Accounting

Standards and 3
International Financial
Reporting Standards

OVERVIEW
Objectives, Advantages and Utilities
D Accounting StandardsMeaning, Nature,
Institute of Chartered Accountants of India
DAccounting Standards specified by Statements, Difference between
IFRS-Meaning. Objectives, Assumptions, Benefits, IFRS Based Financial
D
IFRS and GAAP or Accounting Standards
D Applicability of IFRS in India
(Ind-AS) and their Applicability
D Indian Accounting Standards
and
Generally Accepted Accounting Principles (GAAP) in the form of concepts the
Anumber of
and accepted to bring uniformity and comparability in
conventions have been developedbusiness enterprises. Under the GAAP, a
large number of
financial statements of different the same item. As a result, the financial statements
adopted for
alternative treatments have been harmonise and standardise
Therefore, it was necessary to
incomparable.
become inconsistent and
accounting policies. Accounting
these incomparable published accounts, the International
uniformity in set up in
To promote worldwide International Financial Reporting Committee) wasformulate
(now is to(i)
Standards Committee (IASC) founder members. The purpose of this committee
June 1973 with nine
nations as observed in the presentation ofaudited financial
interest, the standards to be observance. (ii) LASC exists to
and publish in public acceptance and
promote their worldwide practices. This process of
statements and (ii) to between different countries accounting operate
financial statenments to
reduce the differences easier for the users and preparers of India
harmonisation will make it Institute of Chartered Accountants of
boundaries. Inour country,
the
to bring uniformity in Accounting
acrossinternational (ASB) in 1977
constituted Accounting Standard Board draft Accounting
Standards.
has task to prepare
with the
Standards. It was assigned
3.2
Aeeountancy XI
Drat Aoouning Standards submited by ASB may be amended by the ounilof lCA n t.
basis of ommens leccived fhom the government, industry, professionals, ctc.
Incase ot conpanies, NationalFinancial Reporting Authority (NFRA) notifies the standard.
to be applicable tothe conpanies, and followed by the companiesunder the Companies Act, 2013
ACCOUNTNG STANDARDS
Simply stated, Accounting Standards (AS) are the policy documnents issued by the recognised
accounting bodies relatimg to various aspects of measurement, treatment and disclosure of
accoumting transactions.
In the words of Kohler, "Accounting Standards are a code of conduct imposed on accountants by
custom, aw or professional body."
Accounting Standards (AS) provide structured framework for the preparation of financial
statements. They help in standardised the diverse accounting practices followed for different
aspectsofaccounting. Hence, Accounting Standards (AS) are written statements, issued from time
totime by institutions for accounting professionals, specifying uniform rules or practices for the
preparation of financial statements.

Nature of Accounting Standards

The nature of accounting standards can be explained as:
1. They lay down the norms of accounting policies and practices.
2. They limit the area within which accountants have to function.
3. They prescribe apreferred accounting treatment from the available set of methods for
solving one or more accounting problems.
4. They remove the effect of diverse accounting policies and practices so that financial
statements of different business units become comparable.
5. They provide information to the users of financial statements about the basis on which
such standards have been prepared.
Objectives of Accounting Standards
The main objectives of framing accounting standards are as follows:
1. To Provide Direction: Accounting Standards provide guidance and direction for
maintaining accounting records.
2. To Provide Uniformity: Accounting Standards provide universality to accounting
procedures by making uniformity of assumptions, rules and policies adopted in financial
reporting.
3. To Improve Comparability: Accounting Standards ensure consistency, creditability and
comparability in the data published/presented by the various business firms.
4. To Improve Understandability: To be useful, an accounting standard must be capable of
being well understood and it must be able to reduce significantly the degree of
manipulationof the reporteddata.
 Accounting StandanBs and lntemational bnancitRepwrting Stanlarda 3.3

