CHAPTER-1

INTRODUCTION

Accounting is primarily concerned with the recording of economic data of business

enterprise and communicating it to the interested parties. It has its own set of rules
developed over long period of time. However these rules are not rigid like those of pure
sciences. Depending upon the economic environment, social needs, legal requirements
and technological developments, these accounting rules and principles are used with
some degree of flexibility. However these cannot be applied arbitrarily. They have to be
used with in the framework of rationality.

The end product of the whole process of accounting is financial statements through which
business communicates to interested parties, so these statements must present a true
and fair view of the activities of the enterprise.

True Blood committee (1973) remarked that financial statements should “serve primarily
those users who have limited authority, ability, and resources to obtain information and rely
on the financial statements as their principal source of information about enterprise’s
economic activity”. This highlights the need for laying down qualitative standards of
financial accounting and reporting by representative standard setting body, so that external
users can directly or with help of financial analyst make comparative assessments and
employ or deploy resources in particular enterprise (Porwal- 1989, p.557).

However in practice, accounting has turned up to be a movable device to promote self-

interest and often produce profits from the air. The management can use “creative
accounting practices” to change the reported operating results according to their wishes.
This is so because different organizations may follow different accounting policies for
similar items in accounts. Such practices pose a major problem for the external users of
financial statements, who can’t compare with objectivity the performance of different
organizations for the purpose of relevant decision-making (Chander-1992, p.605).Diverse
accounting policies and practices that are presently available for adoption can produce
significantly different sets of financial statements based on same events and conditions
(Mahindra 1990, p.767). So, efforts have been made all over the globe for standardizing
these diverse accounting policies and procedures. The aim is to get enterprise reporting
like events and like transactions in like manner.

1.1 ACCOUNTING STANDARDS

Accounting standards relate to the codification of Generally Accepted Accounting

Principles (GAAP). It consists of detailed rules to be adopted for the treatment of various
items before the presentation of financial statements. It may be regarded as a sort of law, a
guide to action, ground or basis of conduct or practice so that financial statements
become more meaningful and comparable under various heads (Mittal and Singal 2004,
p3). These are the policy documents issued by recognized expert accountancy body
relating to various aspects of measurements. Treatments and disclosure of accounting
transactions and events. The purpose of accounting standards is to standardize the diverse
accounting policies with a view to eliminate to the extent possible, incomparability of the
financial statements information with in and across the entity (Ghosh-1998 p.11). They can
check the creative accounting practices and window dressing in financial statements.

Accounting standards can be thought of as rules, procedures and conventions of

accounting, which provide a measure of acceptable conduct in accounting. They are
formulated after taking in to consideration the customs, usages and business environment.
They guide the judgment of professional accountant so that the highest quality of
measurement and presentation is consistently produced in any particular set of
circumstances (Pasricha, 1989 р 203).

In 1996 SEC in US had identified three key elements that are necessary for the Standards to
gain acceptance. These included:

• The standards should include a core set of accounting pronouncements that

constitute a comprehensive, generally accepted basis of accounting.
• The standards must be of high quality, they must result in comparability and
transparency, and they must provide for full disclosure.
• The standards must be rigorously interpreted and applied. If accounting standards
are to satisfy the objective of having similar transactions and events accounted for
 in similar ways, whenever and wherever they are encountered, auditors and
regulators around the world must insist on rigorous interpretation and application of
those standards. Otherwise, the comparability and transparency that are the
objectives of common standards will be eroded. (Tokar, 1997 p1)

1.2 SIGNIFICANCE OF ACCOUNTING STANDARDS

The objective of financial statements is to provide information about financial position,

performance and change in cash flow position of reporting entity, which are useful to a
wide range of users in making their decisions and is necessary in discharge of
accountability of the management towards the shareholders and other interested groups
(Ghosh- 1998, p.3). So the financial statements must possess the qualitative
characteristics like relevance, completeness, comparability, consistency and
understandability.

The accounting standards lay down sound accounting policies to ensure proper
accounting and to improve comparability of financial statements. They attempt to bring
about uniformity in accounting practices by putting reasonable limits on the choice
available regarding accounting methods as well as by requiring disclosure of accounting
policies used (Ahuja-1988, p.1110).

Accounting standards influence the financial statements, which may, in turn

influence the investors’ decisions. Further, accounting standards influence the
management decisions regarding utilizations of company resources. Accordingly the real
resources of the organization will be affected. Standards, thus, can have economic
implications also (Pasricha-1989, p.203).

Accounting standards are formulated with a view to harmonise different

accounting policies and practices in use in a country. The objective of accounting
standards is, therefore, to reduce the accounting alternatives in the preparation of financial
statements within the bounds of rationality, thereby ensuring comparabilityof financial
statements of different enterprises with a view to provide meaningful information to various
users of financial statements to enable them to make informed economic decisions
(www.icai.org).
The stability of our economic system depends upon the confidence that users groups have
in the fairness and reliability of the financial statements on which they rely. Accounting
standards add to the quality of the financial statements, make them consistent,
comparable and hence useful. Recent years have witnessed the growth of global
environmental influences upon business activities of the MNCs. Zealous corporates have
been untiring in their hunt for fresh sources of funds. The need to supplement the
burgeoning capital needs by international debt and equity is escalating over time. So, the
modern focus of accounting has come to serve the capital markets, to make those markets
work more efficiently. This has increased the significance of accounting standards beyond
limit.

