized on the basis of the period to which they relate and not when they are paid e.g., Salary for the year ending 31^st. March, 2014 is paid in April, 2014 but it will be treated as an expense of March, 2014.

(c)      If a machinery is purchased whose useful life is 5 years, then, only 1/5 of the cost of machine should be treated as an expense, to generate sales for the accounting period and remaining 4/5 of the machine be shown as an asset in the balance sheet.

(d)     If insurance premium paid is partly related to next accounting year, the part related to current year is an expense of the current year and rest is an expense of the next year.

(e)      The costs of goods are also matched with their sales revenue while preparing profit and loss account, cost of goods sold need to be considered (Cost of all the goods produced less cost of unsold goods (Stock)).

In brief, matching concept implies that all revenues earned during an accounting year, whether received or not and all expenses incurred during an accounting year, whether paid or not are matched to ascertain the profit or loss for that accounting year.

(ix)     Dual Aspect or Duality Principle : Dual aspect concept is the basic principle of accounting on the basis of which transactions are recorded in the books of accounts. The concept states that every business transaction has two aspects i.e. a debit and a credit of equal amount. For every debit, there is a credit of equal amount in one or more accounts and vice versa. The system of accounting is, thus, called ‘Double Entry System.’ For example – Mohan started business with
` 1,00,000. At the same time, capital will also increase by the same amount. Here, we find two aspects – one is receiving a benefit and the other is yielding a benefit.

The duality principle is commonly represented in terms of accounting equation which states that :

Assets = Liabilities + Capital

or

Capital = Assets – Liabilities

If a transaction affects one side of the accounting equation, it will also affect the other side of the equation with similar increase or decrease. Thus, equation stands balanced after each transaction.

 

          Example 1.

Mohan started business with ` 1,00,000

Assets = Liabilities + Capital

` 1,00,000 = 0 +  ` 1,00,000

Now, he bought a machine from Ram for ` 30,000

Accounting equation will be:

Assets          =     Liabilities            +   Capital

Old          ` 1,00,000      =     0                          +   ` 1,00,000

New         ` 30,000         =     ` 30,000 (creditor) +   0

Total        ` 1,30,000      =     ` 30,000                +   ` 1,00,000

The equation states that assets of a business are always equal to claim of the owner and the outsides.

(x)      Revenue Recognition Concept : According to revenue recognition concept, revenue is considered as realized when transaction has taken place and obligation to receive its payment has been established. The recognition of revenue and receipt of payment are two different aspects.

Example 1.

X received order from Y on 28^th March, 2014. X dispatched them on 30^th March, 2014 and Y received them on 3^rd April 2014. X received payment on 10^th April 2015. In this case the revenue will be recognized in 2014-15.

 

Example 2.

Suppose X got an advance of ` 10,000 in April, 2014 for sale of goods in June, 2014. The revenue shall be recognized in June, 2014 i.e., the date of sale as legal obligation to pay the amount arises only from the date of sales.

Generally, revenue is recognized at the point of sales when the title of goods passes from the seller to the buyer and the buyer is liable to pay the amount. But there are certain exceptions to this rule.

(xi)     Verifiable Objective Concept : This concept requires that accounting transactions should be recorded in an objective manner and they should be free from the personal bias of the accountant. This is feasible only when each transaction is supported by documentary evidence or vouchers. For example, in case of purchase of goods for cash, there should be a cash memo. In case of credit purchase of goods, invoice and copy of delivery Chalan be examined. Similarly, if machine is purchased, invoice of machine and receipt of payment made be examined.

The basic reason for the adoption of ‘Historical Cost’ as the basis of recording accounting transaction is that it is verifiable and is based on objectivity. For instance–amount paid for the purchase of an asset can be verified from the purchase documents but in case of market value of an asset, it is very difficult to verify it objectively as there is no verifiable document to ascertain the market value of asset.

 

ACCOUNTING STANDARDS

Introduction : The present era of industrialization and globalization necessitated the study of accounting information by the various users but the diversity in the accounting policies and in the treatment of transactions made the financial statements less meaningful and incomparable. A need was felt to formulate certain minimum accounting standards which should be universally acceptable so that the financial statements should possess the qualitative features of reliability, relevance, understandability and comparability.

As a result ‘International Accounting Standard Committee (IASC)’ was set up in June, 1973 comprising professional accounting bodies of over 75 countries (including the Institute of Chartered Accountants of India (ICAI) and the Institute of Cost Accountants of India.

The Institute of Chartered Accountant of India set up the Accounting Standards Board (ASB) in April, 1977 to identify the areas of accounting where alternative and diverse practices were followed. ASB was, therefore, asked to draft the accounting standards in view of the legal provisions of the country. ASB submitted the draft accounting standards to Institute of Chartered Accountants of India. Presently there are 28 mandatory standards and 3 non-mandatory standards.

