Unit – 1

Introduction to accounting Standards and IFRS

Question Bank

Q1) What is account standard board and its function?

A1) ACCOUNTING STANDARDS BOARD AND ITS FUNCTIONS-

The Institute of Chartered Accountants of India (ICAI) constituted the Accounting Standards

 Board on 21st April, 1977 with a view to harmonise the diverse accounting policies and practices in use in India and also to develop in the field of accounting at International level. It is one of the member of International Accounting Standards Committee. This Board is also committed to develop and to integrate the standards issued by LASC to the extent possible in the light of conditions and practices prevailing in India.

The composition of the Accounting Standards Board is broad-based with a view to

ensuring participation of all interest-groups in the process of formulation of standards. These interest groups include industry, various departments of Government and regulatory authorities, financial institutions and academic and professional bodies. Industry is represented by their apex level associations, viz. Associated Chamber of Commerce and Industry of India, Federation of Indian Chamber of Commerce and Industry and Confederation of Indian Industries. As regards government departments and regulatory authorities, Reserve

Bank of India, Department of Company Affairs, Central Board of Direct Taxes, Comptroller and Auditor General of India, Controller of General Accounts, Security Exchange Board of India, and Central Board of Excise and Customs are represented on the ASB. Beside these, representatives of academic and professional institutions such as universities, IIMS, ICWA

and ICSI are also represented on the ISB Members of the Central Council of ICAI are also on the ASB.

The main function of the ASB is to develop accounting standards in India and to ensure their applicability. Whatever the standards formulated by Accounting Standards Board, they are in accordance with conditions prevailing in India, local conventions and applicable laws, so that these standards are set by the ICAI and are complied with by the parties in preparing and presenting the financial accounts and also that these standards are made mandatory. The

ASB has adopted a very objective approach to rules and limitations relating to the publication of financial statements with a view to eliminate the double accounting policy and also to limit the alternatives in selecting from the diverse alternate methods of accounting. This Board formulated standards for practical applications of those principles which were experienced for performing accounting activities on the basis of basic concepts. The Board also explains the

terms used in financial statements along with the formulation of standards and there is need it can modify and improve the defined terms used in accounting according to changed situation.

If the enterprises, for whom the Board has formulated the accounting standards, have any problem or difficulty in complying or applying the Standards, they can have guidelines from the Board. The function of Accounting Standard Board is not only to decide and to incorporate accounting  standards but also to revise and to modify from time to time the standards issued as per the changed situation is also within its Preview.

Although the standards issued by ICAI are very much in tune with Indian Laws, Acts, Local Conventions and Environment, yet if there is need to modify any standard due to changes in any Act, the modified/changed standards shall be applied in accordance with the changes in Acts because the financial statements of any business enterprise cannot be against the provisions of concerned Acts. Under such circumstances, the important function of ASB is to

determine the extent to which these changes are to be noted in financial statements and auditors report. Such statement may be provided by business enterprises separately along with financial accounts in the form of short notes or in the form of clarification.

Q2) What is International accounting standard (IAS)?

A2) Institute of Chartered Accountants of India has taken due care (while formulating

accounting standards) of the International Accounting Standards issued by the IASC. The Institute has tried to cover almost all the subjects/topics for setting Standards in Indian perspective which have been covered by the IASC at international level. Thus, so far LASC has issued 41 Standards and has revised/reformatted and dropped a number of these standards.

ICAI in our country has issued 29 standards thus far and expected that the disclosure status of Indian Companies may improve and reach close to international standards. SEBI and ICAI

need to address issues like accounting and reporting and bridging the gap between Indian Accounting Standards and disclosure practices with the rest of the world.

CLASSIFICATION OF IAS STANDARDS, BY ACCOUNTING ISSUE-

Disclosure and Presentation:

IAS 1: Presentation of Financial Statements:This standard prescribes the minimum

structure and content, including information required on the face of the financial statements.

IAS 2: Inventories: This standard deals with the valuation of inventories and states

that inventories should be measured at the lower of cost and net realisable value.

IAS 7: Cash Flow Statements: The objective of this standard is to explain the changes in cash and cash equivalents during the accounting period by means of a cash flow statement which should classify changes in cash and cash equivalents into operating, investing and financing activities.

