CA NITIN GOEL AS BASICS CH-13A

CH
13
• GAAP refer to a common set of accepted accounting principles,
standards, and procedures that business reporting entity must follow
when it prepares and present its financial statements.
Generally
• It’s a combination of authoritative standards (set by policy boards) &
Accepted
the commonly accepted ways of recording & reporting accounting
Accounting
information
Principles
• At international level such authoritative standards are known as
(GAAP)
International Financial Reporting Standards (IFRS) and in India we
have authoritative standards named as AS and IND-AS.

Accounting standards are written policy documents issued by expert

accounting body or by government with the support of other regulatory
bodies [e.g. MCA issuing AS for companies in consultation with NFRA
Meaning of AS
(National Financial Reporting Authority)] covering the aspects of
recognition, measurement, presentation and disclosure of accounting
transactions in the financial statements.

➢ Recognition of events and transactions in the financial statements.

➢ Measurement of these transactions and events.
➢ Presentation of these transactions & events in financial statements in
a manner that is meaningful and understandable to the reader.
Issues dealt by ➢ The disclosure requirements which should be there to enable public
AS at large, the stakeholders and potential investors in particular, to get
an insight in to what these financial statements are trying to reflect
and thereby facilitating them to take prudent and informed business
decisions.

➢ The primary objective is to establish standards which have to be

complied with to ensure that the financial statements are prepared in
accordance with generally accepted accounting principles.
➢ To provide standard for the diverse accounting policies and principles.
Objectives
➢ To eliminate the non-comparability of financial statements.
➢ To increase/improve the reliability of the financial statements.
➢ To provide standards which are transparent for users.

➢ Standardization of alternative accounting treatment (Reduce/

eliminate the confusing variations in the accounting treatments used
to prepare the financial statements)
Benefits
➢ Requirement for additional disclosures. (disclosures which are not
statutorily required)
➢ Comparability of financial statements.

➢ Difficulties in making choice between different treatments.

➢ Lack of flexibilities
Limitations
➢ Restricted scope (accounting standards cannot override the statute)

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ICAI has constituted the Accounting Standard Board (ASB) in 1977.

ASB is responsible for setting accounting standards. Although ASB is a
Standards body constituted by council of ICAI, it is independent in the formulation
setting process of accounting standards and council of ICAI is not empowered to make
any modifications in the draft AS formulated by ASB without consulting
with the ASB.

➢ Identification of area (where standardization is required)

➢ Constitution of study groups (for research)
➢ Preparation of draft and its circulation
➢ Ascertainment of views of different bodies on draft (like SEBI, CBDT,
C&AG)
Process
➢ Finalization of exposure draft
➢ Comments reviewed on exposure draft (public comments)
➢ Modification of the draft
➢ Issue of AS
• For Non Corporate Entities by ICAI
• For Corporate Entities by Central Government of India

NEED FOR CONVERGENCE TOWARDS GLOBAL STANDARDS

Each country has its own set of rules and regulations for accounting and financial reporting.
Therefore, when an enterprise decides to raise capital from the markets other than the
country in which it is located, the rules and regulations of that other country will apply and
this in turn will require that the enterprise is in a position to understand the differences
between the rules governing financial reporting in the foreign country as compared to its own
country of origin.
International analysts and investors would like to compare financial statements based on
similar accounting standards, and this has led to the growing support for an internationally
accepted set of accounting standards for cross-border filings.

SIGNIFICANCE:
➢ Global Standards facilitate cross border flow of money, global listing in different stock
markets and comparability of financial statements.
➢ The convergence of financial reporting and Accounting Standards is a valuable process
that contributes to the free flow of global investment and achieves substantial benefits for
all capital market stakeholders.
➢ It improves the ability of investors to compare investments on a global basis and, thus,
lower their risk of errors of judgment.
➢ It facilitates accounting and reporting for companies with global operations and eliminates
some costly requirements say reinstatement of financial statements

INTERNATIONAL FINANCIAL REPORTING STANDARDS AS GLOBAL STANDARDS

The term International Financial Reporting Standards (IFRS) comprises IFRS issued by IASB;
IAS issued by International Accounting Standards Committee (IASC); Interpretations issued
by the Standard Interpretations Committee (SIC) and the IFRS Interpretations Committee of
the IASB.
International Financial Reporting Standards (IFRSs) are considered a "principles based" set
of standards. In fact, they establish broad rules rather than dictating specific treatments.

