Accounting Principles and Standards

Meaning and Nature of GAAP

• Generally Accepted Accounting Principles (GAAP) define accounting parameters and constraints.

• GAAP are the rules or guidelines for financial statement preparation.

• They form the theory base of accounting.

• The Institute of Chartered Accountants of India (ICAI) issues accounting standards to standardize accounting practices.

• ICAI standards apply to non-corporate enterprises.

• Accounting standards under the Companies Act, 2013, are mandatory for companies.

Meaning and Nature of Accounting Principles

• Accounting Principles are universally adopted rules for recording financial transactions.

• They are norms for accounting assets, liabilities, expenses, and incomes.

  • Example: Inventory is valued at the lower of cost or net realizable value.

  • Example: Fixed assets are depreciated over their expected useful life.

• Accounting Principles are fundamental propositions for recording transactions and preparing financial statements.

• They are classified into Accounting Concepts and Accounting Conventions.

Accounting Concepts

• Accounting Concepts are fundamental propositions for recording transactions and preparing financial statements.

• They are basic assumptions within which accounting operates.

• Following accounting concepts enables users to better understand financial statements in the same manner.

Accounting Conventions

• Accounting Conventions are the outcome of accounting practices followed over time and may change to improve accounting information quality.
  *Accounting Conventions result from accounting practices followed by enterprises.

Features of Accounting Principles

1. Man-Made:

   • They are based on practical experiences and recommended for uniformity and understandability.

2. Flexible:

   • They are not rigid and change with time.

3. Generally Accepted:

   • General acceptance depends on:

     • Relevance: usefulness to users.

     • Objectivity: free from personal bias.

     • Feasibility: applicable without undue complexity and cost.

Necessity of Accounting Principles

• Accounting information is better understood when prepared following a uniform set of Accounting Principles.

• This ensures financial information is meaningful and useful for users.

Fundamental Accounting Assumptions or Concepts (AS-1)

• These assumptions are presumed to be followed in preparing annual accounts; non-compliance requires disclosure.

1. Going Concern Assumption:

   • Business will continue for a foreseeable period without intention to close or significantly scale down operations.

   • Distinguishes between capital and revenue expenditure.

   • Fixed assets are recorded at original cost and depreciated systematically.

   • For example, a machine purchased for $1,10,000$ (residual value $10,000$, life of 10 years) is recorded at $1,10,000$, and $1,00,000$ is written off over 10 years.

2. Consistency Assumption:

   • Accounting practices should be consistently applied year after year for comparability.

   • Important because equally acceptable alternative accounting practices exist.

   • Eliminates personal bias and helps in showing comparable results.

   • For example, if Written Down Value Method or Straight Line Method is chosen for depreciation, it should be applied consistently.

   • Changes are allowed if required by law or Accounting Standard or if the change results in more meaningful presentation.

3. Accrual Assumption:

   • Transactions are recorded when entered into, regardless of when the amount is exchanged.

   • Revenue is recognized when sale is complete or services are rendered, whether cash is received or not.

   • Expenses are recognized when the related revenue is recognized, whether paid in cash or not.

   • Recognizes assets, liabilities, income, and expenses when transactions occur.

   • Example: RSM & Co. purchases computers for $5,00,000$ on January 1, 2025, to be paid on April 15, 2025; the transaction is recorded on January 1, 2025.

   • Example: RSM & Co. sells goods to VS & Co. on February 27, 2025, for $15,000$ on two months' credit; the sale is recorded on February 27, 2025.

Accounting Principles (Others)

1. Accounting Entity or Business Entity Principle:

   • Business is separate from its owners.

   • Transactions are recorded from the business's point of view.

   • Owners are considered creditors to the extent of their capital.

   • Example: Amrit starts a business with $1,00,000$; the firm debits the Bank Account and credits Amrit's Capital Account.

2. Money Measurement Principle:

   • Only transactions and events measurable in money terms are recorded.

   • Money is the common denominator.

   • Limitations:

     • Non-monetary events are not recorded, regardless of their importance.

     • The value of money is considered static, ignoring inflation.

3. Accounting Period Principle:

   • The life of a business is divided into smaller periods (usually 12 months) for performance measurement.

   • Regular intervals provide information for decision-making by management and banks.