5. To Provide Information to the Users: Another important objetive of aconting

standards IN to provide intormation to the users as the basis con whichthe aconts have
been prepared. In the absence of accounting standards, comparison of different financal
statements may lead to misleading conclusions.
Advantages and Utilities of Accounting Standards
Accouning Standards prOvide the accountants those accounting policies which are mOst
suitable in a given situation.
Accouning Standards are regarded as a major component in the framework of accounting and
reporting practies. The seting of accounting standarcds has the following acdvantages and utilities:
1. Improve the Reliability and Credibilityof Financial Statements: It is necessary that the
financial statementsshouldpresent a true and fair view of the financial position and the
operating resultsof the business organisation tothe users of the financial information.
Accounting Standards generate confidence among the users of the acCOunting
information which increases the reliability and credibility of theaccounting information.
2. Ensures Consistency and Comparability of Financial Statements: Accounting Standards
make the financial statements of different enterprises or of the same enterprise tor
different accounting periods comparable. They bring the uniformity of assumptions,
rules and policies adopted in the presentation of financial statements and thus ensure the
consistency and comparability of these statements.
3. Help in Resolving Conflict of Financial Interests among Various Interested Groups:
Sometimes, there is aconflict of financial interests among various persons interested in the
financialinformation. For example, shareholders and creditors may have different
interests in assessing the profitability and net worth of the business firm. Accounting
Standards are helpfulin resolving such a conflict, because financial statements drawn up
on the basis of established accounting standards are acceptable to all the persons.
4. Reduce the Chance of Frauds and Manipulations: Use of Accounting Standards has
reduced the chance of frauds, manipulation, insufficient disclosures and the use of
inappropriate accounting policies.
5. Helpful to Accountants and Auditors: Accounting Standards are needed, not only by
business enterprises but also by accountants and auditors. The use of accounting
standards make them free from court cases, other legal formalities, penalties due to
inadequate disclosure of accounting information and adoption of inappropriate
accounting policies.
6. Helpful in Reducing the Variations: Accounting Standards reduce to a reasonable extent
the confusing variations in the accounting treatment used to prepare financial statements.
Limitations of Accounting standards
Accounting standards are considered beneficial to bring in reliability, uniformity and
Comparability in accounting practices, still they have some limitations.
Some of the limiations are as follows:
(1) Inflexible: Accounting standards eliminates thechoice between alternatives. In practice,
cach alternative solution to certain accounting problems pOssesses its own positive points
3.4

Accountancy-X|
and benetits and each company faces different experiences and circumstanes, In this
by elimination of choice between alternatives, accounting standards may
bring rigidwaityy, .
Flexibility is generally taken away by rigidity in applying the accounting principles.
(2) Difficlt and Challenging: The selection of the best alternative for
challenging and difficult task as each alternative has its own arguments. standard is
(3) Expensive: Another disadvantage of using and applying accounting standards may prowe
costly for the business organisation as it is costly to comply with the accounting standard.
In some cases, a company is required to design and implement new procedures and also
large financial investment is needed for applying accounting standards.
(4) Cannot override the Statute (Regulation): Accounting standards
cannot override the
statute. It is required for accounting standards to be framed within the ambit of prevailing
statues.
(5) Require Unnecessary Disclosure: There are certain areas in a
business organisation where
important information are not statutorily required to be disclosed. However, accounting
standards may call for disclosure beyond that required by law.
Accounting Standards Specified by Institute of Chartered Accountants of India
According to Section 133 of the Companies Act, 2013, the Statement of Profit and LosS and
Balance Sheet of a company shall comply with the accounting standards to ensure
prepared uniformly and in line with the Indian GAAPs for better understanding that accounts are
of users. For this
purpose, 'Accounting Standards' are recommended by the Institute of Chartered
India as may be prescribed by the Central Government. Accountants of

INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)

The Interational Accounting Standards Board (LASB) has issued a set of
International Financial Reporting Standards (IFRS). IFRS also cover a wide accounting standards known as
Accounting Standards (IAS) which are issued by the International Accountingrange of International
(LASC). Standard Committee
International Accounting Standards (IAS) were
set of accounting and financial reporting standardsoriginated and developed through a common
to facilitate investment and other economic
decisions around the world, increase market efficiency and reduce the cost of
replaced or superseded by IFRS. capital. IAS are being
The IASB is theindependent standard-setting body of the IFRS foundation. It replaced
International Accounting Standards Committee (founded in 1973), in 2001 and initially
the accounting standards issued by IASC as its own standards. adopted
The main objective behind the establishment of IASC and later
IASB is to develop Worldwide
acceptable accounting standards to produce and present financial information
accounting standards and to help investors and other participants in the world'sbased on similar
capital markets
make economic decisions.
Thus, International Financial Reporting Standards (IFRS) are replacing
GAAP. Companies
throughout the world are adopting IFRS. The extent and manner of these standards vary fronm
country to country. In some countries GAAP has been fully replaced by IFRS. Presently, more than
Arcounting Standlards andlntenational Financial lReporting Standards 3.5

