Accounting Standards and Policies

"The rulebook that makes financial statements comparable and reliable."

Accounting Standards are written policy documents that define how transactions should be recorded and presented. They ensure uniformity and comparability across companies.

What are Accounting Standards?

Definition: Codified rules and guidelines issued by regulatory bodies to standardize accounting practices.

Purpose:

• Ensure consistency in financial reporting
• Enable comparability between companies
• Reduce manipulation and window dressing
• Protect stakeholder interests

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Types of Accounting Standards in India

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AS (Accounting Standards) by ICAI

Issued by: Institute of Chartered Accountants of India (ICAI)

Applicable to: Companies not falling under Ind AS criteria

Total: 32 AS issued (AS-1 to AS-32)

Key AS for CA Foundation

AS No.	Title	Key Concept
AS-1	Disclosure of Accounting Policies	Fundamental assumptions, policies
AS-2	Valuation of Inventories	Lower of cost or NRV, FIFO/Weighted Avg
AS-6	Depreciation Accounting	SLM, WDV methods
AS-10	Property, Plant & Equipment	Fixed assets accounting
AS-29	Provisions, Contingent Liabilities and Assets	Treatment of contingencies

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Ind AS (Indian Accounting Standards)

Issued by: Ministry of Corporate Affairs (MCA)

Based on: IFRS (International Financial Reporting Standards)

Applicable to:

• Listed companies (mandatory from 2016-17 onward)
• Unlisted companies with net worth ≥ ₹500 Crores
• Banks, NBFCs (as per RBI)

Key Differences from AS:

• More detailed and principle-based
• Fair value measurement emphasis
• Extensive disclosure requirements

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Accounting Policies

Definition: Specific accounting principles and methods chosen by management from available alternatives.

Examples:

• Depreciation method: SLM or WDV?
• Inventory valuation: FIFO or Weighted Average?
• Revenue recognition: Point of sale or over time?

Disclosure Requirement (AS-1):

• All significant accounting policies must be disclosed in financial statements
• Changes in policies must be explained

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Fundamental Accounting Assumptions (AS-1)

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Comparison: AS vs Ind AS vs IFRS

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Benefits of Accounting Standards

✅ Comparability: Compare TCS vs Infosys financial statements
✅ Reliability: Standards reduce manipulation
✅ Transparency: Clear disclosure requirements
✅ Investor Confidence: Standardized reporting builds trust
✅ Global Integration: Ind AS enables Indian companies to access global capital

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AS-1: Disclosure of Accounting Policies

Key Requirements:

1. Disclose all significant accounting policies
2. State fundamental assumptions (if not followed)
3. Explain any changes in policies
4. Show impact of policy changes on financial statements

Example Policies to Disclose:

• Method of depreciation
• Basis of inventory valuation
• Revenue recognition policy
• Treatment of foreign exchange differences
• Retirement benefit accounting

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Consistency vs Change in Policy

Consistency: Use same policies year after year (comparability)

Change Allowed When:

• Required by law/standard
• Will result in more appropriate presentation
• Required by accounting standard

When Policy Changes:

• Disclose nature of change
• Reason for change
• Effect on profit/loss
• Effect on assets/liabilities

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Real-World Example

Reliance Industries - Accounting Policies (Extract)

From Annual Report:

• "Inventories valued at lower of cost (weighted average) or NRV" → AS-2
• "Depreciation on PPE on SLM over estimated useful life" → AS-6
• "Revenue recognized when risks and rewards transferred" → AS-9
• "Financial statements prepared under Ind AS" → Ind AS compliance

These disclosures help investors understand how Reliance accounts for transactions.

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Importance for CA Students

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Quiz: Accounting Standards and Policies