   • An accounting period is the interval at the end of which Income Statement and Balance Sheet are prepared.

4. Full Disclosure Principle:

   • Complete and understandable reporting of all significant information relating to the economic affairs of the entity is required.

   • Includes legal requirements and material information, such as reasons for low turnover.

5. Materiality Principle:

   • An item is material if it may influence the decision of the user.

   • Depends on the nature and/or amount and requires judgment.

   • Example: Repairs of building costing $2,50,000$ is material for a company with a turnover of $10,00,000$ but not for one with $15,00,00,000$.

   • On the other hand, closure of a production plant, even temporarily because of an environmental problem is always material

6. Prudence or Conservatism Principle:

   • "Do not anticipate profit, but provide for all possible losses."

   • Takes into consideration all prospective losses but not prospective profits.

   • Ensures financial statements do not paint a better picture than reality.

   • Example: Closing stock is valued at the lower of cost or net realizable value.

   • Example: Making provision for doubtful debts.

   • May lead to overstated liabilities and creation of Secret Reserve, distorting the true and fair view.

   • The Concept of Conservatism needs to be applied with caution and care so that the reported results are not distorted. It may result in creation of Secret Reserve.

7. Cost Concept or Historical Cost Principle:

   • An asset is recorded at the price paid to acquire it, and this cost serves as the basis for all subsequent accounting of the asset.

   • The asset is recorded at cost at the time of its purchase but is systematically reduced by charging depreciation.

   • The market value of the asset may change with the passage of time but for accounting purposes it continues to be shown in the books of account at its book value (i.e., cost at which it was purchased minus depreciation provided up-to-date).

   • Example: An asset purchased for $5,00,000$ is shown at this price even if its market value changes to $4,00,000$ or $7,00,000$.

   • Brings objectivity to financial statements, free from personal bias.

8. Matching Principle or Concept:

   • Expenses incurred to earn the revenue should be recognised as expense in the year revenue is recognised.

   • Matches revenues with expenses to determine correct profit (or loss) for the accounting period.

   • Adjustments are made for all outstanding expenses and prepaid expenses.

   • The concept is followed while preparing financial statements to have a true and fair view of the profitability and financial position of a business firm.

9. Dual Aspect or Duality Principle:

   • Every transaction has two aspects: 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.

   • Example: Rahul starts a business with a capital of $1,00,000$. The business has an asset of $1,00,000$ (cash), and a liability towards Rahul of $1,00,000$ (capital).

   • Accounting equation: Assets = Owner's Equity + Claims of Outsiders.

   • The system of Double Entry Book Keeping is based on this concept.

10. Revenue Recognition Concept:

    • Revenue is considered realised when the transaction has been entered into, and the obligation to receive the amount is established.

    • Recognising revenue and receipt of an amount are two separate aspects.

    • Example: Goods sold in February 2025, and the amount received in April 2025; revenue is recognised in February 2025.

    • Example: Advance received in February 2025 for sales to be made in May 2025; revenue is recognised in May 2025.

11. Verifiable Objective Concept:

    • Accounting should be free from personal bias.

    • Measurements are based on verifiable evidence.

    • Transactions are evidenced by business documents like cash memos, invoices, and sales bills.

Accounting Standards

• Diversity, complexity, and globalisation increased the importance of accounting information.

• The diverse accounting policies and the accounting treatment of transactions and events made the accounting information less meaningful and also incomparable.

• Minimum standards should be universally applicable for reliability, relevance, understandability, and comparability.

• The International Accounting Standards Committee (IASC) (now International Financial Reporting Board) was set up in 1973.

• Objectives of IASC:

  1. Formulate and publish Accounting Standards to be observed in the presentation of Financial Statements and also their worldwide acceptance

  2. Work for the improvement and harmonisation of regulation of Accounting Standards and procedures relating to the presentation of financial transactions.

• The Institute of Chartered Accountants of India (ICAI) is a member of this committee and has undertaken to formulate and implement accounting standards in India.

• ICAI set up the Accounting Standards Board (ASB) in April 1977.

• ASB develops draft Accounting Standards keeping in view the business environment and legal provisions of the country and after discussions with various stakeholders (Government, Industry Federations, etc.).

