Application Guidance

THE INDIAN SCENE

There are certain attributes to human beings such as knowledge and humility, money and magnanimity, power and justice and strength and gentleness. These attributes ought to go together in pairs. A person having only one of these two attributes, such as power without justice or strength without gentleness could do immense harm to the society.

In the field of accounting, this raison d'être means that performance and financial position of a business and the truthful accounting and reporting of such performance and position should go together. This is possible only if the best practices are bench-marked and uniformity in financial reporting is ensured. This bench-marking is achieved through Accounting Standards.

In the Indian-context, Accounting Standards Board of ICAI (ASB), constituted on the 21st April 1977, has been vested with the authority to develop and introduce the Standards. As a first step, ICAI laid the foundation for the emergence of Standards by issuing the Preface to the Statements of Accounting Standards in January 1979. Soon thereafter, ICAI pronounced its first Accounting Standard in November 1979. In the two decades between 1980 and 2000, ICAI had brought out 15 Accounting Standards and had updated at least four of these.

Notably, it was during this period that, through the Companies (Amendment) Act, 1999, the new Section 210A and Sub-sections 211(3A), 211(3B) and 211(3C) were introduced in the Act, with retrospective effect from October 1998, paving the way for establishment of National Advisory Committee on Accounting Standards (NACAS). Pending formation of the Board, Accounting Standards pronounced by ICAI were made applicable for implementation by Companies. Within a short span, S. 217(2AA) was introduced in the Act effective from 13th December 2000, requiring the Directors of a Company to incorporate a Statement to the effect that Accounting Standards are being followed.

It needs a mention at this point, that the role of NACAS is that of an intermediary body to advise the Government, on the formulation and laying down of Accounting Policies and Accounting Standards for adoption by companies or class of companies. ICAI continues to be the Institution that interacts with the counterpart institutions in other countries. It is ICAI that organises for research to be conducted on select topics, prepares a draft of proposed Standards, invites and evaluates public comments, and finalises what the accounting principles should be. Also, it is ICAI that proposes revisions to existing Standards where appropriate.
Following the pronouncement of the Framework for the Preparation of Financial Statements (in June-July 2000), the accounting profession witnessed the issuance of thirteen new Standards by ICAI, during the twenty-one month period between October 2000 and June 2002.
In order to mitigate the difficulties experienced by a segment of enterprises in the compliance of some of these Standards, the Council of ICAI at its 236th Meeting held on 16th September 2003, introduced the Scheme of Applicability of Accounting Standards, classifying the Enterprises into three categories, viz., Level I, II and III. Enterprises falling under Level II and III are reckoned as Small and Medium Enterprises. Alongside, ICAI also revised and re-issued the Preface to the Statements of Accounting Standards in early 2004, which superseded the then existing Preface issued in January 1979.
More recently, the Accounting Standards that were required to be prescribed u/s 211(3C) were notified by the Government on 7th December 2006, under the Companies (Accounting Standards) Rules, 2006. These Rules, applicable only to companies registered under the Act, incorporate the interpretations issued by the ICAI in the form of explanations or provisos forming part of the principle to which the interpretation relates. However, a few interpretations (e.g. those relating to Treatment of machinery spares, accounting for taxes on income in the case of Amalgamation, Applicability of AS 25 to Interim Financial Results, and Turnover in the case of Contractors) have not been included.
Henceforth, corporates will require to follow the Accounting Standards prescribed u/s 211(3C), and non-corporate will be governed by the pronouncements of ICAI. Nevertheless, to all intent and purposes, there does not seem to be any significant difference between the Accounting Standards u/s 211(3C), and those pronounced by the ICAI, excepting in the classification of small and medium units and in the applicability of certain relaxations and exemptions [refer to the summary under the head ‘Applicability, Exemptions and Relaxations’].
One cannot ignore the fact that -- in addition to the AS pronounced by the professional body ICAI, and those prescribed under the Companies Act, -- Income Tax Act also contains Accounting Standards. Securities and Exchange Board of India has recently constituted a new Committee, ‘SEBI Committee on Disclosures and Accounting Standards (SCODA)’ headed by Shri Y. H. Malegam. SEBI had, earlier, constituted two committees both chaired by Shri Y.H.Malegam namely, the SEBI Committee on Disclosures and the Accounting Standards Committee. These two committees have now been merged to form SCODA in order to address the overlaps in the areas addressed by them.
In the context of ICAI’s intention to converge Indian AS fully with IAS/IFRS by 2009, the process of change and updation is continuing. The revisions on the anvil include:
§ Disclosure of Accounting Policies (AS 1)
§ Contingencies and Events Occurring after the Balance Sheet Date (AS 4)
§ Net Profit or loss for the period etc. (AS 5) and
§ Revenue Recognition (AS 9)
§ Discontinuing Operations (AS 4)
The final version in respect of the Revised Standard on Tangible Fixed Assets (likely to be titled a Property, Plant and Equipment), is reported to be under the consideration of Central Council of ICAI. Also, Exposure Drafts on three new Standards covering the topic of ‘Financial Instruments’ have already been released, for public comments. Another Exposure Draft under the title of ‘Non-current Assets held for Sale and Discontinued Operations’ is likely to be released soon.
It is a time of transition.


S D Bala
M P Vijay Kumar