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BECOMING IFRS COMPLIANT

Any country can become IFRS compliant either by adoption process or by convergence
process.
Adoption would mean that the country sets a specific timetable when specific entities would
be required to use IFRS as issued by the IASB.
Convergence means that the country will develop high quality, compatible accounting
standards over time. Convergence means alignment of the standards of different standard
setters with a certain rate of compromise, by adopting the requirements of the standards
either fully or partially. Indian Accounting Standards are almost similar to IFRS but with few
carve outs so as to make them suitable for Indian Environment.

Convergence with IFRS will result in following benefits:

• Improves investor confidence across the world with transparency and comparability
• Improves inter-unit/ inter-firm/inter-industry comparison
• Group consolidation will be easy with same standard by all companies in group
irrespective of their global location.
• Acceptability of financial statements stock exchanges across the globe, which will
facilitate entry of any Indian company to any stock exchange.

ISSUE OF IND AS
The Government of India in consultation with the ICAI decided to converge and not to adopt
IFRS issued by the IASB. The decision of convergence rather than adoption was taken after
the detailed analysis of IFRS requirements and extensive discussion with various
stakeholders.
Accordingly, while formulating IFRS converged Indian Accounting Standards (Ind AS), efforts
have been made to keep these Standards, as far as possible, in line with the corresponding
IAS/IFRS and departures have been made where considered absolutely essential.

Indian Accounting Standards (Ind AS) are IFRS converged standards issued by the Central
Government of India under the supervision and control of Accounting Standards Board (ASB)
of ICAI and in consultation with NFRA. NFRA recommends these standards to the MCA and
MCA has to spell out the AS applicable for companies in India.
Ind AS are named and numbered in the same way as the corresponding International Financial
Reporting Standards (IFRS).

In July 2014, the Finance Minister of India at that time, Shri Arun Jaitely ji, in his Budget
Speech, announced an urgency to converge the existing accounting standards with the
International Financial Reporting Standards (IFRS) through adoption of the new Indian
Accounting Standards (Ind AS) by the Indian companies
The Ministry of Corporate Affairs (MCA) has issued the Companies (Indian Accounting
Standards) Rules, 2015 vide Notification dated February 16, 2015 covering the revised roadmap
of implementation of Ind AS for companies other than Banking companies, Insurance
Companies and NBFCs and Indian Accounting Standards (Ind AS).
As per the Notification, Indian Accounting Standards (Ind AS) converged with International
Financial Reporting Standards (IFRS) shall be implemented on voluntary basis from 1st April,
2015 and mandatorily from 1st April, 2016. Separate roadmaps have been prescribed for
implementation of Ind AS to Banking, Insurance companies and NBFCs respectively.

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CARVE OUTS/INS IN IND AS

➢ Various terminology related changes have been made to make it consistent with the
terminology used in law, e.g., ‘statement of profit and loss’ in place of ‘statement of
comprehensive income’ and ‘balance sheet’ in place of ‘statement of financial position’.
➢ Removal of options in accounting principles and practices in Ind AS vis-a-vis IFRS, have
been made to maintain consistency and comparability of the financial statements to be
prepared by following Ind AS. However, these changes will not result into carve outs.
➢ Certain changes have been made considering the economic environment of the country,
which is different as compared to the economic environment presumed to be in existence
by IFRS. These differences are due to differences in economic conditions prevailing in India.
These differences which are in deviation to the accounting principles and practices stated
in IFRS, are commonly known as ‘Carve-outs’.
➢ Additional guidance given in Ind AS over and above what is given in IFRS, is termed as
‘Carve in’

APPLICABILITY / CLASSIFICATION
Enterprises to which Accounting Standards apply
Accounting Standards apply in respect of any enterprise (whether organized in corporate,
cooperative or other forms) engaged in commercial, industrial or business activities, whether
or not profit oriented and even if established for charitable or religious purposes.
AS however, do not apply to enterprises solely carrying on the activities, which are not
of commercial, industrial or business nature, (e.g., an activity of collecting donations and
giving them to flood affected people). Exclusion of an enterprise from the applicability of the
AS would be permissible only if no part of the activity of such enterprise is commercial,
industrial or business in nature.
Even if a very small proportion of activities of an enterprise were considered to be
commercial, industrial or business in nature, the AS would apply to all its activities including
those, which are not commercial, industrial or business in nature