• ASB submits the draft Accounting Standards to the Council, the Institute of Chartered Accountants of India which issues it for the comments of the government, industry professionals, etc.

• The Council of ICAI gives due consideration to the comments received by amending the draft Accounting Standards, if necessary, before notifying it.

• In the case of Companies, ICAI recommends Accounting Standards to National Financial Reporting Authority (NFRA), an authority under the Companies Act, 2013, which notifies the standards to be applicable to companies.

• In the case of companies, accounting standards notified under the Companies Act, 2013 are followed.

• At present, three sets of accounting standards are used for preparing the financial statements by the enterprises, namely:

  1. Accounting Standards issued by the Institute of Chartered Accountants of India (ICAI);

  2. Accounting Standards (AS) notified under Companies Act, 2013 by Ministry of Corporate Affairs, Government of India; and

  3. Indian Accounting Standards (IND-AS) notified under Companies Act, 2013 by Ministry of Corporate Affairs, Government of India.

Applicability of IND-AS:

• Listed companies.

• Companies having net worth of $250$ crore or above.

• Holding, subsidiary and associate companies which prepare financial statements as per IND-AS.

Applicability of Accounting Standards

• Accounting Standards issued by ICAI apply to non-corporate enterprises.

• These standards are not backed by law and implemented by ICAI through its members who audit their accounts and issue audit reports.

• Accounting Standards notified under Companies Act, 2013 are backed by law, being the notified accounting standards to be followed by companies to whom they are applicable.

• Accounting Standards notified under the Companies Act, 2013 are applicable to companies on which IND-AS are not applicable or where IND-AS are not applicable and have been adopted voluntarily.

• IND-AS are applicable on following categories of companies:

  • Listed companies. They are the companies whose securities are listed on the stock exchange.

  • Companies having net worth of 250 crores or above; and

  • Holding, subsidiary and associate companies of companies preparing the financial statements following IND-AS.

• Besides the above category of companies, other companies may adopt IND-AS and prepare their financial statements accordingly.

• All companies other than the companies on whom IND-AS apply or have voluntarily adopted IND-AS must prepare their financial statements following AS notified under the Companies Act, 2013.

Meaning of Accounting Standards

• Accounting Standards are a set of guidelines, i.e., Generally Accepted Accounting Principles, that are followed for preparation and presentation of Financial Statements.

• They are accounting rules and procedures relating to measurement, recognition, treatment, presentation and disclosure of accounting transactions in the financial statements issued by the Council of the Institute of Chartered Accountants of India.

Nature of Accounting Standards

1. Accounting Standards are guidelines providing the framework so that credible Financial Statements are prepared.

2. The objective of setting Accounting Standards is to bring uniformity in accounting practices and to ensure transparency, consistency and comparability.

3. Accounting Standards are prepared keeping in view the business environment and laws of the country. It, therefore, naturally means that the guidelines change with change in business environment and laws. It is because of this that Accounting Standards are being revised from time to time. It may be noted that whenever a conflict arises between law and Accounting Standards, law will prevail.

4. Accounting Standards are mandatory in nature.

5. Accounting Standards have also been made flexible in the sense that where any of the alternative accounting practices are acceptable, an enterprise may adopt any of the practices with a suitable disclosure. For example, an enterprise may charge depreciation on the Written Down Value Method or Straight Line Method.

Concept of Accounting Standards

• Accounting Standards prescribe the accounting rules and procedures for recognition, measurement, treatment, presentation and disclosure of accounting transactions in financial statements.

• They are prescribed to be followed in preparing and presenting the financial statements, so that the financial statements are based on common rules and principles for better understanding by the users.

Objectives of Accounting Standards

1. Minimise the diverse accounting policies and practices with the aim to eliminate them to the extent possible.

2. Promote better understanding of financial statements.

3. Understand significant Accounting Policies adopted and applied.

4. Facilitating meaningful comparison of financial statements of two or more entities.

5. Enhancing reliability of financial statements.

Utility of Accounting Standards

1. Accounting Standards provide the norms on the basis of which financial statements should be prepared.

2. Accounting Standards ensure uniformity in the preparation and presentation of financial statements by removing the effect of diverse accounting practices. The application of Accounting Standards makes financial statements more meaningful and comparable.