Imagine the case of international business with operations in many different countries. It is
likely to be required to prepare accounts for its operations in each country, in compliance
with the rules of that country. It will then have to convert those accounts to conform to the
rules of the country in which the holding company is resident, for preparation of group
accounts. If the company has listings on the stock exchanges outside its home country,
these exchanges or their regulators may require the accounts to be filed under some other
basis. The extra cost is enormous. Moreover a company may report dramatically different
results for its operations according to different rules in different countries. This will lead to
confusion and lack of confidence in accounting information. The well-known case of
Daimler Benz provides a dramatic example. In 1993, its reported profits under German
rules was DM 615 mn, where as under US accounting rules it reported a loss of DM 1839
mn (Paul Pacter 1998).

Hence there exists a valid case for global accounting standards or harmonization of
accounting standards. Investors are not only ones to gain from it: there are big incentives
for the companies as well. Most obvious is the saving from not having to keep records in
accordance with the multiple sets of accounting rules.But the benefits are much more
fundamental and financially rewarding in terms of access to capital markets, information
credibility, understandability, and lowered capital cost (Paul Pacter 1998).

1.3 STANDARDISATION INTERNATIONAL LEVEL OF ACCOUNTING PRACTICES AT

INTERNATIONAL LEVEL
 In order to harmonize and standardize the divergent accounting practices adopted by
different companies operating in various countries, the professional accounting bodies
all over the world constituted their own board/ committees viz. American Institute of
Certified Public Accountants (AICPA US), Institute of Chartered Accountants In England
and Wales (ICAEW- UK), Canadian Institute of Chartered Accountants (CICA- Canada).
Australian Society of Accountants, Institute of Chartered Accountants of India (ICAI)
and above all the International Accounting Standards Committee (IASC).

IASC was founded in June 1973 as a result of an agreement by accountancy bodies in

Australia, Canada, France, Germany, Japan, Mexico, the Netherlands, the United Kingdom
and Ireland and the United States, and these countries constituted the Board of IASC at
that time (www.iasb.org).

The objectives of IASC were:

(a) To formulate and publish in the public interest accounting standards to be observed
in the presentation of financial statements and promote their world wide
acceptance and observance; and
(b) To work generally for the improvements and harmonization in regulation of
accounting standards and procedures relating to the presentation of financial
statements.

It was an independent body as far as decision making was concerned. The standards were
approved by the Board of IASC and were not subject to confirmation by any other body. It
worked till March 2001 when it was restructured and International Accounting Standards
Board took over its place. IASC has been quite successful in achieving its objectives and
some of its major achievements include:

1. In 1974, issued IAS 1 on Disclosure of Accounting Policies’.

2. In 1976, Group of Ten Bank Governors decides to work with IASC, and fund
IASC project on banks’ financial statements.
 3. In 1980, United Nations Intergovernmental Working Group on Accounting and
Reporting meets for first time and IASC presents position paper on co-
operation.

4. In 1982. IASC and IFAC make mutual commitments, Board expanded to 13

countries plus four ‘other organizations with an interest in financial reporting’.

3.
4. 5. In 1987, IOSCO joins Consultative Group and supp supports
Comparability project.
5.
6. 6. In 1989, IFAC public sector guideline requires government business
enterprises to follow IASs.
7.
8. 7. In 1995, European Commission supports IASC/IOSCO agreement and use
of IASs by EU multinationals.
9.
10. 8. In 1996, ministers at World Trade Organisation encourage successful
completion of international accountancy standards. Australian Stock
Exchange supports programme to harmonise Australian standards with IASS.
11.
12. 9. In 1997, IASC and FASB issue similar standards on earnings per share.
13.
14. 10. In 1999, New IFAC International Forum on Accountancy Development
(IFAD) assumes commitment to ‘support the use of International Accounting
Standards as the minimum benchmark’ worldwide.
15.
16. 11. In 2000, European Commission announces plans to require IASC
standards for all EU listed companies from no later than 2005. Basel
Committee expresses support for IASs and for efforts to harmonise
accounting internationally. IOSCO recommends that its members allow
multinational issuers to use 30 IASC standards in cross-border offerings and
listings. As part of restructuring programme, IASC Board approves a new
Constitution. IAS 41 ‘Agriculture was approved at the last meeting of the IASC
Board.
17.
 18. 12. In 2001, Trustees bring new structure into effect. From 1 st April 2001, IASB
assumes responsibility for setting accounting standards, designated as
International Financial Reporting Standards (www.iasplus.com).
1.4 LIST OF INTERNATIONAL ACCOUNTING STANDARDS (IASs) ISSUED BY IASC.

The IASC had issued following 41 International Accounting Standards before

International Accounting Standards Board came into being.

