AS 28

1
Compliance with Accounting Standards
Presented by CA. Rajeev Bansal ACA,
D.I.S.A.(ICA) B. Com. M/s Rajeev Lakshmi Bansal
Co. Chartered Accountants
2
Rationale behind Accounting Standards

• Measurements are within a conceptual framework
  which emphasises prudence, going concern, cost
  (not current value), accrual, substance over
  form, consistency and materiality
• Test each auditing issue for its capacity for
  adding credibility to given propositions/assertion
  s

3
Mandatory documents on accounting

• The standards describe the
• accounting principles and
• methods of applying these principles in the
  preparation and presentation of financial
  statements
• so that they give a true and fair view

Purpose

• In the event of any deviation from a mandatory
  standard the auditor is required to make adequate
  disclosure in his report

Reporting
4
Auditors duty in relation to a mandatory
accounting standard in case of companies
Ascertain accounting policy followed and
disclosure made by the enterprise
Is disclosure as per standard?
Is accounting policy as per standard?
No
No
Make negative statement under section 227(3)(d)
Make negative statement under section 227(3)(d)
Make positive statement under section 227(3)(d)
Yes
Yes
Is there a violation of legal requirements?
Yes
No
Is effect of deviation material?
Yes
Is true and fair view affected?
Yes
Qualify the audit report
No
No further action required
No
5
Standard setting

• ICAI took up the task of laying down accounting
  standards in 1977
• accounting standards issued by the ICAI were
  however mandatory only for its members
• Companies (Amendment) Act, 1999 gave recognition
  to accounting standards thereby making it
  mandatory for companies
• Standards to be formulated by ASB/ICAI Council
• Standards to be prescribed by the Central
  Government in consultation with the National
  Advisory Committee on Accounting Standards (NACAS)

COMPLIANCE WITH ACCOUNTING STANDARDS IS A LEGAL
REQUIREMENT !!
6
Companies (Accounting Standards) Rules, 2006
Central Government, in consultation with NACAS,
has issued the Companies (Accounting Standards)
Rules, 2006 notifying accounting standards 1-7
and 9-29, effective for COMPANIES for accounting
periods commencing on or after 7 December 2006
7
Applicability
ICAI
RULES

• The Rules stipulate only two categories
• Small and Medium Sized Company (SMC) which is
  entitled to certain exemptions and
• (ii) other companies

• ICAI classifies enterprises into three categories
• Level I (large),
• Level II (medium) and
• Level III (small)

Unlike ICAI, no distinction between small and
medium companies
The prescribed standards are mandatory for all
companies except as exempted/relaxed for SMCs.
8
Level II Enterprises

• Enterprises which are not Level I Enterprises but
  fall in any one or more of the following category
  
• All commercial, industrial and business reporting
  enterprises, whose turnover for the immediately
  preceding accounting period on the basis of
  audited financial statements exceeds Rs. 40 lakhs
  but does not exceeds Rs. 50 crore.
• All commercial, industrial and business reporting
  enterprises having borrowings, including public
  deposit, in excess of Rs. 1 crore but not in
  excess of Rs. 10 crore at any time during the
  accounting period
• Holding and subsidiary enterprises of any of the
  above at any time during the accounting period

9
Auditors Duty Mandatory Accounting
Standard

• According to Para 6.1 of the Preface to the
  statement of Accounting Standard (Revised 2004)
• The Accounting Standards will be mandatory from
  the respective date(s) mentioned in the
  Accounting Standard(s). The mandatory status of
  an Accounting Standard implies that while
  discharging their attest functions, it will be
  the duty of the members of the Institute to
  examine whether the Accounting Standard is
  complied with in the presentation of financial
  statements covered by their audit. In the event
  of any deviation from the Accounting Standard, it
  will be their duty to make adequate disclosures
  in their audit reports so that the users of
  financial statements may be aware of such
  deviation.

10
Question - Answer

• Do the Accounting Standard issued by ICAI apply
  in respect of Tax Audit under section 44AB of the
  Income Tax Act, 1961 ?
• Do the Accounting Standard issued by ICAI apply
  to co-operative society ?
• Do the Accounting Standard issued by ICAI apply
  to Charitable entities ?

