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
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/assertions
The standards are applicable to general purpose financial statements and other financial reporting, subject to attest function, issued by Applicability • corporate or co-operative or non-corporate • commercial, industrial or business enterprises whether profit oriented or not • charitable or religious organisations, if any proportion (howsoever small) of their activities is commercial, industrial or business in nature • financial statements prepared on cash basis Mandatory documents on accounting Purpose • 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 • In the event of any deviation from a mandatory standard the auditor is required to make adequate disclosure in his report Reporting
Auditor’s duty in relation to a mandatory accounting standard in case of companies Ascertain accounting policy followed and disclosure made by the enterprise Is accounting policy as per standard? Is disclosure as per standard? No No Make negative statement under section 227(3)(d) Make negative statement under section 227(3)(d) Yes Make positive statement under section 227(3)(d) 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
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 !!
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 forCOMPANIESfor accounting periods commencing on or after 7 December 2006
Applicability ICAI RULES • The Rules stipulate onlytwocategories – • 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.
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
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.
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 ?
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
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)
General Purpose Financial Statements This would include Balance Sheet , P&L 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”
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.
Relaxations/Exemptions available to SMCs AS 3, Cash flow statements AS 17, Segment reporting Full exemption AS 18, Related Party Disclosures AS 21, AS 23, AS 25, AS 27 AS 28, Impairment of assets AS 20, Earnings per share Limited exemptions AS 29, Provisions, contingent liabilities and contingent assets AS 19, Leases
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? ICAI’s existing standards, unless ICAI decides to announce that such enterprises should also follow Government notified standards
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
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 company’s securities
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
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 ?
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.