Meaning of Accounting Standards

Accounting standards are written statements of uniform accounting rules and guidelines issued by the accounting body of the country (Institute of Chartered Accountants of India) to be followed while preparing and presenting the financial statements. These accounting rules and procedures are related to measurement, valuation and disclosure of accounting information in the financial statements.

As per Kohlar, “Accounting standards are a code of conduct imposed on accountants by custom, law and a professional body.”

Nature and Objectives of Accounting Standards

(i)       Accounting standards are the guidelines to the accounting professionals so as to enhance the reliability of financial statements among its users.

(ii)      The basic objective of accounting standards is to bring uniformity in the accounting practices and to ensure consistency and comparability in the financial statements over inter-period and from other similar firms.

(iii)     These accounting standards are mandatory in nature.

(iv)     With the change in the economic environment and law of the nation, accounting standards are subject to change from time to time but in no case they will override the provisions of law.

(v)      Where alternative accounting practices are available, accounting standards prescribe a preferred accounting practice, however management is free to use any accounting practice by giving suitable disclosures. If the management prefers to change the existing accounting practice, the change in practice must be disclosed along with its financial impact e.g. change in the method of charging depreciation.

Utility of Accounting Standards

(i)       Accounting standards provide accounting rule and guidelines for the preparation of financial statements.

(ii)      They ensure consistency and uniformity in the financial statement and thus, make them comparable over periods and from other similar firms.

(iii)     The accounting standards are mandatory in nature so auditor has to ensure the compliance of these standards. This enhances the reliability of financial statements among the various users of accounting service.

(iv)     The mandatory nature of account standards ensure complete disclosure of accounting policies and practices. Thus, reliability of financial statements is further enhanced

Accounting Standards issued by the Institute of Chartered Accountants of India

The Council of Institute of Chartered Accountants of India has issued 32 accounting standards so far as per provisions of Section 211 (3A) of Companies Act, 1956. The compliance of accounting standards is mandatory. These standards are as follow:

AS No.

Title

AS-1 AS-2 AS-3 AS-4 AS-5 AS-6 AS-7 AS-8 AS-9 AS-10 AS-11 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 AS-30 AS-31 AS-32

Disclosure of Accounting Policies Valuation of Inventories Cash Flow Statement Contingencies and Events Occurring after the Balance Sheet Date Prior Period and Extraordinary Items and Changes in Accounting Policies Depreciation Accounting Accounting for Construction contracts Withdrawn and included in AS-26 Revenue Recognition Accounting for Fixed Assets Accounting for the Effects of Changes in Foreign Exchange Rates Accounting for Government Grants Accounting for Investments Accounting for Amalgamations Treatment of Employee Benefit Schemes in the Financial Statements of Employers Borrowing Costs Segment Reporting Related Parties 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 Venture Impairment of Assets Provisions, Contingent Liabilities and Contingent Assets Financial Instruments : Recognition and Measurement [Not Mandatory] Financial Instruments Presentation [Not Mandatory] Financial Instrument : Disclosures [Not Mandatory]

 

INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)

Introduction : With the emergence of industrialization and automation at global level, various multi nation companies (MNC’s) have emerged having branches in different countries. The accounting concepts and conventions vary from country to country so financial information is not comparable. Thus, it was felt to have a common set of accounting and financial reporting standards so as to understand and compare the financial information worldwide. With this aim in view International Accounting Committee (IASC) was established in 1973 through an agreement by professional accounting bodies from U.K., U.S.A., Canada, France, Germany, Japan, Australia, Maxico, Netherlands and Ireland. The Institute of Chartered Accountants of India joined IASC as an associate member in 1974 and joined the board in 1993. IASC has issued 41 accounting standards known as International Accounting Standards (IAS). The objective was to develop accounting standards which would be acceptable worldwide so that financial reporting be improved internationally.

International Accounting Standards Boards (IASB) and International Financial Reporting Standards (IFRS).

In the year 2001, IASC was replaced with International Accounting Standards Board (IASB). The accounting standards issued by IASB are termed as International Financial Reporting Standards (IFRS).

Objectives of IASB

(i)       To develop single set of high quality global accounting standards requiring transparency and comparability in the financial reporting.

(ii)      To promote the use of accounting standards, and

(iii)     To bring about the convergence of national accounting standards and International Financial Reporting Standards to high quality levels.