100 countiies of the world require conpliance of lFRS while preparing financial statemnents of
companies.
Intemational Acouning Standards (IAS) require inanial statements to comply with all
requirements of IFRS.
Objectives of IFRS
The four major objectives of IFRS are mentioned below:
1. To tormulate a single set of superior quality accounting standards that are easily
understandable,globally enforceable, transparent, comparable, and hence, assist users in
various capital markets and otherwise to make sound economic decisions.
2. To encourage usage and through application of these accounting standards.
3. To look after and provide well for the needs of small and medium-sized organisations and
emerging economics, in light of both the objectives mentioned above.
4. To present and actually aid convergence of national accounting standards with the
International Financial Reporting Standards.
Assumptions of IFRS
1. Going Concern Assumption: As per this assumption,it is assumed that the life of the
business enterprise is infinite and the business entity will continue its business for an
indefinite period or a very long time in the future.
2. Accrual Assumption: According to this assumption, transactions are recorded on accrual
basis in the books of accounts, i.e., as and when they occur and the date of settlement is
insignificant.
3. Measuring Unit Assumption: According to this assumption, the assets are not shown in the
Balance Sheet at historical cost but they are shown at current or fair value. Assets are shown
at theamount that would have been paid if the same asset has been acquired currently.
Similarly, liabilities are shown at the amount that would be required to settle them.
4. Constant Purchasing Power Assumption: According to this assumption, value of capital
hasto be adjusted for inflation at the end of the financial year.
Benefits of IFRS
IFRS are very beneficial for business entities carrying on business throughout the world. In
addition to the enterprises operating globally, IFRS are useful for investors, industry and
accounting professionals as follows:
1. Helpful to Global Business Enterprises: Enterprises having business operations in
different countries will face problems of consolidation of financial statements if they
prepare their financial statements according to the standards prevailing in different
countries. IFRS provide uniformity to accounting practices worldwide as aresult of which
the problem of consolidation is solved to a great extent.
2. Helpful to Industry: Ifthe financial statements comply with globally accepted accounting
standards, then it is easyto obtain financial resources fromn outside the country.
 3.6

3. Helpful to Investors: High quality, relevant, reliable,

transparent
intormation in tinancial statements are required by investors
decisions. The use of IFRS would be beneficial to
investors
in order
make to
andAecocompar
untancya-Xbl\e
adopted economi
financiacl
in
statements prepared according to different accounting standards Comparison to
countries. by
4. Helpful to Accounting
Professionals: Accounting professionals can
services in different countries
dif eren
by adopting IFRS. provide
IFRS Based Financial better
Statements
The various financial
statements formulated under IFRS are as
1. Statement of under:
Financial Position: The various
financial position are as under: elements or parts of the statement of
(i) Assets: Assets signify the
by the
organisation resources material value that are
of
which
operations of the firm, and from have been acquired as a owned and controlled
(iü) result
which further economic of past events and
Liabilities:
and Liabilities are the obligations of the benefits shall be derived
operations
(iii) Equity: Equity
in the past and
shall result in
firm which have
resulted from events
signifies the ownership interest of outflow of assets of the firm in the future.
words, it is the residual
deducting total interest of shareholders in shareholders
the
in a firm. In other
2. liabilities from total assets. assets of the
enterprise after
Statements of Comprehensive Income: This
statements, that is
The Statement of the Income Statement and the statenment includes two
per the Income Comprehensive Income Statement of independent
the contents of Statement with the provides a
reconciliationComprehensive
of the gain orIncome.
3.
this
statement.
Statement ofof Changes in Equity Comprehensive income. Revenue' and
loss as
'Expenses' are
4.
Statement Cash Flow
5. Notes and
Difference betweenSignificant Accounting Policies
IFRS and Indian
Following GAAP or
1. IFRS are
are the main
points of
distinction Accounting Standards
based on between IFRS
For
example, underPrinciplesthe Indianwhereas Indiam GAAP or
and Indian
GAAP:
Companido enots are prepared according to Balance SheetAccount
IFRS
laws,
and
ing Standards are based on Rules.
the Balance prescribe anyformat for Schedule III of the Statement of Profit and Loss of
Schedule III,
Sheet as per the these. IFRS prescribe Companies Act, 2013, whereas
but IFRS
require Redeemabl
it e principles
to be Preference Shares areassociated with each
that items should be shown in
Share Capital itenm. For under
is not a shown under the shown under the headexample,
Capital but loan head'itLoans' since, in the sense, 'Share Capital'
because carries a fixed realof Preference
rate dividend and also
 Accounting Standards and International Financial Reporting Standards 3.7

has to be redeemed as per the terns of issue but not later than 25 years from the date of
their issue.
9. IFRS are based on 'Fair Value' concept whereas Indian GAAP or AccountingSlandards are based on
'Historical Cost concept. As per Indian GAAP assets are shown in the Balance Sheet at
'Historical Cost but IFRS require that the assets and liabilities should be shown at current
or fair value as at the date of Balance sheet.
The section belowpresents more differences between GAAP and IFRS Comprehensively.
Difference between Indian GAAP (or Accounting Standards), and IFRS (or International
Financial Reporting Standards)
Basis Indian GAAP IFRS

