Unit-2 Accounting Standards and Principles

2.1 Concept of AS

We are aware that generally accepted accounting principles (GAAP) work to make financial
statements consistent and comparable. It is clear that GAAP allows a wide range of alternative
accounting methods in many different places for the same item. For instance, various stock
valuation techniques produce various financial statement results.

Such actions occasionally may lead intended users astray while making decisions related to
their area of expertise. The necessity for the creation of uniform accounting standards was
sparked by the issues that many users of accounting were experiencing.

The Accounting Standard Board (ASB) was established for this purpose in 1977 by the Institute
of Chartered Accountants of India (ICAI), which is also a member of the International
Accounting Standards Committee (IASC). The ASB recognised the areas where accounting
standardisation was necessary. It created and presented a draft to the ICAI following extensive
research and debate. Following a thorough review, ICAI finalised them and informed them for
use in financial statements.

Financial Accounting Principles

We shall have a babel of useless financial data if every corporate organisation delivers its
information in its own manner. Personal accounting systems may have been useful when most
businesses were owned by sole proprietors or partners, but they are no longer applicable in the
age of joint stock companies.

These businesses require a uniform, standardised system of accounting so that businesses can
be compared on the basis of their performance and worth. These businesses have thousands of
stakeholders who have invested millions in them.

As a result, international accounting authorities and regulators have developed accounting

principles that are based on certain notions, conventions, and traditions. The "Generally
Accepted Accounting Principles," also known as GAAP, are a set of guidelines for recording
financial transactions and creating financial statements.

Accounting professionals ensure that financial statements are credible and useful by putting the
concepts into practice. It makes sure that accepted customs, customary practices, and accepted
rules and practices are adhered to. Because of the observance of accounting standards, a
language and terminology for documenting financial statements that are broadly understood
have been developed. However, it should be noted that depending on the accountant, there
may be some changes in how accounting laws and processes are applied, just as there may be
discrepancies in how a language is spoken by two persons who live on different continents.