Presentation of Financial Statements.

IAS 1

IAS 2. Inventories

IAS 7. Cash Flow Statements

IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

IAS 10. Events After the Balance Sheet Date

IAS 11. Construction Contracts

IAS 12. Income Taxes

IAS 14. Segment Reporting

IAS 16. Property. Plant and Equipment

IAS 17. Leases

IAS 18. Revenue

IAS 19 Employee Benefits

IAS 20. Accounting for Government Grants and Disclosure of Government

IAS 21. Assistance

IAS 23. The Effects of Changes in Foreign Exchange Rates

IAS 24. Borrowing Costs

IAS 26. Related Party Disclosures

IAS 27. Accounting and Reporting by Retirement Benefit Plans

IAS 28 Consolidated and Separate Financial Statements

IAS 29. Investments in Associates

IAS 30. Financial Reporting in Hyperinflationary Economies

 IAS 31. Disclosures in the Financial Statements of Banks and Similar

IAS 32. Financial Institutions

Financial Instruments: Disclosure and Presentation

IAS 33. Interests in Joint Ventures

Earnings per Share

IAS 34. Interim Financial Reporting

IAS 36. Impairment of Assets

IAS 37. Provisions, Contingent Liabilities and Contingent Assets

IAS 38. Intangible Assets

IAS 39. Financial Instruments: Recognition and Measurement

IAS 40. Investment Property

IAS 41. Agriculture

1.5 INTERNATIONAL ACCOUNTING STANDARDS BOARD

In December 1999, after a two-year review that included public consultation and
discussions with leading business organisations, the former IASC Board approved a
restructuring plan. Under the terms of the plan, IASC became a separate corporate entity.
The parent body named International Accounting Standards Committee Foundation
(IASCF) was formed. It is a non-profit making corporation governed by the Trustees and
funds the activities of the standard-setting body, named the International Accounting
Standards Board (IASB). The IASB is responsible for the technical agenda and the
development and approval of International Financial Reporting Standards.

IASB’s objectives are:

(a) 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 world’s capital markets and other users make economic
decisions;

(b) To promote the use and rigorous application of those standards; and

© In fulfilling the objectives associated with (a) and (b), to take account of, as
appropriate, the special needs of small and medium-sized entities and emerging
economies; and

(d)To bring about convergence of national accounting standards and International

Financial Reporting Standards to high quality solutions.

The IASB has fourteen members (twelve full-time members and two part-time members). It
has sole responsibility for setting accounting standards. The foremost qualification for
Board membership is technical expertise and the Trustees exercise
Their best judgement to ensure that the Board is not dominated by any particular
constituency or regional interest. At least five Board members have a background as
practising auditors, at least three have a background in the preparation of financial
statements, at least three have a background as users of financial statements, and at least
one has an academic background. Seven of the fourteen Board members have direct
responsibility for liaison with one or more national standard-setters. The publication of a
Standard, Exposure Draft, or Interpretation requires approval by eight of the Board’s
fourteen members.

1.5 PROCEDURE FOR ISSUING IFRS

1.6

International Financial Reporting Standards (IFRSs) are developed and issued after an
international consultation process, the “due process” that involves interested individuals
and organizations from around the world. The process comprises six stages as explained
below:

1.6.1 Setting the agenda

The IASB takes an item on its agenda for developing accounting standard to address a
demand for better quality information that is of value to all users of financial statements.
Better quality information will also be of value to preparers of financial statements.

The IASB evaluates the merits of adding a potential item to its agenda mainly by reference
to the needs of investors and takes into account:

The relevance to users of the information and the reliability of information that could be
provided;

Existing guidance available;

The possibility of increasing convergence;

The quality of the standard to be developed: and

Resource constraints.

The staff of IASB identifies, reviews and raises issues that might warrant the IASB’s
attention and puts them on the future agenda. In addition, the IASB raises and

Discusses potential agenda items in the light of comments from other standard-setters
and other interested parties.

The IASB receives requests from constituents to interpret, review or amend existing
publications. The staff considers all such requests, summarises major or common issues
raised, and present them to the IASB from time to time as candidates for when the IASB is
next considering its agenda.

The IASB’s discussion of potential projects and its decisions to adopt new projects take
place in public IASB meetings. Before reaching such decisions the IASB consults the SAC
and accounting standard-setting bodies on proposed agenda items and setting priorities.
In making decisions regarding its agenda priorities, the IASB also considers factors related
to its convergence initiatives with accounting standard- setters.

1.6.2 Project planning

When adding an item to its active agenda. The IASB also decides whether, to conduct the
project alone or jointly with another standard-setter. Similar due process is followed under
both approaches. After considering the nature of the issues and the level of interest among
constituents, the IASB may establish a working group at this stage. A team is selected for
the project by the two most senior members of the technical staff. The team may also
include members of staff from other accounting standard-setters, as deemed appropriate
by the IASB.
1.6.3 Development and publication of a discussion paper

Although a discussion paper is not mandatory, the IASB normally publishes it as its first
publication on any major new topic to explain the issue and solicit early comment from
constituents. If the IASB decides to omit this step, it will state why. Typically, a discussion
paper includes:

A comprehensive overview of the issue:

Possible approaches in addressing the issue;

The preliminary views of its authors or the IASB; and

An invitation to comment.