Meaning of IFRS

International Financial Reporting Standards (IFRS) are the accounting standards developed by International Accounting Standard Board (IASB). IASB has developed 10 principles based accounting standards so far known as – IFRS. These are as under:

IFRS Issued by IASB

Sr. No.		Title
1.	IFRS 1	First time adoption of International Financial Reporting Standards.
2.	IFRS 2	Share-Based Payment
3.	IFRS 3	Business Combinations
4.	IFRS 4	Insurance Contracts
5.	IFRS 5	Non-current Assets Held for Sale and Discontinued Operations.
6.	IFRS 6	Exploration for and Evaluation of Mineral Resources
7.	IFRS 7	Financial Instruments : Disclosures
8.	IFRS 8	Operating Segments
9.	IFRS 9	Financial Instruments
10.	–	IFRS for Small and Medium Enterprises. It provides standards applicable to private entities (those are not public accountable as defined in this standard).

 

IASC had issued 41 accounting standards so far. IASB has revised several accounting standards and 12 standards have been superseded which have been developed by IASC. The International Accounting Standards (IAS) presently in force are remaining 29 which are as under:

 

Sr. No.		Title
1.	IAS 1	Presentation of Financial Statements
2.	IAS 2	Inventories
3.	IAS 7	Cash Flow Statements
4.	IAS 8	Net Profit or Loss for the Period, Fundamental Errors and changes in Accounting policies
5.	IAS 10	Events after Balance Sheet-Date
6.	IAS 11	Construction Contracts
7.	IAS 12	Income Taxes
8.	IAS 16	Property, Plant and Equipment
9.	IAS 17	Leases
10.	IAS 18	Revenue
11.	IAS 19	Employee Benefits
12.	IAS 20	Accounting of Govt. Grants and Disclosure of Govt. Assistance
13.	IAS 21	The Effects of changes in Foreign Exchange Rates
14.	IAS 23	Borrowing Costs
15.	IAS 24	Related Party Disclosures
16.	IAS 26	Accounting & Reporting by Retirement Benefit Plans.
17.	IAS 27	Consolidated Financial Statements
18.	IAS 28	Investments in Associates
19.	IAS 29	Financial Reporting in Hyperinflationary Economies
20.	IAS 31	Financial Reporting of Interests in Joint Ventures
21.	IAS 32	Financial Instruments : Disclosure and Presentations
22.	IAS 33	Earnings Per Share
23.	IAS 34	Interim Financial Reporting
24.	IAS 36	Impairment of Assets
25.	IAS 37	Provisions, Contingent Liabilities and Contingent Assets
26.	IAS 38	Intangible Assets
27.	IAS 39	Financial Instruments : Recognition and Measurement
28.	IAS 40	Investment Property
29.	IAS 41	Agriculture

The above 29 standards issued by IASC out of 41 standards are still in force to the extent they are not amended by IASB. New standards issued by IASB are known as IFRS. New interpretations are issued by the International Financial Reporting Interpretations Committee (IFRIC) are known as IFRIC Interpretations.

IFRS Based Financial Statements

They include :

(i)       Statement of Financial Position

(ii)      Statement of Comprehensive Income

(a)     Income Statement

(b)     Statement of Comprehensive Income

(iii)     Statement of Change in Equity

(iv)     Statement of Cash Flow

(v)      Notes and Significant Accounting Policies

Benefits of IFRS Compliance

As stated earlier, IFRS are important to those entities which operate worldwide so their investors and lenders are also spreaded over worldwide. A single financial statement will provide all useful information to all of them. The IFRS compliant financial statements are accepted globally so the credibility of financial statements will improve further.

Investors : Financial Statement prepared as per IFRS accounting standards shall be better in relation to financial statements prepared under accounting standards of a specific country. Investors can take better financial decisions if IFRS based accounting standards are followed.

Raising Loans globally : If the financial statement are IFRS compliant, company can raise loan from abroad at a cheaper rate of interest. The financial institutions can easily evaluate the financial position of the borrower if globally accepted accounting standards are used.

Accounting Professionals can also render their services abroad if Globally Accepted Accounting standards are used all over the world.

Difference between IFRS and Accounting Standards (AS) issued by Institute of Chartered Accountants of India.

(i)       The IFRS are principle based accounting standards while Indian GAAP (Generally Accepted Accounting Standards) or AS (accounting standards) are rules based accounting standards.

(ii)      IFRS do not prescribe any format of Balance Sheet while Indian laws prescribe a specific format of Balance Sheet and Profit & Loss Account.

(iii)     IFRS are based on Fair Value Concept while Indian Accounting Standards are based on Historical Cost Concepts.

(iv)     Besides these, various differences also emerge on treatment of various items in various areas such as useful life of tangible assets, prior period items, extra ordinary items, impact on fixed assets and so on.