2.2 Meaning of Accounting Standards

Accounting standards are written statements that include rules and principles that accounting
institutions have established for the compilation of consistent and uniform financial statements
as well as for other disclosures affecting the various users of accounting information.
In order to facilitate the easy interpretation of the items appearing in the financial statements
as well as their treatment in the books of account, accounting standards provide the terms and
conditions of accounting policies and procedures through codes, guidelines, and modifications.
2.3 Nature of Accounting Standards
We can conclude from the discussion above that the role of accounting standards in the
accounting process is that of a guide, a dictator, a service provider, and a unifier.
(i) Serve as a guide to the accountants:
Accountants use accounting standards as a guide during the accounting procedure. They offer
the foundation for which accounting is made. For instance, they offer the technique for
inventory value.
(ii) Act as a dictator:
Accounting practices are controlled by accounting standards. Similar to a tyrant, accountants
sometimes have little choice but to choose procedures other than those outlined in the
accounting standards. For instance, the format required by accounting standards should be
followed while preparing a cash flow statement.
(iii) Serve as a service provider:
Accounting standards define specific phrases, present accounting concerns, specify standards,
explain numerous disclosures, and specify an implementation date to include the extent of
accounting. Accounting standards are, therefore, descriptive in nature and provide a service.
(iv) Act as a harmonizer:
Accounting standards promote the standardisation of accounting practices and are impartial.
They eliminate the impact of various accounting methods and regulations. Accounting
standards frequently evolve and offer solutions to certain accounting problems.
It follows that anytime there is a disagreement over an accounting issue, accounting standards
serve as a unifier and help accountants find solutions. Accounting used to be restricted to the
recording of financial company transactions. Its current primary focus is on giving decision-
makers accounting information.
2.4 Need for Accounting Standards
(i) For bringing uniformity in accounting methods:
Accounting standards are necessary to provide consistency in accounting practices by
recommending standard approaches to the accounting problem.
(ii) To improve the reliability of the financial statements:
The language of business is accounting. Many people who use the information provided by
accountants base their decisions about various aspects of their industry solely on the data
found in financial statements. The financial statements must present a true and fair picture of
the business concern in this regard. When used, accounting standards instill trust and
dependability in a variety of users.
By establishing disclosure standards that make it simple for even a layperson to understand the
data, they also assist future consumers with the information found in the financial statements.
Accounting practices are supported by concrete theory thanks to accounting standards. They
ensure consistency in accounting so that the financial statements of various business divisions
for various years can be compared, which again helps in decision-making.
(iii) Simplify the accounting information:
Accounting standards make financial data easier to understand for everyone and prevent
consumers from drawing any false assumptions. For instance, AS-3 (Revised) delineates
between "operating activities," "investment activities," and "financing activities" when
classifying cash flows.
(iv) Prevents manipulations and frauds:
Accounting regulations stop managers and others from falsifying data. Frauds and
manipulations can be reduced through the codification of accounting procedures.
(v) Helps auditors:
By way of codes, rules, and adjustments for creating and interpreting the items appearing in the
financial statements, accounting standards establish the terms and conditions for accounting
policies and procedures. These conditions, rules, and so forth serve as the foundation for
auditing the books of accounts.
2.4 Ind AS (Indian Accounting Standards)
In India, accounting rules have evolved over time. Ind As is another name for it. Under the
direction of the Accounting Standards Board, various corporate forms and NBFCs in India must
adopt these standards (ASB). As a body and regulator, the Accounting Standards Board was
founded in 1977.
The Institute of Chartered Accountants of India is the organisation in charge of ASB, a
professional and independent body (ICAI). In addition, other organisations that control ASB
include the Confederation of Indian Industry (CII), the Federation of Indian Chambers of
Commerce and Industry (FICCI), and the Associated Chambers of Commerce and Industry of
India (ASSOCHAM).
The above-mentioned organisations' members, professors, and academics develop various
standards for accounting. In order to reconcile international accounting and reporting
standards, Indian accounting standards were created.
International Financial Reporting Standards are compatible with International Accounting
Standards (IFRS). The National Advisory Committee on Accounting Standards is a body of the
Indian government that recommends this standard to the Department of Corporate Affairs
(NACAS).
2.4 Objective of Indian Accounting Standard
The objectives of using Indian Accounting Standards are as follows:
1. Make sure Indian businesses follow these guidelines in order to apply widely
acknowledged best practices.
2. Make sure that compliance is upheld globally.
3. A single accounting system with a single structure
4. The IFRS principles were followed in the development of the standard. As a result, it acts
as a manual for carrying out the standard.
5. Global businesses may examine and comprehend Indian accounting processes.
6. The annual financial statements and corporate accounts will become transparent as a
result.
7. The harmonisation of these standards helps to guarantee that businesses adhere to
international norms.
8. This Indian accounting standard allows for a larger reach because Indian businesses now
operate more globally than they did in the past.
Applicability of Ind As
All Indian corporations have been instructed to recognise and use Indian accounting standards,
according to announcements made by the Indian government and the Department of
Corporate Affairs.
Under the 2015 Company Accounting Standards Act (US IND), this notice was submitted. All
organisations who receive this notification will be required to get Ind As gradually throughout
the 2016–17 fiscal year, in accordance with the notification above. There have been three
notification modifications since its introduction in 2016, 2017, and 2018.
Benefits of Adopting Indian Accounting Standards
Adopting Indian accounting standards has various benefits, including:
1. Harmonization: Businesses can unify accounting practices by adopting these standards.
Through harmonisation, global accounting norms can be developed.