LEGAL PROVISION: COMPANIES ACT 2013

➢ Section 129 (1) of the Companies Act, 2013 requires companies to present their financial
statements in accordance with the accounting standards notified under Section 133 of the
Companies Act, 2013.
➢ Also, the auditor is required by Section 143(3)(e) to report whether, in his opinion, the
financial statements of the company audited, comply with the accounting standards
referred to in Section 133 of the Companies Act, 2013.
➢ As per Section 133 of the Companies Act, 2013, the Central Government may prescribe the
standards of accounting or any addendum thereto, as recommended by the ICAI in
consultation with and after examination of the recommendations made by the National
Financial Reporting Authority (NFRA)

Criteria for classification of Non-company entities by ICAI

For the purpose of applicability of Accounting Standards, Non-company entities are classified
into four categories, viz., Level I, Level II, Level III and Level IV.
Level I entities are large size entities, Level II entities are medium size entities, Level III
entities are small size entities and Level IV entities are micro entities. Level IV, Level III and
Level II entities are referred to as Micro, Small and Medium size entities (MSMEs).

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Level Criterion
Level I Non-company entities which fall in any one or more of the following categories,
Entities at the end of the relevant accounting period, are classified as Level I entities:
(i) Entities whose securities are listed or are in the process of listing on any
stock exchange, whether in India or outside India.
(ii) Banks (including co-operative banks), financial institutions or entities
carrying on insurance business.
(iii) All entities engaged in commercial, industrial or business activities, whose
turnover (excluding other income) exceeds ₹ 250 crore in the immediately
preceding accounting year.
(iv) All entities engaged in commercial, industrial or business activities having
borrowings (including public deposits) in excess of ₹ 50 crore at any time
during the immediately preceding accounting year.
(v) Holding and subsidiary entities of any one of the above.
Level II Non-company entities which are not Level I entities but fall in any one or more
Entities of the following categories are classified as Level II entities:
(i) All entities engaged in commercial, industrial or business activities, whose
turnover (excluding other income) exceeds ₹ 50 crore but does not exceed
₹ 250 crore in the immediately preceding accounting year.
(ii) All entities engaged in commercial, industrial or business activities having
borrowings (including public deposits) in excess of ₹ 10 crore but not in
excess of ₹ 50 crore at any time during the immediately preceding
accounting year.
(iii) Holding and subsidiary entities of any one of the above.
Level III Non-company entities which are not Level I and Level II entities but fall in any
Entities one or more of the following categories are classified as Level III entities:
(i) All entities engaged in commercial, industrial or business activities, whose
turnover (excluding other income) exceeds ₹ 10 crore but does not exceed ₹
50 crore in the immediately preceding accounting year.
(ii) All entities engaged in commercial, industrial or business activities having
borrowings (including public deposits) in excess of ₹ 2 crore but not in
excess of ₹ 10 crore at any time during the immediately preceding
accounting year.
(iii) Holding and subsidiary entities of any one of the above.

Level IV Non-company entities which are not covered under Level I, Level II and Level III
Entities are considered as Level IV entities
Additional Requirements:
(1) MSME which avails the exemptions or relaxations given to it shall disclose (by way of a
note to its financial statements) the fact that it is an MSME, the Level of MSME and that it
has complied with the Accounting Standards insofar as they are applicable to entities
falling in Level II or Level III or Level IV, as the case may be.
(2) Where an entity, being covered in Level II or Level III or Level IV, had qualified for any
exemption or relaxation previously but no longer qualifies for the relevant exemption or
relaxation in the current accounting period, the relevant standards or requirements
become applicable from the current period and the figures for the corresponding period
of the previous accounting period need not be revised merely by reason of its having
ceased to be covered in Level II or Level III or Level IV, as the case may be. The fact that
the entity was covered in Level II or Level III or Level IV, as the case may be, in the
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previous period and it had availed of the exemptions or relaxations available to that Level
of entities shall be disclosed in the notes to the financial statements. The fact that
previous period figures have not been revised shall also be disclosed in the notes to the
financial statements.
(3) Where an entity has been covered in Level I & subsequently, ceases to be so covered and
gets covered in Level II or Level III or Level IV, the entity will not qualify for exemption/
relaxation available to that Level, until the entity ceases to be covered in Level I for 2
consecutive years. Similar is the case in respect of an entity, which has been covered in
Level II or Level III and subsequently, gets covered under Level III or Level IV.
(4) If an entity covered in Level II or Level III or Level IV opts not to avail of the exemptions
or relaxations available to that Level of entities in respect of any but not all of the
Accounting Standards, it shall disclose the Standard(s) in respect of which it has availed
the exemption or relaxation.
(5) If an entity covered in Level II or Level III or Level IV opts not to avail any one or more of
the exemptions or relaxations available to that Level of entities, it shall comply with the
relevant requirements of the Accounting Standard.
(6) An entity covered in Level II or Level III or Level IV may opt for availing certain exemptions
or relaxations from compliance with the requirements prescribed in an Accounting
Standard: Provided that such a partial exemption or relaxation and disclosure shall not
be permitted to mislead any person or public.