3. Accounting Standards create confidence among the users of accounting information Accounting information based on Accounting Standards is considered reliable by users of such information.

4. Accounting Standards help auditors in auditing the accounts. They help accountants to follow uniform practices and policies.

Limitations of Accounting Standards

1. Accounting Standards are man-made. Hence, it does not pass the verification test always.

2. Accounting Standards are based on business environment and laws of the country. Hence, they change often to meet the changes in the business environment or laws.

Problem and Solutions Illustrating Accounting Concepts

• A series of issues faced by a company are addressed using various accounting concepts.

1. Recording good industrial relations in the accounts:

   • Money Measurement Concept: Cannot be measured in money terms, so not recorded.

2. Long-term success of the company is doubtful due to market competition:

   • Going Concern Concept: Doubt of success does not mean business will not continue.

3. Large orders placed by reliable customers from which huge profit is expected:

   • Realisation Concept: Revenue is recognised when the sale has been made, not when the order is placed.

4. One of the shareholders of the company has invested his savings in shares of another company:

   • Business Entity Concept: Business is distinct from its owners; the investment is by a shareholder, not the business.

5. Factory rent of the company is outstanding for $10,000$.

   • Accrual Concept: Recognises revenues and expenses when earned or incurred, so outstanding rent is recorded.

6. Market price of the fixed assets of the company is very high as compared to the book value and directors are interested to show the fixed assets in accounts at their current market price.

   • Historical Cost Concept: Assets are shown at cost less depreciation.

7. During the year the company purchased pencils of $50$. These had all been issued from stock and were still in use at the end of the year.

   • Materiality Concept: The amount and nature is not material, so it is debited to Stationery Account.

8. Directors are interested to adopt Written Down Value (WDV) Method of charging depreciation in place of Straight Line Method (SLM) in the current accounting period to show higher profit.

   • Consistency Assumption or Concept: All accounting principles and methods should be applied in a similar way from one period to the next so that data reported in financial statements data can be compared with previous periods. Method may be changed by the company but it should be disclosed along with its impact on profit or loss.

9. A debtor who owes an amount to the company is likely to be declared insolvent.

   • Conservatism Convention or Concept: Provide for all possible losses, so provision for doubtful debts should be made.

International financial reporting standards (IFRS)

• Globalisation integrates the national economies into the international economy through trade, foreign direct investments, capital flow, etc.

• Business enterprises around the world should not be speaking different languages while sharing financial information

• There is a need of single set of accounting standards that can unify the accounting practice worldwide.

• The use of a single set of high quality accounting standards would facilitate investment and other economic decisions across borders, increase market efficiency, and reduce the cost of capital.

• International Accounting Standards (IAS) were developed, which are being withdrawn or superseded by International Financial Reporting Standards (IFRS).

• The International Accounting Standards Committee (IASC) established in 1973 was replaced by International Accounting Standards Board (IASB) in the year 2001 which now issues International Financial Reporting Standards (IFRS).

• The IASB develops accounting standards that would be acceptable worldwide to produce and present financial information based on similar accounting standards.

Objectives of IASB

1. To develop, in the public interest, a single set of high-quality, understandable, and enforceable global accounting standards that require high-quality, transparent, and comparable information in financial statements and other financial reporting to help participants in the various capital markets of the world and other users of the information to make economic decisions

2. To promote the use and rigorous application of those standards;

3. In fulfilling the objectives associated with (i) and (ii), to take account of, as appropriate, the special needs of small and medium-sized entities and emerging economies; and

4. To bring about convergence of national accounting standards and International Financial Reporting Standards to high-quality solutions.

Meaning of IFRS

• IFRS are a set of accounting standards developed by the International Accounting Standards Board (IASB), the international accounting standard-setting body.

• The standards issued by IASB are based on sound and clearly stated principles therefore IFRS are referred to as principles-based accounting standards

Accounting Standards Issued by the IASC and Standing Interpretation Committee (SIC)

• IASC had issued 41 accounting standards, known as the International Accounting Standards (IAS), and a Framework for the Preparation and Presentation of Financial Statements, out of which 12 IASs have been superseded and a large number of them have been revised.

• Standing Interpretation Committee (SIC) was the interpretive body of the IASC. The interpretation of IAS issued by the SIC are described as SIC-1, SIC-2, etc.