This approach may differ if another accounting standard-setter develops the research
paper. Discussion papers may result either from a research project being conducted by
another accounting standard-setter, or as the first stage of an active agenda project carried
out by the IASB.

In the first case, the discussion paper is drafted by another standard-setter and published
by the IASB. Issues related to the discussion paper are discussed in IASB meetings, and
publication of such a paper requires a simple majority vote by the IASB.

If the discussion paper includes the preliminary views of other authors, the IASB reviews
the draft discussion paper to ensure that its analysis is an appropriate basis on which to
invite publie comments.

1.6.4 Development and publication of an exposure draft

Publication of an exposure draft is a mandatory step in due process.. Irrespective of
whether the IASB has published a discussion paper, an exposure draft is the IASB’s main
vehicle for consulting the public. Unlike a discussion paper, an exposure draft sets out a
specific proposal in the form of a proposed standard (or amendment to an existing
standard).

The development of an exposure draft begins with the IASB considering:

Issues on the basis of staff research and recommendations:

Comments received on any discussion paper, and suggestions made by the SAC, working
group and accounting standard-setters. And arising from public education sessions.

After resolving issues at its meetings, the IASB instructs the staff to draft the exposure draft.
Once it has been completed, and the IASB has balloted on it, the exposure draft is
published for public comment.

1.6.5 Development and publication of an IFRS

The development of an IFRS is carried out during IASB meetings, when the IASB considers
the comments received on the exposure draft. After resolving issues arising from the
exposure draft, the IASB considers whether it should expose its revised proposals for
public comment, for example by publishing a second exposure draft.

In considering the need for re-exposure, the IASB:

Identifies substantial issues that emerged during the comment period on the exposure
draft that it had not previously considered:

Assesses the evidence that it has considered;

Evaluates whether it has sufficiently understood the issues and actively sought the views of
constituents:

Considers whether the various viewpoints were aired in the exposure draft and adequately
discussed and reviewed in the basis for conclusions.

1.6.6 Drafting the IFRS

The IASB’s decision on whether to publish its revised proposals for another round of
comment is made in an IASB meeting. If the IASB decides that re-exposure is necessary,
the due process to be followed is the same as for the first exposure draft. When the IASB is
satisfied that it has reached a conclusion on the issues arising from the exposure draft, it
instructs the staff to draft the IFRS.

Finally, after the due process is completed, all outstanding issues are resolved. And the
IASB members have balloted in favour of publication, the IFRS is issued.

1.6.7 Procedures after an IFRS is issued

After an IFRS is issued. The staff and the IASB members hold regular meetings with
interested parties, including other standard-setting bodies. To help understand
unanticipated issues related to the practical implementation and potential impact of its
proposals.

Since its inception IASB has issued eight International Financial Reporting Standards as
below:

IFRS 1 First-time Adoption of International Financial Reporting Standards

IFRS 2 Share-based Payment

IFRS 3 Business Combinations

IFRS 4 Insurance Contracts

IFRS 5 Non-current Assets Held for Sale and Discontinued Operations

IFRS 6 Exploration for and evaluation of Mineral Resources

IFRS 7 Financial Instruments: Disclosures

IFRS 8 Operating Segments

1.7 CONVERGENCE OF IFRS WITH NATIONAL ACCOUNTING STANDARDS

In the present era of globalization and liberalization, the World has become an

Economic village. The globalization of business world and the attendant structures and

The regulations, which support it, as well as the development of e-commerce makes it

Imperative to have a single globally accepted financial reporting system. A number of

Multi-national companies are establishing their businesses in various countries with

Emerging economies and vice versa. The entities in emerging economies are

Increasingly accessing global markets to fulfill their capital needs by getting their

Securities listed on the stock exchanges outside their country. Capital markets are,

Thus, becoming integrated consistently with this world wide trend. More and more

Indian companies are also being listed on overseas stock exchanges. Sound financial

Reporting structure is now imperative for economic well being and effective

Functioning of the capital markets.

The accounting standards are a measure by which investors choose issuers and markets.
Investors would invest in companies and in markets, only to the extent they could rely on
the quality of the measure. The accounting standard is indeed one of the most important
infrastructures of capital markets. The globalization of markets and trades would
presuppose a set of high quality and globally consistent accounting standards, which
could win the confidence of both domestic and foreign investors. The International
Financial Reporting Standards (IFRSs) issued by the InternationalAccounting Standards
Board (IASB) are increasingly being recognized as global reporting standards. More than
100 countries such as countries of European Union. Australia, New Zealand, and Russia
currently require or permit the use of IFRSs in their countries. China and Canada have also
announced their intention to adopt IFRSS from 2008 and 2011 respectively. United States
of America has also taken up convergence projects with IASB with a view to permit filing of
IFRS Compliant Financial Statements in the US stock exchanges without requiring the
presentation of reconciliation statement.
Indian accounting standards have undergone significant improvement particularly since
the late 1990s, in line with the global developments in accounting standards, aimed at
providing investors with an enhanced set of information. Within a short period of time, new
sets of standards have been formulated, and today, Indian accounting standards can be
considered as of high quality. Besides, they are, taken as a whole, consistent with global
accounting standards, albeit with some differences..

