Accounting Standards – Meaning and its Applicability

Contents:

• Introduction
• Scope and Compliance with Accounting Standards
• Applicability of Accounting Standards
• Classification of enterprises

Introduction 

Accounting Standards are the written form of statements which consists of rules, principles and guidelines to be used consistently and uniformly for the preparation and presentation of financial statements by a business entity. These Accounting Standards lay down the accounting policies and practices explaining as to when and how the financial transactions should be measured, recognized and disclosed in the books of accounts of an entity.

Generally these Accounting Standards are issued by any accounting body or regulatory authority and even sometimes by the government. The Accounting Standard Board (ASB) of the Institute of Chartered Accountants of India (ICAI) has framed and issued these set of standards. The application of Accounting Standards (AS) not only ensures the transparency, reliability and consistency but also sets the formal boundaries within which the financial transactions should be reported by any business entity.

Also Read: Accounting – Meaning and its Basic Concepts

Scope and Compliance with Accounting Standards

Accounting Standards issued by the Accounting Standard Board (ASB) of ICAI are of such nature that they do not override the local regulations which govern the preparation and presentation of financial statements and these standards shall apply to items which are material.

While preparing financial statements it is management’s responsibility to prepare and present the financial statements in compliance with the relevant applicable accounting standards. In the event of any deviation, it is the responsibility of the auditor to provide adequate disclosures in their audit report to make the users of financial statements aware about the matter.

Applicability of Accounting Standards

For the purpose of applicability of accounting standards, the enterprises are classified as Level I, Level II and Level III entities.

Classification of Enterprises

Level I Enterprises – Non- corporate entities which fall in any one or more of the following category, at the end of relevant accounting period.

• Entities whose equity or debt securities are listed or are in the process of listing on any stock exchange, whether in India or outside India.
• Banks (including co-operative banks), financial institutions or entities carrying on insurance business.
• All commercial, industrial and business reporting entities, whose turnover (excluding other income) exceeds rupees fifty crore in the immediately preceding accounting year.
• All commercial, industrial and business reporting entities having borrowings (including public deposits) in excess of rupee ten crore at any time during the immediately preceding accounting year.
• Holding and subsidiary entities of any of the above.

Level II Entities (SMEs) – Non-corporate entities which are not Level I entities but fall in any one or more of the following categories:

• All commercial, industrial and business reporting entities, whose turnover (excluding other income) exceeds rupee one crore but does not exceed rupee fifty crore in the immediately preceding accounting year.
• All commercial, industrial and business reporting entities having borrowings (including public deposits) in excess of rupee one crore but not in excess of rupee ten crore at any time during the immediately preceding accounting year.
• (iii) Holding and subsidiary entities of any one of above.

Level III Entities (SMEs) – Non-corporate entities which are not covered under Level I and Level II are considered as Level III entities.

Note 1: Not applicable in case of Small and Medium Sized Company, One Person Company and Dormant Company. 

Note 2: AS 21, AS 23 and AS 27 for the preparation of consolidated financial statements are required to be complied with by a non- corporate entity if the non- corporate entity voluntarily prepare and present the consolidated financial statements.                       

Note 3: Accounting Standards listed above are subject to certain exemptions and relaxations for Small and Medium Companies, Entities falling in level II and Level III.  

• AS 19 Leases – Disclosure requirements as stated in para 22(c), (e) and (f); 25(a), (b) and (e); 37(a), (f) and (g) and 46(b), (d) and (e) are not applicable.
• AS 20 Earnings Per Share – Disclosure requirement of Diluted Earnings per Share (DPS) is not applicable to SMCs and Level II/ III entities.                                      
• AS 29 Provisions, Contingent Liabilities and Contingent Assets – Disclosure requirements as stated in para 66 and 67 are not applicable.