1.Characteristics of Places greater importance on reliability, accuracy, Requires the financial information to be
understandable, relevant, reliable and
Financial information completeness, objectivity and understandability of financial
information. comparable.
There are five reporting elements such as
|2. Reporting Elements Reporting elements and the definition and recognition
criteria are similar to IFRS. assets, liabilities, equity, income (includes
revenue and gains)and expenses
(includes losses).
Revenues are recognised when all
3. Revenue Recognition Revenues are recognised when all significant risks and |significant risks and rewards of ownership
rewards of ownership have been transferred or on a
percentage of completion basis. No detailed guidelines for |have been transferred.
particular industries have been specified.

4. Historical Cost or Historical cost is the main acCOunting conventions. Fair Value is the main accounting
Fair Valuation |However, it permits revaluation of property, plant and convention. However IFRS permits the
equipment but there's no requirement on frequency of revaluation of intangible assets; property.
revaluation only certain derivates are carried at fair value. plant and equipment (PPE); and
investment property. IFRS also requires
certain categories of financial instruments
and certain biological assets to be
reported at fair value.

APPLICABILITY OF IFRS IN INDIA

converge the Indian Accounting
India had two options, i.e., either to adopt IFRS as they are or
Standards with IFRS.
Standards with IFRS. It has been decided to converge the Indian Accounting
accounting standards
Conversion is much more than a technical accounting issue. The converged
They have been issued and notified. It
nave been titled Indian Accounting Standards (Ind-AS)'.
be applicable. They
Should be remembered that the Indian Accounting Standards shallnot cease to the
migrate to Ind-AS. But, if
Will continue to be applicable on entities that are not required to
entities are not required to migrate to Ind-AS, they may adopt them.
 3.8
Accountancy-XI
INDIAN ACCOUNTING STANDARDS (IND-AS) AND THEIR APPLICABILITY
Ind-AS are a set of acCOunting sandards notified under the Companies Ad, 2013 that
converge with International Financial Reporting Standards (IFRS). Therefore, they can be called
converged standards of IFRS.
Ind-AS are notified under the Companies Act, 2013 and are applicable to:
(i) Companies listed on the Stock Exchange in India.
(ii) Companies having net worthof ?250 croresor more.
(iii) Above mentioned companies and their holding, subsidiary, associate and joint venture
companies.
Other companies may follow Ind-AS voluntarily.
Note: It should be noted that Accounting Standards (AS) are applicable on companies On
which Ind-AS is not applicable or are not adopted voluntarily by the companies.
Difference between Ind-AS andAS
1. Ind-AS are Principle based while Accounting Standards are Rule based.
Ind-AS involves Fair Value concept while Accounting Standards are based on Historical
Cost Concept.
Assumptions of Ind-AS
1. Going Concern Assumption
2. Accrual Assumption
Ind-AS Based Financial Statements
1. Statement of Financial Position: They consist:
(i) Asset (iü) Liability
2. Statement of Changes in Equity
3
Statement of Comprehensive Income: They consist:
(i)) Revenue (ii) Expense
4. Statement of Cash Flow
5. Notes and Significant Accounting Policies

Analysing, Evaluating, Creating and HOTS (Higher Order Thinking Skills)

Q. 1. Mr. Vishal Khera & Sons follow the accounting standards completely. Which benefits he
must be deriving by following the accounting standards?
Ans. He must be deriving the
following benefits:
(i) Improvement in reliability and credibility of
financial statements.
(ii) Ensure consistency and comparability of financial
statements.
Accounting Standards and lntemational Financial Reporting Slandards 3.9

o2. How do Accounting Standards help in reduction of frauds and manipulations?