The convergence of accounting standards is critically important to our future economic

strategy. In order to make our economy more dynamic and competitive, the country needs
to have fair and transparent markets, which could maintain and foster market vitalities. The
importance of investors’ viewpoint needs to be reaffirmed, and the confidence in our
capital markets needs to be enhanced. As such ICAI has decided that IFRSs be adopted
from the accounting periods beginning on or after 1 April, 2011. These would be applicable
to public interest entities such as listed entities, banks and insurance entities and large
sized entities (www.icai.org/icairoot/announcements).

1.7 ACCOUNTING STANDARDS IN INDIA

1.8

The paradigm shift in the economic environment in India during last few years has led to
increasing attention being devoted to accounting standards as a means towards ensuring
potent and transparent financial reporting by corporates. Further. Cross-border raising of
huge amounts of capital has also generated considerable interest in the generally accepted
accounting principles in advanced countries such asUSA. Recent initiatives taken by
International Organization of Securities Commission (IOSCO) towards propagating
International Accounting Standards (IASS), issued by the International Accounting
Standards Committee (now International Accounting Standards Board), as the uniform
language of business to protect the interests of international investors have brought into
focus the LASs. The Institute of Chartered Accountants of India, being a premier
accounting body in the country, took upon itself the leadership role by establishing
Accounting Standards Board, more than thirty years back, to fall in line with the
international and national expectations. Today, accounting standards issued by the
Institute have come a long way in harmonizing the accounting practices in India with the
internationally accepted accounting practices.

1.9 ACCOUNTING STANDARDS SETTING IN INDIA

The Institute of Chartered Accountants of India (ICAI) being a member body of the IASC,
constituted the Accounting Standards Board (ASB) on 21 st April, 1977, with a view to
harmonise the diverse accounting policies and practices in use in India. After the avowed
adoption of liberalisation and globalisation as the corner stones of Indian economic
policies in early 90s, the accounting standards have increasingly assumed importance.

While formulating accounting standards, the ASB takes into consideration the applicable
laws, customs, usages and business environment prevailing in the country. The ASB also
gives due consideration to International Accounting Standards issued by IASC and tries to
integrate them, to the extent possible, in the light of conditions and practices prevailing in
India.

Although the Accounting Standards Board is a body constituted by the Council of the
Institute of Chartered Accountants of India, it is independent in the formulation of
accounting standards since in case the Council considers it necessary that certain
modifications be made in the draft accounting standards formulated by the ASB, it can only
be done in consultation with the ASB.

1.9 COMPOSITION OF THE ACCOUNTING STANDARDS BOARD

1.10

The composition of the ASB is broad-based with a view to ensuring participation of all
interest groups in the standard-setting process. These interest groups include industry,
representatives of various departments of government and regulatory authorities, financial
institutions and academic and professional bodies. Industry is represented on the ASB by
their apex level associations, viz., Associated Chambers of Commerce (ASSOCHAM),
Federation of Indian Chambers of Commerce and Industry (FICCI) and Confederation of
Indian Industries (CII). As regards government departments and regulatory authorities.
Reserve Bank of India, Department of Company Affairs. Central Board of Direct Taxes,
Comptroller & Auditor General of India, Controller General of Accounts, Securities and
Exchange Board of India and Central Board of Excise and Customs are represented on the
ASB. Besides these interest-groups, representatives of academic and professional
institutions such as Universities, Indian Institutes of Management, Institute of Cost and
Works Accountants of India and Institute of Company Secretaries of India are also
represented on the ASB. Apart from these interest-groups, members of the Central Council
of ICAI are also on the ASB.
1.10.1 Objectives and Functions of ASB

1. To conceive of and suggest areas where accounting standards need to be

developed.

2. To formulate accounting standards with a view to assist the council of ICAI in

evolving and establishing accounting standards in India.

3. To examine how far the relevant International Accounting Standards/International

Financial Reporting Standards can be adapted while formulating the accounting
standards and to adapt the same.

4. To review, at regular intervals, the accounting standards from point of view of

acceptance or changed conditions, and if necessary, revise the same.

5. To provide, from time to time, interpretation and guidance on accounting standards.

6. To carry out such other functions relating to accounting standards.

1.11 THE ACCOUNTING STANDARD SETTING PROCESS

The accounting standard setting, by its very nature, involves reaching an optimal balance of
the requirements of financial information for various interest groups having a stake in
financial reporting. With a view to reach consensus, to the extent possible, as to the
requirements of the relevant interest-groups and thereby bringing about general
acceptance of the Accounting Standards among such groups, considerable research,
consultations and discussions with the representatives of the relevant interest-groups at
different stages of standard formulation becomes necessary. The standard-setting
procedure of the ASB, as briefly outlined below, is designed in such a way so as to ensure
such consultation and discussions:

Identification of the broad areas by the ASB where the need for formulating the accounting
standards exists.