IAS 8: Net Profit or Loss for the Period, Fundamental Errors and changes in Accounting Policies. This standard requires a separate disclosure of extraordinary items of profit and loss arising from ordinary activities that are abnormal because of their nature or

incidence, correction of a fundamental error which should be treated as prior period adjustment and change in accounting policy which should be treated retrospectively.

IAS 10: Events after the Balance Sheet Date The standard permits an enterprise

to adjust its financial statements for events after the balance sheet date and provide further

evidence of conditions that existed at the balance sheet.

IAS 11: Construction Contracts : The standard deals with the recognition of total

revenue, past and future costs by stage of completion (the "percentage of completion method").

IAS 12: Income Taxes: This standard deals with accounting treatment for acerued

deferred tax liability, accrued deferred tax assets, tax rates, accrue unused tax losses and tax credits etc.

IAS 14 Segment Reporting : The standard states that public companies must report

information along with product and service lines and along with geographical lines. The segmentation disclosure should be done on the basis of primary and secondary segment.

IAS 15: Information Reflecting the Effects of Changing Prices : The standard

requires to disclose the depreciation adjustment, cost of sales adjustment, monetary items adjustments and their effect on a general purchasing power on a current cost basis.

IAS 16: Property, Plant and Equipment: The standard deals with the recognition,

measurement and depreciation of property, plant and equipment,

IAS 17: Leases: The standard requires enhanced disclosures by lessees and lessons about financial leases and rental payment and sublease rentals.

IAS 18: Revenue: The standard requires disclosure as regard to revenue recognition accounting policies, amount of each significant category of revenue recognised, amount of revenue from exchange of goods or services.t

IAS 19: Employee Benefits: This standard deals with disclosure as regards to

contribution plans, benefit plans and other employee benefits.

IAS 20 : Accounting for Government Grants and Disclosure of Government

Assistance : The standard states that grants should not be credited directly to equity. They should be recognised as income and matched with related costs. Grants which are related to assets should be deducted from the cost or treated as deferred income.

IAS 21: The Effects of Changes in Foreign Exchange Rates: The standard deals

with the disclosure of translation differences included in net income arising from foreign currency transactions and analysis of translation differences in equity.

IAS 22 : Business Combinations : The standard deals with two types of business

combination viz., Acquisitions and uniting of interest (unusual business combinations).

IAS 23: Borrowing Costs: The standard deals with the borrowing costs and states to treat borrowing costs as expense or alternatively to capitalise those directly attributable to construction.

IAS 24 Related Party Disclosures: The standard requires disclosure in respect to

nature of relationships where control exists, even if there were no transactions related parties, nature and amount of transactions with related parties, grouped as appropriate.

applies to accounting and reporting by retirement benefit plans.

consolidated financial statement if a parent has one or more subsidiaries."

IAS 26: Accounting and Reporting by Retirement Benefit Plans.

AS 27: Consolidated Financial Statements.

IAS 28: Investments in Associates: The standard deals with accounting for associates which are other than a subsidiary or joint venture and they should be accounted for by the equity method in consolidated financial statements.

IAS 29: Financial Reporting in Hyperinflationary Economics: This standard

states hyperinflation as cumulative inflation over three years is 100 percent or more. In such

a circumstance, financial statements should be presented in a measuring unit that is current at the balance sheet date.

Q3)  Discuss scope, objective and function  of accounting.

A3)  Accounting is an art and a science both : Accounting is both an art and a science of ing the accounts and records maintained by a book-keeper and preparing financial

statements based on them and to interpret their effect on the business.

SCOPE OF ACCOUNTING-

The action of accounting starts where the work of book-keeping ends. From this point of view following are the scope of accounting:

(1) To test and verify the entries in book-keeping.

(2) To test the total and balances of ledger.

(3) To prepare Trial Balance from the ledger.

(4) To disclose adjustments.

(6) To prepare Final Accounts (Manufacturing Account, Trading Account, Profit and LOSS

Account and Balance Sheet).

(6) To rectify errors.

(7) To find out concussions on the basis of analysis of financial statements.

