Introduction of the Accounting Standards

Before 1977 Accounting system of the Indian enterprises was pathetic, their profits were not reliable, they could modify their Balance sheet in their favor as a result of this the confusion was increasing and the users of the financial statements were losing faith in the accounting data and thus the fragile condition of commerce was there in India.

Then the experts Accounting body of India named ICAI first time took the initiative in 1977 to standardize the process of Accounting and for this they formed Accounting Standard Board (ASB).

The work of ASB, which was an independent body was to form and draft Accounting Standards and submit to the ICAI for issuance and if ICAI found it necessary to modify the draft, they after taking the consultation with ASB modify it, and finally ICAI issued that Accounting Standards.

And this process is being carried now also.

So this was how the Accounting Standards came in to existence in India. Currently there are 31 Accounting Standards.

This was in short the necessary idea that every students pursuing professional examination should know. Hope you all will like it.

Benefits of Accounting Standards  

Now what Accounting Standards does?

Accounting Standards gives Accounting principles and the method of applying those principals in the preparation of financial statements.

Accounting principals like separate entity concept (business and owners are two separate entity), materiality concept(all the items which have a significant effect in the business of an enterprise need to be disclose)conservatism concept(to anticipate all future loss but not future gains)going concern concept(that enterprise has the intention to carry on the business for long period)etc etc.

1)      Thus by applying those principals Accounting Standards provides true and fair view of the financial statements.

2)      Financial statements are now reliable

3)      Confusions which existed earlier that is all the accountants were following their own accounting system are eliminated now after issuance of AS.

4)      Earlier the enterprises were not disclosing the important information if that was not mandatory by statutory law and so users were not getting full information but now after issuance of AS they are bound to disclose all the financial items which has material effect on the business of an enterprises.

These are some of the main benefits of Accounting Standards.

 Applicability of Accounting Standards:

General idea

Accounting Standards are applicable in respect of every enterprises engage in commercial and business activity whether or not enterprise are corporate or co-operative even in the non profit organizations the accounting standards will be applicable.

Important point:

Now very important point to be noted ”For the applicability of AS, earlier ICAI divided all the enterprises in to 3 categories viz level 1, level 2, level 3.level 2 and level 3 were called SMEs(small and medium enterprise )and level 1 called NON SME, but in the meanwhile Government has given notification about the applicability of Accounting Standards for companies and thus divide the companies(that is only corporate entities not non corporate entities) into two levels viz SMCs and Non SMCs after this notification lots of criteria in the levels of the enterprises were contradicting  so     lastly it was decided that levels recommended by the ICAI for the applicability of AS would be applicable only for non corporate entities and levels as per government notification would remain applicable  for corporate entities”

Government in that notification notified that ALL the Accounting standards issued by ICAI will be applicable for Non- SMCs and give some exemption and relaxation to the SMCs for few accounting standards.

Criteria for SMCs:

        1)A company whose equity or debt securities are not listed in any stock exchange whether in india  

         Or outside india        

2)Whose turnover does not exists Rs 50 crore in the immediately preceding year.

3)Which is not bank ,financial institution or insurance company

4)Whose borrowings do not increases 10 crore in the immediate preceding year.

5)Which is not holding company or subsidiary company of Non Smcs.

Companies which are not falling in the definition of SMCs are Non SMCs.

Criteria for the level 1 enterprises according to the ICAI for non corporate entities:

These criteria’s are just the opposite of what have been stated above for SMCs that is ,

1) if the turnover of the non corporate entities exceeds 50 crore or

2) if its borrowings increases 10 crore or

3)if its equity or debt securities are listed in stock exchange  whether in India or outside India or

4)Banks financial instutiuion or entities carry on the insurance business.

Criteria for level two according to ICAI for non corporate entities are:

1)Entities whose turnoever exceeds 40 lakhs but does not exceed 50 crore or

2)Entities whose borrowings exceeds 1 core but does not exceeds 10 crore in the immediately preceding year.

 

This was all about applicability of AS and when you will read each AS you will know clearly which AS is applicable for which level.

All I stated till now is the basic and important idea that every student should know before starting the journey of learning each AS in details.