Constitution of the study groups by the ASB for preparing the preliminary drafts of the
proposed accounting standards.

Consideration of the preliminary draft prepared by the study group by the ASB and revision,
if any, of the draft on the basis of deliberations at the ASB.

Circulation of the draft, so revised, among the Council members of the ICAI and 12
specified outside bodies such as Standing Conference of Public Enterprises (SCOPE),
Indian Banks Association, Confederation of Indian Industry (CII), Securities and Exchange
Board of India (SEBI), Comptroller and Auditor General of India (C& AG), and Department of
Company Affairs, for comments.

Meeting with the representatives of specified outside bodies to ascertain their views on the
draft of the proposed accounting standard.

Finalisation of the Exposure Draft of the proposed accounting standard on the basis of
comments received and discussion with the representatives of specified outside bodies.

Issuance of the Exposure Draft inviting public comments.

Consideration of the comments received on the Exposure Draft and finalisation of the draft
Accounting Standard by the ASB for submission to the Council of the ICAI for its
consideration and approval for issuance.
Consideration of the draft Accounting Standard by the Council of the Institute, and if found
necessary, modification of the draft in consultation with the ASB.

The Accounting Standard, so finalised, is issued under the authority of the

Council.

So far, the Institute has issued 31 Indian Accounting Standards on the following subjects:

AS 1

Disclosure of Accounting Policies

AS 2

Valuation of Inventories

AS 3

Cash Flow Statements

AS 4

Contingencies and Events Occurring after the Balance Sheet Date

AS 5

Net Profit or Loss for the Period. Prior Period Items and Changes in Accounting Policies

AS 6

Depreciation Accounting

AS 7

Accounting for Construction Contracts (revised and titled as Construction Contracts)

AS 8

Accounting for Research and Development

AS 9

Revenue Recognition

AS 10

Accounting for Fixed Assets

AS 11
Accounting for the Effects of Changes in Foreign Exchange Rates (revised and titled as The
Effects of Changes in Foreign Exchange Rates 2003)

AS 12

Accounting for Government Grants

AS 13

Accounting for Investments

AS 14

Accounting for Amalgamations

AS 15

Accounting for Retirement Benefits in the Financial Statements of Employers (revised as

Employee Benefit 2005)

AS 16

Borrowing Costs

AS 17

Segment Reporting
AS 18

Related Party Disclosures

AS 19

Leases

AS 20

Earnings Per Share

AS 21

Consolidated Financial Statements

AS 22

Accounting for Taxes on Income

AS 23

Accounting for Investments in Associates in Consolidated Financial Statements

AS 24
Discontinuing Operations

AS 25

Interim Financial Reporting

AS 26

Intangible Assets

AS 27

Financial Reporting of Interests in Joint Ventures

AS 28

Impairment of Assets

AS 29

Provisions. Contingent Liabilities and Contingent Assets

AS 30

Financial Instruments: Recognition & measurement

AS 31

Financial Instruments: Presentation

1.11 REGULATORY FRAMEWORK AND ENFORCEMENT OF ACCOUNTING STANDARDS

1.12

It would be pertinent to discuss the regulatory framework for enforcement of accounting

standards.

1.12.1 Legal Recognition of Accounting Standards issued by ICAI under the Companies Act
(1956)

The Companies Act (1956) provides the basic requirements relating to financial reporting of
all companies incorporated in India. The Act requires the preparation, presentation,
publication, and disclosure of financial statements, as well as an audit of all companies by
a member-in-practice certified by the Institute of Chartered Accountants of India (ICAI).
Under the Act, the Central Government has the power, by notification in the Official
Gazette, to constitute the National Advisory Committee on Accounting Standards (NACAS),
to advise the Central Government on the formulation and laying down of accounting
standards for adoption by companies or class of companies. For this purpose. The Act
requires that NACAS has to consider accounting standards issued by the ICAI when
recommending accounting standards to the Government. While, as stated earlier, the ICAI
bases its accounting standards on the corresponding IASs/IFRSS, NACAS also specifically
considers the deviations and reasons, if any from the corresponding IAS/IFRS while
reviewing ICAI accounting standards. In case the NACAS is not satisfied about any
deviation, it requests ICAI to amend the standard to comply with IFRS. ICAI generally
deviates from the corresponding IAS/IFRS because of different factors like:Legal and
regulatory environment prevailing in the country;

Alternatives permitted in IFRSs would lead to incomparable financial information:

Economic environment within the country:

Level of preparedness of industry.

NACAS has recommended that all 29 accounting standards issued by ICAL. With the
exception of AS 8. ‘Accounting for Research and Development, which has already been
withdrawn pursuant to AS 26. Intangible Assets. Becoming mandatory, to the Government,
for notification under the Companies Act (1956). Notification has been recently issued by
Press Information Bureau of Government of India. (PIB, GOI, http://pib.nic.in/release).