India and Use of IFRS in India

Since Institute of Chartered Accountants of India had joined the IASC board in 1993 and it has also issued 32 Accounting Standards (AS) so far which are mandatory in nature. The chairman of IASB, Sir David Tweedie wishes that by 2011, over 150 countries of the world be IFRS compliant countries. In India, the National Advisory Committee on Accounting Standards advised the Ministry of Corporate Affairs, Govt. of India to converge the Indian Accounting Standards in line with IFRS.

The Govt. of India has issued notification in this respect. The converged accounting standards are now called Ind–AS. Following Ind AS have been issued and notified.

Sr. No.	Standard	Particulars
1.	Ind AS 1	Presentation of Financial Statements
2.	Ind AS 2	Inventories
3.	Ind AS 7	Statements of Cash Flows
4.	Ind AS 8	Accounting Policies, Changes in Accounting Estimates and Errors
5.	Ind AS 10	Events after the Reporting Period
6.	Ind AS 11	Construction Contracts
7.	Ind AS 12	Income Taxes
8.	Ind AS 16	Property, Plant and Equipment
9.	Ind AS 17	Leases
10.	Ind AS 18	Revenue
11.	Ind AS 19	Employee Benefits
12.	Ind AS 20	Accounting of Govt. Grants and Disclosure of Govt. Assistance
13.	Ind AS 21	The Effects of changes in Foreign Exchange Rates
14.	Ind AS 23	Borrowing Costs
15.	Ind AS 24	Related Party Disclosures
16.	Ind AS 27	Consolidated and Separate Financial Statements
17.	Ind AS 28	Investments in Associates
18.	Ind AS 29	Financial Reporting in Hyperinflationary Economies
19.	Ind AS 31	Interests in Joint Ventures
20.	Ind AS 32	Financial Instruments : Presentations
21.	Ind AS 33	Earnings Per Share
22.	Ind AS 34	Interim Financial Reporting
23.	Ind AS 36	Impairment of Assets
24.	Ind AS 37	Provisions, Contingent Liabilities and Contingent Assets
25.	Ind AS 38	Intangible Assets
26.	Ind AS 39	Financial Instruments : Recognition and Measurement
27.	Ind AS 40	Investment Property
28.	Ind AS 101	First-time Adoption of Indian Accounting Standards
29.	Ind AS 102	Share-based Payment
30.	Ind AS 103	Business Combinations
31.	Ind AS 104	Insurance Contracts
32.	Ind AS 105	Non-current Assets Held for Sale and Discontinued Operations
33.	Ind AS 106	Exploration for and Evaluation of Mineral Resources
34.	Ind AS 107	Financial Instruments : Disclosures
35.	Ind AS 108	Operating Segments

The road map issued by Indian Government for compliance of IFRS is as under:

For Companies other than Insurance, Banking and Non-banking

Financial Companies (NBFC)

Phase	Class of Companies	Date for Convergence to IFRS
I	¨  Companies which are part of NSE-Nifty 50. ¨  Companies which are part of BSE-Sensex 30. ¨  Companies whose shares or other securities are listed on stock exchanges overseas. ¨  Companies with net worth of ` 1,000 crores,     whether listed or not.	April 01, 2011
II	All companies with net worth between ` 500 crores and ` 1,000 crores.	April 01, 2013
III	All listed Companies with a net worth of ` 500 crores or less	April 01, 2014

For Insurance, Banking and Non-banking Financial Companies (NBFC)

Class of Companies	Date for Convergence to IFRS
Insurance Companies	April 01, 2012
Banking Companies ¨  All Scheduled Commercial Banks and Urban     Co-operative Banks which have net – worth of more than ` 300 crores. ¨  Urban Co-operative Banks which have net – worth between ` 200 crores and ` 300 crores. ¨  Companies whose shares or other securities are listed on stock exchanges overseas. ¨  Companies with net worth of ` 1,000 crores,     whether listed or not.	April 01, 2013     April 01, 2014
Non – Banking Financial Companies (NBFC) ¨  Companies which are part of NSE-Nifty 50. ¨  Companies which are part of BSE-Sensex 30. ¨  Companies with net – worth of ` 1,000 crores,         whether listed or not. ¨  All listed NBFCs and Unlisted NBFCs which do not fall within the above categories and which have a net worth of more than ` 500 crores.	April 01, 2013 April 01, 2013 April 01, 2013   April 01, 2014

          Note :

(i)      It is pertinent to note that the existing Indian Accounting Standards (i.e., AS-1 to AS-32) will continue to apply on entities that are not required to comply Ind – AS as per road map of implementation of IFRS. However, the entities not required to comply Ind-AS, may adopt them if they so desire.

(ii)     If you closely study Ind-AS, given at Sr. No. 1 to 27 are among the IAS (1 to 29) and Ind-AS 28 to 35 are the IFRS (1 to 8).