EXEMPTIONS or RELAXATIONS FOR NON-COMPANY ENTITIES FALLING IN

LEVEL II / LEVEL III AND LEVEL IV

Level II Level III Level IV

AS not Applicable AS 3, AS 17, AS AS 3, AS 17, AS 18, AS 3, AS 14, AS 17, AS 18,
20, AS 21, AS 23, AS 20, AS 21, AS 23, AS 20, AS 21, AS 23,
AS 25, AS 27 AS 24, AS 25, AS 27 AS 24, AS 25, AS 27, AS 28
AS applicable with AS 19, AS 28, AS AS 10, AS 11, AS 19, AS 10, AS 11, AS 13,
Disclosure 29 AS 28, AS 29 AS 19, AS 26, AS 29
Exemptions
Applicable with AS 15 AS 15 AS 15, AS 22
Exemptions

LIST OF ACCOUNTING STANDARDS (AS) IN INDIA

AS AS TITLE AS AS TITLE
1 Disclosure of Accounting Policies 16 Borrowing Costs
2 Valuation of Inventories 17 Segment Reporting
3 Cash Flow Statements 18 Related Party Disclosures
4 Events Occurring after Bal. Sheet Date 19 Leases
5 Net P/L for the period, Prior Period 20 Earnings Per Share
Items & Changes in A/cing Policies
6 Depreciation Accounting -Withdrawn- 21 Consolidated Financial Statements
7 Construction Contracts 22 Accounting for Taxes on Income
8 -Withdrawn- 23 Accounting for Investment in
Associates in CFS

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9 Revenue Recognition 24 Discontinuing Operations

10 Property, Plant & Equipment 25 Interims Financial Reporting
11 Effects of changes in Foreign Exchange 26 Intangible assets
Rates
12 Accounting for Government Grants 27 Financial Reporting of Interest in
Joint Ventures
13 Accounting for Investments 28 Impairment of assets
14 Accounting for Amalgamation 29 Provisions, Contingent Liabilities and
15 Employee Benefits Contingent Assets

CRITERIA FOR CLASSIFICATION OF COMPANIES AS PER

COMPANIES (ACCOUNTING STANDARDS) RULES, 2021

Company Criterion
SMC Small and Medium-Sized Company (SMC) as defined in Clause 2(e) of the
Companies (Accounting Standards) Rules, 2021:
“Small and Medium Sized Company” (SMC) means, a company-
(i) whose equity or debt securities are not listed or are not in the process of
listing on any stock exchange, whether in India or outside India;
(ii) which is not a bank, financial institution or an insurance company;
(iii) whose turnover (excluding other income) does not exceed ₹ 250 crore in
the immediately preceding accounting year;
(iv) which does not have borrowings (including public deposits) in excess of ₹
50 crore at any time during immediately preceding accounting year; and
(v) which is not a holding or subsidiary company of a company which is not a
small and medium-sized company.
Explanation: For the purposes of clause 2(e), a company shall qualify as a
Small and Medium Sized Company, if the conditions mentioned therein are
satisfied as at the end of the relevant accounting period

Non- Companies not falling within the definition of SMC are considered as Non- SMCs.
SMCs
Same Additional requirements for Companies as was for non Companies

AS not applicable to SMC’s in their entirety

AS 3 Cash Flow Statements
AS 17 Segment Reporting
AS 21* Consolidated Financial Statements
AS 23* Accounting for Investments in Associates in Consolidated Financial Statements
AS 25* Interim Financial Reporting
AS 27* Financial Reporting of Interests in Joint Ventures
*Applicable to only certain Non SMC’s
AS in respect of which relaxations from certain requirements given to SMCs
AS 15 Employee Benefits
AS 19 Leases
AS 20 Earnings Per Share
AS 28 Impairment of Assets
AS 29 Provisions, Contingent Liabilities and Contingent Assets
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Question 1
M/s Omega & Co. (a partnership firm), had a turnover of ₹ 1.25 crores (excluding other income)
and borrowings of ₹ 0.95 crores in the previous year. It wants to avail the exemptions
available in application of Accounting Standards to non-corporate entities for the year ended
31.3.2021. Advise the management of M/s Omega & Co in respect of the exemptions of
provisions of ASs, as per the directive issued by the ICAI.