1.12.2 Legal recognition of accounting standards by other regulators Reserve Bank of India

The Reserve Bank of India (RBI) was established to regulate the issue of banknotes and
keeping reserves to secure monetary stability in India, as well as to generally operate the
currency and credit system of the country to its advantage. The Banking Regulation Act
(1949) empowers the RBI to regulate financial reporting of the financial sector, including
banks and financial institutions. One of the Schedules to the Banking Regulation Act
prescribes formats for general purpose financial statements (e.g. balance sheet, and profit
and loss account) and other disclosure requirements. Banks are also required to comply
with requirements of the Companies Act (1956), provided they are consistent with the
Banking Regulation Act. The RBI has issued circulars requiring banks to comply with the
accounting standards issued by ICAL

Securities and Exchange Board of India

The Securities and Exchange Board of India (SEBI) Act protects investors and regulates the
securities market. Listed companies in India are required to comply with the requirements
prescribed by the SEBI in its Act of 1992 and the Securities Contracts (Regulation) Act of
1956, which provides for the regulation of securities transactions. To protect investor
interests, SEBI has issued a listing agreement which specifies disclosures applicable to
listed companies in addition to other applicable auditing andaccounting requirements. In
particular, it requires compliance with the accounting standards issued by ICAI.
The Insurance Regulatory and Development Authority (IRDA)

The Insurance Regulatory and Development Authority (IRDA) regulates the financial
reporting practices of insurance companies under the Insurance Regulatory and
Development Authority Act (1999). This Authority has been constituted to regulate,
promote and ensure orderly growth of the insurance business and reinsurance business.
Insurance companies and their auditors are required to comply with the requirements of
the IRDA regulations of 2002 titled "Preparation of Financial Statements and Auditor's
Report of the Insurance Companies”, in preparing and presenting their financial statements
and the format and content of the audit report. IRDA regulations require compliance with
the accounting standards issued by ICAI.

The Institute of Chartered Accountants of India (ICAI)

The ICAl requires its members to ensure compliance with all the accounting standards it
issues while discharging their attest function. Further, the ICAI members are required to
follow a detailed Code of Ethics, as prescribed under the Chartered Accountants Act,
(1949). The ICAI Council is also entrusted with the disciplinary powers that are exercised
through its Disciplinary Committee. Recently, extensive changes have been made in the
Act through the Chartered Accountants (Amendment) Act, 2006, which has made the
disciplinary mechanism of the ICAI more stringent.

The ICAI, with a view to further improving and strengthening financial reporting practices in
India, has also constituted the Financial Reporting Review Board (FRRB). The FRRB reviews
general purpose financial statements of certain selected enterprises with a view to check
compliance, inter alia, with the accounting standards. In cases, where non-compliance is
observed, an appropriate action is taken by the ICAI and/or it is referred to an appropriate
authority for the action. This step definitely helps in improving the quality of financial
reporting in the country.

ICAI has introduced a peer review of audit firms by establishing an 11-member Peer Review
Board in March 2002. The Peer Review Board provides guidance to enhance the quality of
services provided by ICAI members. In the first phase, peer review focuses on the review of
firms that audit major enterprises at least once in a three-year period. The peer review does
not lead to any disciplinary or regulatory mechanism. Peer review certification is either
given or not given based on the findings of the review. Peer reviewers are practitioners with
at least 15 years of audit experience.

The Chartered Accountants (Amendmen”) Act (2006) created a Quality Review Board (QRB)
in place of the Peer Review Board; this Board can make recommendations to the ICAI
Council on the formulation of standards regarding the quality of services provided by the
members. Further, the proposed QRB would also review the quality of services provided by
the members of the ICAI, including audit services, and guide the members of the ICAI on
how to improve the quality of services and adherence to the various statutory and other
regulatory requirements. (UNCTD 2006)

Also, apart from the corporate bodies, the Council of the Institute of Chartered
Accountants of India has made various accounting standards mandatory in respect of
certain non-corporate entities such as partnership firms, sole-proprietary
concerns/individuals, societies registered under the Societies Registration Act, trusts.
Associations of persons, and Hindu undivided families, where financial statements of such
entities are statutorily required to be audited, for example, under section 44AB of the
Income-tax, 1961. The Council has cast a duty on its members to examine compliance with
the Accounting Standards in the financial statements covered by their audit in the event of
any deviations there from, to make adequate disclosures in their audit reports so that the
users of the financial statements may be aware of such deviations (www.icai.org).

1.13 NEED FOR THE STUDY

Looking back over the last decade, we have seen significant political and economic change
worldwide, a change that has created major new demands for capital and, therefore, new
investment opportunities. Rapid globalization of capital markets has heightened
community awareness of the information needs of international investors and the
desirability of the International Accounting Standards (Nobes and Parker, 1998). As these
trends continue, the call for more harmony in capital market. Increased financial reporting
and disclosure can be expected to continue.
IASB (formerly IASC) which has no powers to enforce its standards had issued 41 IASs by
December 2002 and has achieved much since its foundation in 1973 (Choi et al. p298). In
2000, the International organization of Securities Commission (IOSCO) approved a
resolution supporting its members use of IASS. Since then European Commission has
passed legislation requiring all European listed companies preparing consolidated
financial statements to comply with IASs as of 1 January 2005 (EC, 2002). As of mid 2005,
over 90 countries have claimed that they have adopted or will adopt IASs in the future (IASB
2005).