• IASB has adopted all outstanding IAS and SIC issued by the IASC as its own standards.

• Those IAS and SIC continue to be in force to the extent they are not amended or withdrawn by the IASB.

• New standards issued by the IASB are known as IFRS.

• New interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) are known as IFRIC Interpretations. When referring collectively to IFRS, that term includes IAS, SIC, IFRS, and IFRIC Interpretations.

IFRS Based Financial Statements

The financial statements produced under IFRS are:

1. Statement of Financial Position

2. Statement of Comprehensive Income

3. Statement of Changes in Equity.

4. Statement of Cash Flow.

5. Notes and Significant Accounting Policies.

INDIA AND IFRS

• India had two options, i.e., either to adopt IFRS as they are or converge the Indian Accounting Standards in line with the IFRS.

• It decided to converge its existing accounting standards with IFRS.

• The converged accounting standards titled Ind-As have been issued and notified.

INDIAN ACCOUNTING STANDARDS (IND-AS)

• India, instead of adopting IFRS, decided to prepare its own accounting standards equivalent to IFRS.

• Thus, Ind-AS can be said to be converged standards of IFRS.

• These accounting standards are known as Indian Accounting Standards (Ind-AS).

Ind-AS Applicable to:

1. Listed on the Stock Exchange in India;

2. Having net worth of $250$ crores or more; and

3. Their holding, subsidiary, associate and joint venture companies.

• Besides the above companies, other companies may adopt Ind-AS voluntarily.

• The objective behind issuing Ind-AS is to prepare financial statements of a company on the lines of internationally accepted accounting principles and practices and complying with the country's business environment and laws.

Difference between Indian Accounting Standards (Ind-AS) and Accounting Standards (AS)

1. Ind-AS are Principle based while Accounting Standards are Rule based

   • Balance Sheet is prepared by a company (on which IND-AS are not applicable) according to Schedule III of the Companies Act, 2013. It means, a Balance Sheet item should be depicted under the prescribed head.

   • IND-AS are principle based balance sheet.

   • In contrast to this, Ind-AS do not prescribe any form for the Balance Sheet.

   • They prescribe that items may be shown in the Balance Sheet in accordance with the principle associated with them. For example, Redeemable Preference Shares are shown under the main head "Share Capital" under Schedule III of the Companies Act, 2013.

   • But, it is shown as loan because it carries a fixed rate of dividend and also must be redeemed in accordance with the terms of issue but not later than 25 years from the date of issue. Ind-AS require that since it is in the nature of loan, it should be depicted under the main head "Loans".

2. Ind-AS involves Fair Value Concept while Accounting Standards are based on Historical Cost Concept

   • Unlike Accounting Standards, Ind-AS prescribes that the assets and liabilities of the company may be shown at the fair value as at the date of the Balance Sheet. But, financial instruments (Securities, etc.) should be valued at fair value.

   • Thus, in effect, when fair value is adopted for fixed assets, depreciation is not charged on the cost of the asset but it is valued as on that date and the difference in opening and closing valuation is debited or credited to Profit & Loss Account.

   • It means every asset and also liability will have to be valued or discounted every year to be shown in the Balance Sheet.

Meaning of Ind-AS

• Ind-AS are a set of accounting standards notified under the Companies Act, 2013 that converge with International Financial Reporting Standards (IFRS).

• Ind-AS are based on sound and clearly stated principles and therefore, Ind-AS are said to be principle-based accounting standards.

• This contrasts with Accounting Standards that are applicable on companies on which Ind-AS are not applicable, which are rule-based accounting standards.

Underlying Assumptions in Ind-AS (Ind-AS 101)

1. Going Concern Assumption

   • It is assumed that the life of the business is infinite, i.e., the entity will continue its operations for an indefinite period.

2. Accrual Assumption

   • The transactions are recorded in the books of account on accrual basis, i.e., as and when they occur and not when the settlement of transactions takes place.

Ind-AS Based Financial Statements

The financial statements prepared under Ind-AS are:

1. Statement of Financial Position

   • The elements or contents of the statement are:

     1. Asset

        • Assets are the resources controlled by the enterprise as a result of past events and operations from which the future economic benefits shall flow to the enterprise.