OBJECTTVES OF ACCOUNTING

I. Main objects are : i) To know profit or loss of the business. (ii) To know the worth of assets and liabilities of the business at a particular date. (iii) To know about the progress or downfall of business. (iv) To know as to what amount is to be paid to a particular person or

what amount is to be received from a certain person on a particular date. (v) In the case of the companies to comply with the provisions of the Companies Act, 1956 as under this Act it is necessary for the companies to maintain accounting record.

II. Other Objects: In addition to the main objects described above, following are other objects: (i) To know about the position of goods stocks. (ii) To know the position of cash.

 (ii) To know about the errors and frauds committed by the employees. (iv) To have detailed information about capital employed in the business. (v) To satisfy the taxation authorities.

(vi) To know the financial and other requirements of business att a particular time.

In short the object of accounting is measurement of wealth and financial health.

MODERN FUNCTIONS OF ACCOUNTING-

Following are the modern functions of accounting based on modern approach:

(1) Constructive Functions : The language of business is accounting. Under the

constructive functions of accounting business transactions and financial events are classified

and converted into final accounts, rectifying the errors and detecting the economic frauds.

(2) Recording Functions : Under the recording functions of accounts Trial Balance,

Manufacturing Account, Trading Account, Profit and Loss Account and Balance Sheet are

prepared.

Q4) What is the accounting process?

A4) ACCOUNTING PROCESS-

The route of accounting to complete the accounting cycle is called accounting process.

The American Accounting Association has stated that, "Accounting is the process of

identifying, measuring and communicating economic information to permit informed judgements and decisions by the users of the information." So accounting is a process;

identification, measurement and communication of economic information are done through five interrelated important stages:

(1) First Stage : Identification of business transactions : It means determining what to record, ie, to identify recordable economic events. The events which have financial implications and which are relevant for accounting should be identified. Further, these events should be relevant to a particular business organisation. The business transactions and other economic events are evaluated for appropriate accounting action based on

materiality of an event supported by documentary evidence. Documentary evidence means invoices of purchases and sales, credit and debit notes, cash memos, pay-in-slips, payment vouchers, etc.

(2) Second Stage : Record of business transaction: Once the economic events are identified and measured in financial terms, they are recorded in an orderly and systematic manner in the Journal. For this purpose the transaction is analysed to decide which account should be debited and credited. In case transactions of a particular nature are large in number then a subsidiary book can be opened. Accounting principles, policies and procedures should be followed to reflect the proper treatment of the transaction. Now-a-days application of computer is popular to record business transaction.

(3) Third Stage: Classification of business transactions All business transactions are classified according to their nature like income, expense, purchase, sale, assets, liabilities, etc.

This helps in deciding the treatment of transaction in accounting book, i.e., Account. Classified account is called Ledger. Record of Journal and other subsidiary books is input for ledger. On the basis of this record, postings are made in ledger in various accounts. Each account is balanced at the end of a certain period and these balances are output of ledger.

(4) Fourth Stage: Summarisation of business transaction: Preparation of Trial Balance, preparation of Final Accounts with adjustment and rectification of errors is the fourth stage of accounting process. Balances from ledger are transferred to Trial Balance. Total of debit balances in Trial Balance should be equal to total of credit balances in Trial Balance. On the basis of Trial Balance, final accounts are prepared. Final Accounts refer to Trading Account, Profit and Loss Account and Balance Sheet. Balance Sheet is the summary of whole of the

accountancy or business transactions.

(5) Fifth Stage: Analysis and interpretation of business transaction: Analysis and

interpretation is the fifth (last) stage of accounting process. Management needs objective

accounting informations from accounts. For this purpose various reports like sales report, purchases report, expenses report, etc., are prepared. In addition to this Ratio Analysis, Cash Flow Analysis, Fund Flow Analysis are prepared for decision-making process, business forecasting and preparation of future business plans. Among the above five stages of process of accounting, first three stages are relatedto process of book-keeping, fourth stage is related to Financial Accounting and fifth stage is related to Management Accounting.

Q5) Discuss the limitation of accounting. Explain briefly characteristics of an ideal system of accounting ?

