Accounts Notes: Preface to the Statements of Accounting Standards

1. Formation of the Accounting Standards Board

The Institute of Chartered Accountants of India, recognising the need to harmonise the diverse accounting policies and practices at present in use in India, constituted an Accounting Standards Board (ASB) on 21st April, 1977.

2. Scope and Functions of Accounting Standards Board

2.1 The main function of ASB is to formulate accounting standards so that such standards may be established by the Council of the Institute in India. While formulating the accounting standards, ASB will take into consideration the applicable laws, customs, usages and business environment.

2.2 The Institute is one of the Members of the International Accounting Standards Committee (IASC) and has agreed to support the objectives of IASC. While formulating the Accounting Standards, ASB will give due consideration to International Accounting Standards, issued by IASC and try to integrate them, to the extent possible, in the light of the conditions and practices prevailing in India.

2.3 The Accounting Standards will be issued under the authority of the Council. ASB has also been entrusted with the responsibility of propagating the Accounting Standards and of persuading the concerned parties to adopt them in the preparation and presentation of financial statements. ASB will issue guidance notes on the Accounting Standards and give clarifications on issues arising therefrom. ASB will also review the Accounting Standards at periodical intervals.

3. Audited Financial Statements

3.1 For discharging the above functions, ASB will keep in view the purposes and limitations of published financial statements and the attest function of the auditors. ASB will enumerate and describe the basic concept to which accounting principles should be oriented and state the accounting principles to which the practices and procedures should conform.

3.2 ASB will clarify the phrases commonly used in such financial statements and suggest improvements in the terminology wherever necessary. ASB will examine the various current alternative practices in vogue and identify such alternatives which should be preferred.

3.3 The Institute will issue the Accounting Standards for use in the presentation of the general purpose financial statements issued to the public by such commercial, industrial or business enterprises as may be specified by the Institute from time to time and subject to the attest function of its members. The term ‘General Purpose Financial Statements’ includes balance sheet, statement of profit and loss and other statements and explanatory notes which form part thereof, issued for the use of shareholders/members, creditors, employees and public at large. References to financial statements in this Preface and in the standards issued from time to time will be construed to refer to General Purpose Financial Statements.

3.4 Responsibility for the preparation of financial statements and for adequate disclosure is that of the management of the enterprise. The auditor’s responsibility is to form his opinion and report on such financial statements.

4. Scope of Accounting Standards

4.1 Efforts will be made to issue Accounting Standards which are in conformity with the provisions of the applicable laws, customs, usages and business environment of our country. However, if due to subsequent amendments in the law, a particular Accounting Standard is found to be not in conformity with such law, the provisions of the said law will prevail and the financial statements should be prepared in conformity with such law.

4.2 The Accounting Standards by their very nature cannot and do not override the local regulations which govern the preparation and presentation of financial statements in our country. However, the Institute will determine the extent of disclosure to be made in financial statements and the related auditor’s reports. Such disclosure may be by way of appropriate notes explaining the treatment of particular items. Such explanatory notes will be only in the nature of clarification and therefore need not be treated as adverse comments on the related financial statements.

4.3 The Accounting Standards are intended to apply only to items which are material. Any limitations with regard to the applicability of a specific Standard will be made clear by the Institute from time to time. The date from which a particular Standard will come into effect, as well as the class of enterprises to which it will apply, will also be specified by the Institute. However, no standard will have retroactive application, unless otherwise stated.

4.4 The Institute will use its best endeavours to persuade the Government, appropriate authorities, industrial and business community to adopt these Standards in order to achieve uniformity in the presentation of financial statements.

4.5 In carrying out the task of formulation of Accounting Standards, the intention is to concentrate on basic matters. The endeavour would be to confine Accounting Standards to essentials and not to make them so complex that they cannot be applied effectively and on a nation-wide basis. In the years to come, it is to be expected that Accounting Standards will undergo revision and a greater degree of sophistication may then be appropriate.

5. Procedure for Issuing Accounting Standards

Broadly, the following procedure will be adopted for formulating Accounting Standards:

5.1 ASB shall determine the broad areas in which Accounting Standards need to be formulated and the priority in regard to the selection thereof.

5.2 In the preparation of Accounting Standards, ASB will be assisted by Study Groups constituted to consider specific subjects. In the formation of Study Groups, provision will be made for wide participation by the members of the Institute and others.

5.3 ASB will also hold a dialogue with the representatives of the Government, Public Sector Undertakings, Industry and other organisations for ascertaining their views.

5.4 On the basis of the work of the Study Groups and the dialogue with the organisations referred to in 5.3 above, an exposure draft of the proposed standard will be prepared and issued for comments by members of the Institute and the public at large.

5.5 The draft of the proposed standard will include the following basic points:

5.5.1 A Statement of concepts and fundamental accounting principles relating to the Standard.

5.5.2 Definitions of the terms used in the Standard.

5.5.3 The manner in which the accounting principles have been applied for formulating the Standard.

5.5.4 The presentation and disclosure requirements in complying with the Standard.

5.5.5 Class of enterprises to which the Standard will apply.

5.5.6 Date from which the Standard will be effective.

5.6 After taking into consideration the comments received, the draft of the proposed Standard will be finalised by ASB and submitted to the Council of the Institute.

5.7 The Council of the Institute will consider the final draft of the proposed Standard, and if found necessary, modify the same in consultation with ASB. The Accounting Standard on the relevant subject will then be issued under the authority of the Council.

6. Compliance with the Accounting Standards

6.1 While discharging their attest functions, it will be the duty of the members of the Institute to ensure that the Accounting Standards are implemented in the presentation of financial statements covered by their audit reports. In the event of any deviation from the Standards, it will be also their duty to make adequate disclosures in their reports so that the users of such statements may be aware of such deviations.

6.2 In the initial years, the Standards will be recommendatory in character and the Institute will give wide publicity among the users and educate members about the utility of Accounting Standards and the need for compliance with the above disclosure requirements. Once an awareness about these requirements is ensured, steps will be taken, in course of time, to enforce compliance with the accounting standards in the manner outlined in para 6.1 above.

6.3 The adoption of Accounting Standards in our country and disclosure of the extent to which they have not been observed will, over the years, have an important effect, with consequential improvement in the quality of presentation of financial statements.