     2. Liability

        • Liabilities are the obligations of the enterprise from the past events and operations, which shall result in outflow of resources, i.e., assets.

2. Statement of Changes in Equity

   • Equity is the residual interest in the assets of the enterprise after deducting liabilities. It is the real value of shareholders' equity.

3. Statement of Comprehensive Income

   • A Statement of Comprehensive Income includes two separate statements, i.e., Income Statement and a Statement of Comprehensive Income are prepared.

   • The Statement of Comprehensive Income reconciles the income or loss as per Income Statement with total comprehensive income.

   • The elements or contents of the statement are:

     1. Revenue

        • It increases the economic benefit during the accounting period as a result of business operations or increase in value of assets or decrease in liabilities. It results in increase in the value of shareholders' equity.

     2. Expense

        • It is a decrease in economic benefits in the form of outflows during the accounting period as a result of business operations or decrease in value of assets or increase in liabilities.

        • It results in decrease in the value of shareholders' equity.

4. Statement of Cash Flow

5. Notes and Significant Accounting Policies.

Valuation Principles

• Ind-AS prescribes that every company shall value its financial assets (securities) at Fair Value whereas other assets can be valued at historical cost or at Fair Value.

• But, whichever of the two methods is adopted, shall have to be consistently followed

• Fair Value means the price that would be received when an asset is sold or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

• Stating differently, it is a price which a buyer would be willing to pay for an asset and a seller would be willing to accept.
  However, for the purposes of Ind-AS in many cases, fair value is estimated, (except in the case of quoted financial securities) for which Valuation Rules are notified.

Applicability of Ind-AS

• Ind-AS applies to following companies:

  1. Companies that are listed on Stock Exchange, in India; and

  2. Companies having net worth of 250 crores or more.

• Other companies may follow Ind-AS voluntarily.

• Ind-AS will also apply on the Holding, Subsidiary, Associate and Joint-venture Companies on which Ind-AS applies or is voluntarily adopted.

• Ind-AS Under the Companies Act, 2013. So far the number of Ind-AS issued and notified under the Companies Act, 2013 are 40

Meaning and Nature of GAAP

• GAAP: Accounting rules for financial statement preparation, forming the theory base of accounting.

• ICAI issues standards for non-corporate enterprises; Companies Act, 2013 mandates standards for companies.

Meaning and Nature of Accounting Principles

• Accounting Principles: Universally adopted rules for recording financial transactions, classified into Accounting Concepts and Conventions.

Accounting Concepts

• Fundamental propositions for recording transactions, operating as basic assumptions to enhance user understanding.

Accounting Conventions

• Practices followed over time that may evolve to improve accounting information quality.

Features of Accounting Principles

1. Man-Made: Based on experiences, promoting uniformity.

2. Flexible: Adaptable and change over time.

3. Generally Accepted: Dependent on relevance, objectivity, and feasibility.

Necessity of Accounting Principles

• Ensures meaningful and useful financial information through uniform preparation.

Fundamental Accounting Assumptions or Concepts (AS-1)

• Assumptions presumed to be followed; non-compliance requires disclosure.

1. Going Concern Assumption:

   • Business continues indefinitely; capital and revenue expenditures are distinguished.

   • Fixed assets recorded at cost and depreciated.

2. Consistency Assumption:

   • Consistent application of practices for comparability; changes allowed if required by law or for better presentation.

3. Accrual Assumption:

   • Transactions recorded when entered, regardless of cash exchange; recognizes assets, liabilities, income, and expenses.

Accounting Principles (Others)

1. Accounting Entity Principle:

   • Business separate from owners; transactions from business perspective.

2. Money Measurement Principle:

   • Only monetary transactions recorded; limitations include ignoring non-monetary events and static money value.

3. Accounting Period Principle:

   • Business life divided into periods for performance measurement.

4. Full Disclosure Principle:

   • Complete reporting of significant economic information.

5. Materiality Principle:

   • Material items influence user decisions, judged by nature and/or amount.

6. Prudence or Conservatism Principle:

   • Provide for possible losses, not anticipating profit; may lead to overstated liabilities.

7. Cost Concept or Historical Cost Principle:

   • Assets recorded at acquisition price, reduced by depreciation.