2. International Base: These accounting standards are accepted across the globe.
Therefore, these principles are followed when a business wants to grow internationally.
3. Global Acceptance: The existence of these standards ensures that all organisations and
agencies of government are recognised on a global scale.
 4. Compliance: By implementing these standards, businesses may guarantee successful
compliance.
2.5 IFRS (International Financial Reporting Standards)
International Financial Reporting Standards (IFRS) standards define how transactions and other
accounting events must be represented in financial statements.
They are made up of a collection of accounting rules. They are made to maintain the financial
industry's reputation and openness, allowing investors and business operators to make wise
financial decisions.
The International Accounting Standards Board is responsible for issuing and maintaining IFRS
standards, which were developed to establish a common language for financial statements that
can be easily understood from company to company and country to country. Over 100 nations
use IFRS as the norm, including the EU and large portions of Asia and South America.
Businesses must maintain and disclose their accounts in accordance with IFRS guidelines. The
objective of the international financial reporting standards, which were developed to establish
a common accounting language, is to make financial statements coherent and consistent across
various industries and nations.
Revenue recognition, income taxes, inventories, fixed assets, business combinations, foreign
exchange rates, and the presentation of financial statements are only a few of the many issues
covered by IFRS.
There are numerous different IFRS standards that you should be aware of. Here are a few areas
where IFRS offers thorough regulations:
1. Statement of Financial Position: IFRS describes the many components and how they
should be recorded and is more popularly known as a balance sheet.
2. Statement of Comprehensive Income: A profit and loss statement and a statement of
other revenue may be included in the statement of comprehensive income, which may
also be presented as a single statement.
3. Statement of Changes in Equity: Also known as a statement of retained earnings, this
report should detail how your company's profits have changed over the course of a
specific financial period.
4. Statement of Cash Flow: This document should present an overview of the financial
transactions that took place in your company during the specified time period, dividing
your cash flow into financing, operations, and investing.
2.6 Benefits of IFRS
Cross-border commercial transactions are now frequent as several companies look for
investment opportunities around the world. This type of internationalism was formerly
inhabited by many nations having disparate accounting standards, which increased the cost,
complexity, and risk of corporate transactions. By guaranteeing that several nations adopt the
same, globally applicable set of accounting rules, IFRS solves this issue.
2.7 Difference between GAAP and IFRS
Different nations may have different standards that are used to set the guidelines for financial
reporting. These requirements are categorised under GAAP in the US (generally accepted
accounting principles). However, the IFRS framework is used to organise accounting rules in
more than 100 nations worldwide.
The primary factor separating the two is the approach. GAAP is a set of rules, but IFRS is based
on principles. In real terms, this means that IFRS leaves more opportunity for interpretation
because it provides considerably less detail than the gap.
GAAP is the benchmark to follow for US-based companies. The Securities and Exchange
Commission (SEC) of the United States could eventually switch to IFRS, nevertheless. The cost
of comparing different multinational businesses may go down if IFRS is widely adopted. It would
2.8 Summary
 Accounting may be a necessary function for deciding, cost planning, and economic
performance measurement, no matter the dimensions of the business.
 Professional accountants follow a group of commonly accepted accounting principles
(GAAP) when preparing financial statements.
 The Financial Accounting Standards Board (FASB) sets accounting rules for public and
personal companies and non-profits within the us.
 The relevant organization, the Governmental Accounting Standards Board (GASB), sets
the rules for state and local governments.
 In recent years, the FASB has worked with the International Accounting Standards Board
(IASB) to establish compatible standards around the world.
 Accounting standards are a general set of principles, standards, and procedures that
define the basis of financial accounting policies and practices.
 Accounting standards apply to the overall financial position of a company, including
assets, owners, income, expenses and shareholders' equity.
 Banks, investors and regulators rely on accounting standards to ensure that information
about a particular entity is appropriate and accurate.
 International Accounting Standards were replaced by International Financial Reporting
Standards (IFRS) in 2001
 Currently, the United States, Japan and China are the only major capital markets with no
IFRS obligations.
 Since 2002, US GAAP has been working with the Financial Accounting Standards Board
to improve and integrate US GAAP and IFRS
 IFRS is a set of international accounting standards that specify how certain types of
transactions and other events are reported in financial statements.
2.9 Keywords
 FASB- The Financial Accounting Standards Board (FASB) sets accounting rules for public
and personal companies and non-profits within the us.
  IFRS- International Financial Reporting Standards (IFRS) standards define how
transactions and other accounting events must be represented in financial statements.
 GAAP- Generally Accepted Accounting Principles (GAAP) work to make financial
statements consistent and comparable. It is clear that GAAP allows a wide range of
alternative accounting methods in many different places for the same item. For
instance, various stock valuation techniques produce various financial statement results.

2.10 Self-Assessment Questions

1. What are the international accounting standards?
2. What are the main functions of IASB?
3. Define accounting standards. What are the objectives of accounting standards?
4. What are the advantages and disadvantages of accounting standards?
5. Write a note on the development of accounting standards in India
6. What are the objectives and functions of ASB?
7. Discuss the role of IASB in developing IFRS
8. What are the functions of FASB?
9. What is the role of FASB in developing accounting standards and GAAPs?
10. Define IFRS. What are the features of IFRSs?
2.11 References
1. Deepak Sehgal, Financial Accounting – Vikash Publication
2. Horngren, Introduction to Financial Accounting, Pearson Education.
3. Monga, J.R. Financial Accounting: Concepts and Applications. Mayoor Paper Backs, New
Delhi.
4. Shukla, M.C., T.S. Grewal and S.C. Gupta. Advanced Accounts. Vol.-I. S. Chand & Co.,
New Delhi.