In ancient times, traders and their groups were duty-bound to satisfy only a small group of investors from among their relatives, friends, and acquaintances about the financial propriety of their businesses.
These days, millions of investors put their money into thousands of companies all over the world, and business organisations are legally bound to prepare financial statements for not only their creditors and investors, but also tax and other government authorities.
The basic objective of accounting standards is to ensure that there are no differences in the approach to accounting and to standardise the presentation of accounts.
Companies follow the general principles of accounting followed internationally, so that it is possible to compare their financial statements, which record various facets of their performance, with those of other companies.
Globally, companies prepare their financial statements under the “Generally Accepted Accounting Principles” (GAAP), International Financial Reporting Standards (IFRS), and other standard rules and procedures followed throughout the world.
History and evolution of accounting standards
The evolution of the International Accounting Standards began in 1966 with a suggestion to set up a worldwide study group.
The next year, the Accountants’ International Study Group was formed, and it began to publish papers on various accounting topics, some of which formed the foundation for accounting standards that came into force later.
In 1973, the International Accounting Standards Committee (IASC) was set up with the objective of developing accounting standards that would be internationally followed.
The IASC issued a series of standards called the International Accounting Standards, named and numbered from IAS 1 to IAS 41 (Agriculture).
In 2001, the International Accounting Standards Board (IASB), formed under the International Financial Reporting Standards (IFRS) Foundation, replaced the IASC.
The IASB announced that it would follow the standards already issued by the IASC, but stated that any new standards would be known as part of a series called the International Financial Reporting Standards, evolved by the IFRS Foundation.
The objective of the IFRS is to develop, in the public interest, a high-quality set of comprehensible, internationally accepted, and enforceable accounting standards.
The IFRS Foundation, an independent, not-for-profit organisation, raises funds from banks and other organisations that desire to have international accounting standards in place in all countries.
The IASB consists of board members who are accounting experts drawn from all over the world, who are well-versed in standards-setting and academic work.
Accounting Standards in India
Recognizing the need to synchronise the various accounting policies and practices, the Institute of Chartered Accountants of India (ICAI) constituted the Accounting Standards Board (ASB) in April 1977.
Accounting standards in India are issued by the ICAI and notified by the Union Ministry of Corporate Affairs. Thirty accounting standards have been issued by the ICAI so far.
At present, “Indian Accounting Standards” (Indian AS), a set of standards evolved under the Companies (Accounting Standards) Rules, 2006, is in force.
Standards in the wake of the IFRS (to be called “Ind AS”) are to be notified by the Ministry of Corporate Affairs and made mandatory for listed companies with a net worth of Rs. 500 crore or more from April 1, 2016.
The standards will be made compulsory for other categories of companies from later deadlines.
Some categories do not have to follow the new standards, and they will continue to follow the Companies (Accounting Standards) Rules, 2006. Companies have been allowed to voluntarily follow the new Ind AS rules from April 1, 2015.
The new accounting standards are expected to improve India’s place in global rankings in corporate governance and transparency in financial reporting.
The standards are evolved with the assistance of the National Advisory Committee on Accounting Standards (NACAs) constituted under Section 210(1) of the Companies Act, 1956.
Sub-Section (3A) of Section 211 of the Companies Act, 1956, requires that the profit/loss accounts and balance sheet of companies should comply with Indian accounting standards.
Important Topics in Accounting
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