A5)  LIMITATIONS OF ACCOUNTING-

Accounting has the following limitations-

I. No record of non-monetary transactions: The transactions which cannot be expressed in terms of money are not recorded in accounting. Hence, accounting is limited only upto monetary transactions.

2. Legal restrictions : In case of companies various provisions of the Companies Act, 1956, are to be complied with and hence certain limitations are imposed by law on accounting system.

3. No record of changing price level: Cost concept is adopted in accounting. Changing prices are not considered. This is a very strong limitation of accounting.

4. No record of immaterial informations: Convention of materiality is very important in accounting. An accountant has to make a distinction between material and immaterial items.

All material items must be disclosed in financial statements. Hence, material item is the limitation of accounting. A. S.-1 and A. S.-5 emphasize on this aspect.

5. No record of prospective profits: In accounting provision is made for prospective losses like provision for bad and doubtful debts but no provision is made for prospective profits. This is another limitation of accounting which is based on the concept of conservation and it is recognised in A. S.-1.

6. No application of objectivity factor : Accounting policies are framed by the accountant according to his own individual judgement, hence it is the subjective factor that prevails in accounting and objective factor is ignored.

In a nutshell, language of business has certain practical limitations and therefore, the accounting statements should be interpreted carefully keeping in mind all various factors influencing the true picture.

ESSENTIAL CHARACTERISTICS OF AN IDEAL SYSTEM OF ACCOUNTING-

Following are the essentials (characteristics) for an ideal system of accounting:

(i) There should be definite principles and rules of accounting.

(ii) Principles and rules of accounting must be simple and clear.

(iii) System of accounting must be flexible depending upon the need and nature

business.

(iv) System of accounting must be accurate and complete.

(v) It must be in accordance with the size, type and nature of business.

(vi) System of accounting must contain quick rules, conventions and principles so

results can be found out at an appropriate time.

Q6)  What is accounting standards board and it’s function?

A6) ACCOUNTING STANDARDS BOARD AND ITS FUNCTIONS-

The Institute of Chartered Accountants of India (ICAI) constituted the Accounting

Standards Board on 21st April, 1977 with a view to harmonise the diverse accounting policiesand practices in use in India and also to develop in the field of accounting at internationallevel. It is one of the member of International Accounting Standards Committee. This Boardis also committed to develop and to integrate the standards issued by IASC to the extentpossible in the light of conditions and practices prevailing in India.

The composition of the Accounting Standards Board is broad-based with a view to

ensuring participation of all interest-groups in the process of formulation of standards. Theseinterest groups include industry, various departments of Government and regulatoryauthorities, financial institutions and academic and professional bodies. Industry isrepresented by their apex level associations, viz. Associated Chamber of Commerce andIndustry of India, Federation of Indian Chamber of Commerce and Industry and Confederation of Indian Industries.

 As regards government departments and regulatory authorities, ReserveBank of India, Department of Company Affairs, Central Board of Direct Taxes, Comptrollerand Auditor General of India, Controller of General Accounts, Security Exchange Board ofIndia, and Central Board of Excise and Customs are represented on the ASB. Beside these,representatives of academic and professional institutions such as universities, IIMS, ICWA and ICSI are also represented on the ISB Members of the Central Council of ICAI are also onthe ASB.

The main function of the ASB is to develop accounting standards in India and to ensure their applicability. Whatever the standards formulated by Accounting Standards Board, they are in accordance with conditions prevailing in, India, local conventions and applicable laws,so that these standards are set by the ICAI and are complied with by the parties in preparingand presenting the financial accounts and also that these standards are mademandatory.

 The ASB has adopted a very objective approach to rules and limitations relating to the publicationof financial statements with a view to eliminate the double accounting policy and also to limit the alternatives in selecting from the diverse alternate methods of accounting. This Board formulated standards for practical applications of those principles which were experienced for performing accounting activities on the basis of basic concepts.

 The Board also explains the terms used in financial statements along with the formulation of standards and there is need it can modify and improve the defined terms used in accounting according to changed situation.

