What are Accounting Standards?
The Accounting Standard is the collection of the accounting procedures, common principles, and Accounting Standards which forms the foundation of policies, financial accounting, and financial principles. The Accounting Standards are used for improving transparency of financial reporting across the world. The Generally Accepted Accounting Principles make up the accounting set standard that is widely accepted for the preparation of financial statements. The international companies follow IFRS, which are set by the International Accounting Standards Board, and it also serves as a guideline to GAAP and non-US companies as a measure of reporting financial statements.
Accounting Standards Formulation in the Country
The Accounting Standard board (ASB) is a committee belonging to the ICAI, which has the responsibility for the creation of Accounting Standards in India, after the passing of statute by the government of India. Let us have a brief look at the functioning of ASB and the procedure behind the Formulation of Accounting Standards in India.
ICAI is widely considered as the highest accounting body in India. The ASB, Accounting Standard board, is the committee of the ICAI that devises all Accounting Standards for Indian enterprises and companies. The entire process is completely transparent and incredibly thorough, plus it is fully independent of any government involvement or intervention. While devising the standards, ASB tries to incorporate and include the IFRS and its principles within the Indian framework and standards itself.
India has no plans to adopt the IFRS system and hence this process provides the merging of both the standards and takes advantage of both the standards. The ASB is responsible for modifying IFRS so that it aligns with the laws, common usages, and customs that are used and prevalent in the country.
The Accounting Standards board (ASB) is made up of representatives from various industries, regulatory authorities, government departments, academic and professional bodies, and financial institutions. The industry is represented on ASB by the associations CII, FICCI, and ASSOCHAM amongst others.
The process of formulating Accounting Standards in India is very detailed and comprehensive. We take a brief look.
The setting process of Accounting Standards has the following steps.
Identifying broad matters of ASB and preparing preliminary drafts.
Constituting study groups by ASB to prepare for preliminary drafts.
Considering preliminary drafts that are prepared by a study group involving ASB.
Circulating drafts among ICAI council members and within some outside bodies such as Indian banks association, SEBI, DCA, CAG, etc.
Meeting with representatives of outside bodies for their opinion on the proposed Accounting Standards draft.
Finalizing the draft for proposed Accounting Standards based on the comments received from various bodies.
Issuing the invite for exposure draft for public opinion.
Finalizing the draft for Accounting Standards and submitting to the ICAI council for consideration and then approving it for issuance.
Considering Accounting Standards drafts from institute council and modifications to be done in the drafts if necessary, in consultation with the ASB.
The finalized Accounting Standards are issued under the council authority.
Formulation of Accounting Standards in India
After the government passed a statute, the Accounting Standard Board (ASB) which is a committee of the ICAI took the responsibility for the formulation of the accounting standards in the nation, India. For this we need to take a brief look at the functioning of the ASB and the procedure which is behind the formulation of the accounting standards in India.
Accounting Standard Board
ICAI is recognised as the highest accounting body in the country, India. The ASB is a committee of the ICAI which devises all the accounting standards for the Indian Companies. The process is accurately transparent, the process is also very thorough and completely independent of any government intervention or involvement. While designing the standards, the ASB tries to incorporate the IFRS and its principles in the Indian standards itself. India does not plan to adopt the IFRS system, thus this process helps the merge of the two standards and thus reap the benefits of the both. So, the ASB modifies the IFRS to align with the laws, and the customs and the common usages that are used by the country.
FAQs on Accounting Standards Formulation in India
1. What are Accounting Standards and what is their main purpose?
Accounting Standards are a common set of principles, policies, and procedures that define the basis of financial accounting and reporting. Their primary purpose is to ensure consistency, comparability, and transparency in the financial statements of all enterprises, which helps in making the information more reliable for stakeholders like investors, creditors, and the government.
2. Which body is responsible for setting Accounting Standards in India?
In India, the primary body responsible for setting and issuing Accounting Standards is the Accounting Standards Board (ASB). The ASB was constituted in 1977 by the Council of the Institute of Chartered Accountants of India (ICAI), which is the apex body for the accounting profession in the country.
3. What is the detailed process for formulating an Accounting Standard in India?
The formulation of an Accounting Standard in India is a detailed and consultative process. The key steps are as follows:
- First, the ASB identifies an area where a new standard is needed.
- A study group is formed to prepare a preliminary draft of the standard.
- The draft is circulated to ICAI council members and various outside bodies like SEBI, RBI, and industry associations for their comments.
- An 'Exposure Draft' is issued to the public for wider feedback.
- After considering all comments and feedback, the draft is finalised by the ASB.
- The finalised draft is then submitted to the Council of the ICAI for approval and issuance.
4. What is the significance of Accounting Standards for a business and its stakeholders?
Accounting Standards are highly significant as they provide a standardised framework for financial reporting. For a business, this enhances the credibility and reliability of its financial statements. For stakeholders, such as investors and lenders, it allows for meaningful comparison of a company's performance against its peers and over different time periods, facilitating informed economic decision-making.
5. How does the formulation of Indian Accounting Standards relate to International Financial Reporting Standards (IFRS)?
India's approach to global standards is one of convergence, not direct adoption. The Accounting Standards Board (ASB) formulates Indian Accounting Standards, known as Ind AS, which are largely based on the principles of International Financial Reporting Standards (IFRS). However, the ASB modifies certain aspects of IFRS to align them with India's specific legal, economic, and business environment.
6. Why was the Accounting Standards Board (ASB) established and who are its main representatives?
The ASB was established by the ICAI to harmonise the diverse accounting policies and practices used in India into a single, standardised set of rules. Its diverse representation ensures that standards are practical and widely accepted. Its members include representatives from:
- Government bodies like the Comptroller and Auditor General (CAG) and the Central Board of Direct Taxes (CBDT).
- Regulatory authorities such as the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI).
- Industry associations like CII, FICCI, and ASSOCHAM.
- Academic and professional institutions.
7. Why does India converge with IFRS to create Ind AS instead of directly adopting them?
India chose convergence over direct adoption of IFRS primarily because a direct adoption could create conflicts with existing Indian laws and regulations, such as the Companies Act, 2013. Furthermore, the Indian economic environment has unique features that may not be addressed by global standards. By creating Ind AS, India customises IFRS principles to fit its own legal and business context, ensuring the standards are both globally aligned and nationally relevant.
8. How do uniform Accounting Standards help in comparing the financial statements of two different companies?
Uniform Accounting Standards act as a common financial language. When two different companies follow the same standards, they must measure and report transactions in a similar manner. This eliminates variations that would otherwise arise from using different accounting policies. As a result, an analyst or investor can reliably compare their profitability, financial position, and cash flows to make a fair assessment of their relative performance and financial health.