11
Question AnswerTax - Audit u/s 44AB

• According to Announcement VI of ANNOUNCEMENTS OF
  THE COUNCIL REGARDING STATUS OF VARIOUS DOCUMENTS
  ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS
  OF INDIA
• It is hereby clarify that the mandatory
  Accounting Standard also apply in respect of
  Financial Statements audited under section 44AB
  of the Income Tax Act, 1961. Accordingly, members
  should examine compliance with the mandatory
  Accounting Standard when conducting such audit

12
Question Answer Co-operative Societies

• According to Para 3.3 of the Preface to the
  statement of Accounting Standard (Revised 2004)
• Accounting Standards are designed to apply to the
  general purpose financial statements and other
  financial reporting, which are subject to the
  attest function of the members of the ICAI.
• Accounting Standards apply in respect of any
  enterprise (whether organised in corporate,
  co-operative or other forms) engaged in
  commercial, industrial or business activities,
  irrespective of whether it is profit oriented or
  it is established for charitable or religious
  purposes.
• Further, even if a very small proportion of the
  activities of a co-operative society is
  considered to be commercial, industrial or
  business in nature, then it can not claim
  exemption from the application of Accounting
  Standard (GC 12/2002 issued by ICAI)

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General Purpose Financial Statements

• This would include Balance Sheet , PL account,
  Cash Flow Statement and other statements and
  explanatory notes which form part thereof, issued
  for the use of various stakeholders, government
  and their agencies and the public.
• Thus, it is concluded that accounts prepared
  solely for Tax purpose and/or for use by lenders
  would be considered to be General Purpose
  Financial Statements

14
Question Answer Charitable Entities

• No, Accounting Standard of ICAI do not apply to
  charitable entities. For example, collecting
  donations and distributing them to flood affected
  people
• However, if a charitable entity is also engaged
  in the activities of a commercial, industrial or
  business nature(very small in proportion), then
  the accounting standard would apply to all its
  activities including those which are not
  commercial, industrial or business in nature.

15
Relaxations/Exemptions available to SMCs
AS 3, Cash flow statements
AS 17, Segment reporting
Full exemption
AS 21, AS 23, AS 25, AS 27
AS 18, Related Party Disclosures
AS 28, Impairment of assets
AS 20, Earnings per share
Limited exemptions
AS 19, Leases
AS 29, Provisions, contingent liabilities and
contingent assets
16
Issues to be resolved
What happens if ICAI revises an accounting
standard?
?

• It seems that till such time that the central
  government prescribes the revised standard,
  companies would be required to continue to apply
  the notified (i.e. pre-revised) standard

What standards are applicable to enterprises
other than companies?
?
ICAIs existing standards, unless ICAI decides to
announce that such enterprises should also follow
Government notified standards
17
Issues to be resolved
What happens if ICAI issues an accounting
standard on a topic not covered by any of the
notified accounting standards?
?
The prudent view would be that until an
accounting standard on a new topic issued by ICAI
is prescribed by the Central Government, it will
be deemed to be an accounting standard
18
The four AXIOMS

• Incomplete information creates UNCERTAINTY
• Uncertainty creates RISK for Investors
  Creditors
• Risk makes investors creditors demand a higher
  Rate of Return (ROR)
• Higher ROR means higher cost of capital for the
  company and produces LOWER market values of
  companys securities

19
Quality financial reporting

• More complete information that will reduce
  uncertainty
• Less uncertainty will reduce risk for investors
  and creditors
• Reduced risk makes investors and creditors
  satisfied with a lower Rate of Return (ROR)
• Lower ROR means lower cost of capital for the
  company which produces higher stock market values

20
Query

• ABC Ltd. Was set up in a notified area so that it
  could avail the sales tax deferral benefit, under
  which it would pay sales tax collected to the
  government after 7 years. The sales tax
  collected, which will be paid to the government
  after 7 years, is reflected as unsecured loan in
  the Balance-Sheet or will this borrowing be
  included for the purposes of determining Level 1,
  2 ,3 enterprise
• ?

21
Response

• Though borrowing are not defined, the use of term
  Including Public Deposit in the threshold
  criteria suggests that the amount has to be
  actually borrowed from some entity.
• Therefore, liabilities relating to sales tax
  deferral or provision or creditors, etc would not
  be borrowings for the above purposes.

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• Thank you