8. Matching Principle:

   • Match expenses with revenues for accurate profit determination.

9. Dual Aspect Principle:

   • Every transaction has debit and credit of equal amount; Accounting equation: Assets = Owner's Equity + Claims of Outsiders.

10. Revenue Recognition Concept:

    • Revenue recognised when the transaction occurs and the obligation is established.

11. Verifiable Objective Concept:

    • Accounting free from bias, based on verifiable evidence.

Accounting Standards

• Standards ensure reliability, relevance, understandability, and comparability.

• ICAI formulates and implements standards in India.

• Various standards: ICAI standards, standards notified under Companies Act, and IND-AS.

Applicability of IND-AS:

• Listed companies and those with net worth of $250$ crore or above, including related entities.

Applicability of Accounting Standards

• ICAI standards apply to non-corporate enterprises; standards under Companies Act, 2013, are for companies not under IND-AS.

Meaning of Accounting Standards

• Guidelines followed for financial statement preparation.

Nature of Accounting Standards

1. Guidelines for credible financial statements.

2. Promote uniformity, transparency, and comparability.

3. Change with business environment and laws; law prevails in conflict.

4. Mandatory, with flexibility for alternative practices with disclosure.

Concept of Accounting Standards

• Prescribe rules for recognition, measurement, presentation, and disclosure in financial statements.

Objectives of Accounting Standards

1. Minimise diverse policies.

2. Promote understanding.

3. Facilitate comparisons.

4. Enhance reliability.

Utility of Accounting Standards

1. Provide norms for financial statements.

2. Ensure uniformity, making statements meaningful.

3. Create user confidence.

4. Aid auditors and accountants.

Limitations of Accounting Standards

1. Man-made and subject to change with business environment and laws.

Problem and Solutions Illustrating Accounting Concepts

• Addresses issues using accounting concepts like Money Measurement, Going Concern, Realisation, etc.

International financial reporting standards (IFRS)

• Single set of standards for global economic decisions, investment, and market efficiency.

• IASB develops IFRS, aiming for worldwide acceptability.

Objectives of IASB

1. Develop global accounting standards.

2. Promote rigorous application.

3. Consider SMEs and emerging economies.

4. Converge national and international standards.

Meaning of IFRS

• Standards developed by IASB based on clear principles.

Accounting Standards Issued by the IASC and Standing Interpretation Committee (SIC)

• IASB adopted IAS and SIC standards, issuing new standards (IFRS) and interpretations (IFRIC).

IFRS Based Financial Statements

1. Statement of Financial Position.

2. Statement of Comprehensive Income.

3. Statement of Changes in Equity.

4. Statement of Cash Flow.

5. Notes and Significant Accounting Policies.

INDIA AND IFRS

• India converged existing standards with IFRS, resulting in Ind-AS.

INDIAN ACCOUNTING STANDARDS (IND-AS)

• Equivalent to IFRS, aiming for international alignment while complying with local laws.

Ind-AS Applicable to:

1. Listed companies.

2. Companies with net worth of $250$ crores or more.

3. Related companies.

Difference between Indian Accounting Standards (Ind-AS) and Accounting Standards (AS)

1. Principle-based vs. Rule-based.

2. Fair Value Concept vs. Historical Cost Concept.

Meaning of Ind-AS

• Standards notified under Companies Act, 2013, converging with IFRS.

Underlying Assumptions in Ind-AS (Ind-AS 101)

1. Going Concern Assumption.

2. Accrual Assumption.

Ind-AS Based Financial Statements

1. Statement of Financial Position

   • Assets, Liabilities, and Equity.

2. Statement of Changes in Equity.

• Residual interest in assets after deducting liabilities.

1. Statement of Comprehensive Income

   • Elements: Revenue and Expense.

2. Statement of Cash Flow

3. Notes and Significant Accounting Policies.

Valuation Principles

• Financial assets at Fair Value, other assets at historical cost or Fair Value; consistency required.

• Fair Value: Price received to sell an asset or paid to transfer a liability.

Applicability of Ind-AS

1. Companies listed on Stock Exchange in India.

2. Companies having net worth of 250 crores or more.

• Ind-AS applies under the Companies Act, 2013; 40 standards issued.