Solution
The question deals with the issue of Applicability of Accounting Standards to a noncorporate
entity. For availment of the exemptions, first of all, it has to be seen that M/s Omega & Co.
falls in which level of the non-corporate entities. Its classification will be done on the basis
of the classification of non-corporate entities as prescribed by the ICAI. According to the ICAI,
non-corporate entities can be classified under 4 levels viz Level I, Level II, Level III and Level
IV entities.
Non-corporate entities which meet following criteria are classified as Level IV entities:
(i) All entities engaged in commercial, industrial or business activities, whose turnover
(excluding other income) does not exceed rupees 10 crores in the immediately preceding
accounting year.
(ii) All entities engaged in commercial, industrial or business activities having borrowings
(including public deposits) does not exceed ₹ 2 crores at any time during immediately
preceding accounting year
(iii) Holding and subsidiary entities of any one of the above.
As the turnover of M/s Omega & Co. is less than ₹ 10 crores and borrowings less than ₹ 2
crores, it falls under Level IV non-corporate entities.
In this case, AS 3, AS 14, AS 17, AS 18, AS 20, AS 21, AS 23, AS 24, AS 25, AS 27 and AS 28 will
not be applicable to M/s Omega & Co. Relaxations from certain requirements in respect of AS
10, AS 11, AS 13, AS 15, AS 19, AS 22, AS 26 and AS 29 are also available to M/s Omega & Co.

Question 2
Comment whether the following Companies can be classified as a Small and Medium Sized
Company (SMC) as per the Companies (Accounting Standards), Rules, 2021:
a) A Pvt. Ltd., a subsidiary of a multinational company listed on London Stock Exchange. It has
a turnover of ₹ 12 crores and borrowings of ₹ 5 crores.
b) B Pvt. Ltd., has a turnover of ₹ 45 crores, other income of ₹ 7 crores & bank borrowings of
₹ 9 crores.

Solution
a) As per the definition of SMC, a company will be a SMC, if it is not holding or subsidiary
company of another company which is not a SMC. Since A Pvt. Ltd., is a subsidiary of
another Company which is listed, on London Stock Exchange (and is therefore not a SMC),
A Pvt. Ltd., cannot be a SMC. The turnover and borrowings are not relevant in this case.
b) As per the definition of SMC, a company will be a SMC if its turnover does not exceed ₹ 250
crores or borrowings do not exceed ₹ 50 crore. For calculating this turnover, other income
is not to be included. Since B Pvt. Ltd., has a turnover of ₹ 45 crores and borrowing of ₹ 9
crores, it will satisfy the definition and can be classified as SMC.

Question 3 (ICAI Study Material)

A company was classified as Non-SMC in 2020-21. In 2021-22 it has been classified as SMC.
The management desires to avail the exemption or relaxations available for SMCs in 2021-22.
However, the accountant of the company does not agree with the same. Comment.
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 CA NITIN GOEL AS BASICS CH-13A

Solution
As per Companies (Accounting Standards) Rules, 2021, an existing company, which was
previously not an SMC and subsequently becomes an SMC, shall not be qualified for
exemption or relaxation in respect of accounting standards available to an SMC until the
company remains an SMC for two consecutive accounting periods. Therefore, the
management of the company cannot avail the exemptions available with the SMCs for the
year ended 31st March, 2022.

Question 4 (ICAI Study Material)

XYZ Ltd., with a turnover of ₹ 50 crores during the previous year and borrowings of ₹ 1 crore
during any time in the previous year, wants to avail the exemptions available in adoption of
Accounting Standards applicable to companies for the year ended 31.3.2021. Advise the
management on the exemptions that are available as per the Companies (AS) Rules, 2021.

Solution
The question deals with the issue of Applicability of Accounting Standards for corporate &
non-corporate.

The companies can be classified under two categories viz SMCs and Non SMCs under the
Companies (AS) Rules, 2021.
Since, XYZ Ltd.’s turnover of ₹ 50 crores does not exceed ₹ 250 crores & borrowings of ₹ 1
crore is less than ₹ 50 crores, it is a small and medium sized company (SMC)
In this case, AS 3, AS 17, AS 21, AS 23, AS 27 will not be applicable to XYZ Ltd. Relaxations from
certain requirements in respect of AS 15, AS 19, AS 20, AS 28 and AS 29 are also available to
XYZ Ltd.

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