Ans. By disclosing the use of inappropriate accounting policies, accounting standards help in
reduction of frauds and manipulation.
Q.3. Name two values which are preserved by following accounting standards?
Ans. Uniformity and honesty in business organisations.
Q.4. J.K. Mehra prepares its Statement of Profit and Loss for the period from lst Aprilto 31st
March and its Cash Flow Statement for the period from lst Januaryto 31st March. Is he
correct in this practice?
Ans. No, he is not right in this decision because acash flow statement should be prepared and
presented for the same period for which the Statement of Profit and Loss is prepared.
0.5. Incourse of 20 years of business, Mr. Ghanshyam's firm earned high reputation valued at
R5,00,000. He wants to record the value of goodwill in the books of accounts. Can he do so?
Ans. No, as per Accounting Standard 26 (AS-26) for Intangible assets, self generated (produced)
goodwill can not be recorded in the books because consideration in money or money's
worth has not been paid for it. Hence,only purchased goodwill can be recorded in the
books of accounts.

AsSESS YoURSELF

Typology of Questions-Remembering, Understanding and Application Based

THEORETICAL QUESTIONS
Very Short Answer Type Questions
A. Multiple Choice Questions (MCQs) (Point out the correct answer):
1. The term 'IASC' stands for:
Commission
(a) International Accounting Standards
Committee
(b) International Accounting Standards
(c) Indian Accounting Standards Committee
(d) International Accounting Scheme Commission
formed in the year:
2. In India, Accounting Standard Board (ASB) was
(a) 1977
(b) 2001
(c) 1985
(d) 1991
3.10

3. Which of the following is assumption for IFRS?

Accountancy-XI
(a) Going Concern Assumption
(b) Acrual Assumption
(c) Measuring Unit Assumption
(d) All of the above
4. IFRS are based on:
(a) Principles
(b) Rules
(c) All of the above
(d) None of the above
5. Which of the following is nota limitation of AccouningStandards?
(a) Inflexibility
(b) Expensive
(c) Consistency
(d) Require unnecessary Disclosure
[Ans. 1. (b), 2. (a), 3.(d), 4. (a), 5. (c)])
B. Answer the following questions briefly:
1. What are accounting standards? [Delhi 2014]
Or
Explain accounting standards briefly. (Delhi 2010]
2. Why are accounting standards required? [Delhi 2015]
3. What is the main objective of settingaccounting standards? [Delhi 20I1]|
4. Mention any one limitation of Accounting Standards?
5. What is the full form of IFRS? Who releases these standards? State any two objectives of
IFRS. [KVS 2016]
6. What is the main objective of IFRS?
7. What is the main difference between GAAP and IFRS?

Answers
1. Accounting, Standards (AS) are the policy documents issued by the recognised accounting
bodies relating to various aspects of measurement, treatment and disclosure ofaccounting
transactions.
Accounting Standards and Intenational Fianeial Reporting Stanards 3.11

2. Accounting Standards make the financial statements of different enterprises or of the

same enterprise tor diflerent accounting periods comparable.
3. Aounting Standards provide guidance anddiretion lor maintaining accounting records.
4. Accounting Standards are inflexible and therefore eliminate the choice between
alternatives.
5. International Financial Reporting Standards. International Accounting Standards Board
(IASB) releasesthese standards.
Objectives: (i) To formulate a single set of superior quality accounting standards. (ii) To
present and actually aid convergence of national accounting standards with the
International Financial Reporting Standards.
6. To formulate a single set of superior quality accounting standards that are easily
understandable, globally enforceable, transparent, comparable, and hence, assist users in
various capital markets and otherwise to make sound economic decisions.
7. Indian GAAP: Places greater importance on reliability, accuracy, completeness, objectivity
and understandability of financial information.
IFRS: Requires the Financial information to be understandable, relevant, reliable and
comparable.
Short Answer Type Questions
1. Explain the nature of accounting standards briefly.
2. What are the two basic objectives ofhaving accounting standards?
(Delhi 2009, 2010, Chandigarh 2017]
3. Explain the meaning of accounting standard.
4. Explain any four advantages of accounting standards.
5. How are accounting standards helpful for accountants and auditors?
6. What are 'International Financial Reporting Standards'. [Delhi 2013]
7. What are IFRS?
8. Write a short noteon applicability of I FRS in India.
9. What are Indian Accounting Standards?
10. What is the utility of Indian Accounting Standards?

Long Answer Type Questions

I. Explain accounting standards, its natureand objectíves.
2. Why Accounting Standards are considered beneficial for accountants and auditors?
3. What are the advantages and utilities of accounting standards?
3.12 Accountancy-XI
Define IFRS. How are they useful for business enterprises operating globally?
4.
which IFRSis based.
5. Write down the assumptionson
detail.
6. What are the benefits of IFRS? Explain in