Companies that use International Accounting Standards (IASS) vary considerably in their
level of compliance. Former IASC Secretary-General David Cairns carried “Financial Times
International Accounting Standards Survey 1999” to examine the financial statements of
125 companies that referred to the use of IASS. Survey concluded that some of Europe’s
largest companies are among those that refer to the use of IASs but do not comply fully
with all IASs. Although national and international accounting standards increasingly
converge, national bodies have rejected some recent IASs. For example, Canada and
Malaysia have continued to allow companies to defer foreign exchange losses.

Recent research provides considerable evidence of non-compliance with IASs by

companies claiming to have adopted them (Street and Gray 2001; Glaum and Street 2003).
Similarly, International Federation of Accountants (IFAC) has observed auditors asserting
that financial statements comply with IAS when the accounting policies and notes indicate
otherwise (Cairns 1997, p2).

Previous research has mainly focused on companies domiciled in developed countries.

Developing countries have been some what neglected. Even when research has focused
on developing countries, it has focused on aggregate making it difficult to discern the
reporting practices in specific countries (Dahawy et al. 2002: Chamisa 2000). So there is an
urgent need for research relating to accounting standards application in developing nations
at a nation specific level. This is especially true because:

1. As an applied discipline, accounting is strongly influenced by the surrounding

environment;
 2. National environments differ dramatically between different countries; and

3. Developing nations are not homogenous which makes it misleading to try and
generalize (Chamisa 2000 as quoted in Dahawy and Conover 2007).

There have been significant capital reforms in the recent years in the Indian capital market.
It is well known that trading platform has become automatic, electronic, order driven,
nation wide and screen based. Foreign institutional investors. Mutual funds and every day
small investors have become to play a major role in the capital market. Moreover, capital
markets world over have become integrated and movement in one does affect the others.
With the emerging economic powers in Asia, the capital markets are giving good returns
and have attracted investments from world over. Also the Indian entrepreneur are looking
at the world markets for their capital needs through GDRs and at the same time foreign
companies have been allowed to issue IDRs in India.

More and more accounting standards have become mandatory and companies need to
meet the various disclosure requirements under these accounting standards. This study
seeks to extend and complement previous research findings in the area of compliance and
disclosure of information under mandatory accounting standards.

1.13 OBJECTIVES OF THE STUDY

1.14

The overall purpose of study is to examine the extent of compliance with accounting
standards by the selected companies and to identify various corporate characteristics that
affect the compliance by companies with the disclosure requirements of accounting
standards.

Specific objectives of the study are explained as under:

 1. To find out the extent to which companies in India comply with disclosure
requirements of selected accounting standards issued by ICAI in their annual
reports.

2 To study the changes in compliance over period under study. For this purpose
disclosure scores for the period 2000-01 and 2003-04 have been compared to identify
any change in the level of compliance with disclosure requirements of these
accounting standards.
3
2. To study the association between corporate attributes and compliance with the
disclosure requirements of accounting standards. These attributes include size,
profitability, leverage, listing status, audit firm, domicile status and age of a
company.

3. To analyse awareness level and perception of users of accounting information with

regard to the accounting standards.

1.15 Structure of the Study

This thesis is organized into 7 chapters raising the issue of compliance with the disclosure
requirements of accounting standards and perception of the users in a logical sequence.

Chapter 1, the introduction acquaints the reader with the objectives of study by leading in
to the topic with discussions about the emergence and significance of accounting
standards, their harmonization at international level. It also presents the standards setting
process at international level and in India along with the need for study in India.

Chapter 2 presents the review of existing literature. The literature consists of 3 parts. The
first part discusses the literature available providing empirical evidence of the extent of
disclosure and compliance with accounting standards. The second part throws light on the
literature that provides empirical evidence on the factors affecting the compliance with
requirements under accounting standards. The third part focuses on the perception of the
users towards GAAP/accounting standards.

In chapter 3, database and methodology used in the study have been discussed. The
selected methods of data analysis have been explained.

Chapter 4 provides a detailed analysis of disclosures under the requirements of selected

accounting standards. It also provides a comparative analysis of changes in the disclosure
of the individual accounting standards during the period under study.

Chapter 5 presents the results of the empirical analysis of the factors affecting the
compliance by the companies with disclosure requirements of accounting standards.

Chapter 6 carries the results of a survey among various users like investors, academicians
and chartered accountants to find out the level of awareness and their perception with
regard to accounting standards.

Chapter 7 summarises the findings of the study and in addition, suggestions for future
research are discussed. It also details the limitations of the study. The thesis carries an
exhaustive and updated bibliography. The appendices contain the instruments used in data
collection that are referred to in the discussion parts of the thesis.