 If the enterprises, for whom the Board has formulated the accounting standards, have any problem or difficulty in complying or applying the Standards, they can have guidelines from the Board. The function of Accounting Standard Board is not only to decide and to incorporate accounting standards but also to revise and to modify from time to time the standards issued as per the changed situation is also within its preview.

Although the standards issued by ICAl are very much in tune with Indian Laws, Acts, Local Conventions and Environment, yet if there is need to modify any standard due to changes

in any Act, the modified/changed standards shall be applied in accordance with the changes in Acts because the financial statements of any business enterprise cannot be against the provisions of concerned Acts. Under such circumstances, the important function of ASB is to determine the extent to which these changes are to be noted in financial statements and auditors report. Such statement may be provided by business enterprises separately along with financial accounts in the form of short notes or in the form of clarification.

Q7) Explain the scope of accounting standard.

A7) SCOPE OF ACCOUNTING STANDARDS-

i) The accounting standards issued are in conformity with the provisions of the application laws, customs, usages and business environment of our country.

(ii) The Accounting Standards by their nature cannot and don't override the local

regulations/rules which govern the preparation and presentation of financial statements in our country. Whenever, these seems to be any conflict between the law and accounting standards, provisions of law will prevail and financial statements should be prepared in conformity with the relevant laws. Accounting standards are in the nature of laws but not laws

(ii) The Accounting Standards are intended to apply only to items which are material and become applicable from the date specified by the Institute. These are applicable to all classes of enterprise unless otherwise stated. No standard has retroactive applications, unless otherwise stated.

iv) Accounting Standards are to address the basic matters to the extent possible. The endeavour is to confine accounting standards to essentials and not to make them so complex that they cannot be applied effectively and on nation-wide basis.

Q8) The accounting concepts and accounting standards are generally referred to as the essence of financial accounting." Comment.”

A8)  ACCOUNTING CONCEPTS

There are some assumptions on which accounting is based. These assumptions are

natural and are not forced ones. These are general motions hence they are called concepts.

These concepts are also known as postulates because postulates too are necessary assumptions.

A concept is a self-evident proposition, i.e., something taken for granted. Concepts are also termed as ground rules that govern accounting. In accountancy following concepts are quite popular:

1. Accounting Period Concept : Every businessman wants to know the result ot is

investment and efforts after a certain period. Usually one year period is regarded as an ideal for this purpose. It may be of2 years 6 months or 3 months also. This period is called accounting period. It depends on the nature of business and object of the proprietor of business.

Real income of business can be found out only when the business comes to an end, but this period is usually too long and no businessman can wait for such a long period for knowing its profit or loss, therefore the accounting period is mostly one year.

From taxation point of view one year period is necessary as income-tax is payable every year. From April 1st of the current year to March 31st of the next year may be accounting year.

Effects of this Concept

i) Financial position of one year may be compared with another year.

(ii) Earning capacity of one year may be compared with another year.

ii) These comparisons help the management in planning and increasing the efficiency of

business.

(iv) Proprietor and outsiders can also derive various conclusions according to their queries.

2. Dual Aspect Concept : Accounting concept is that every transaction affects two

accounts. This is why double entry system of book-keeping came into existence. All business

transactions are recorded on the basis of this concept. No transaction is complete without

double aspect. This concept is the foundation on which the entire system of book-keeping and accountancy is based.

Effects of this Concept:

(i) If one aspect of a transaction is recorded and other is ignored, the accountancy record will not indicate true position, hence this concept is of great help in indicating true position of the business.

i) During recent period when production has become very fast due to technological advances and complicated affair in large-scale industries, this concept is of utmost use.

(ii) This concept helps in detecting the errors of employees and in having strict control over them.

3. Money Measurement Concept: Only those transactions are recorded in books of accounts which can be expressed in money. Tho0se transactions which cannot be expressed in money fall beyond the scope of accounting. One serious shortcoming of this concept is that the money value of that date is recorded on which transaction has taken place and later on due to inflation when changes in money value take place, these changes are not considered.

Effects of this Concept:

i) In the absence of this concept, it would have not been possible to add various

Possessions. For example a proprietor has 400 chairs, 10 machines, 500 acre of land and 200 tables. He cannot add them, but by finding out their values in money, total amount of all these possessions can easily be found out.