TABLE OF CONTENTS

Serial

Title

number

Page
Number
I

Title Page
Declaration

ii

Certificate

iii

Acknowledgement

iv

List of Tables

List of Graphs

Ch.1

INDIAN ACCOUNTING STANDARD

1.1

Introduction

1.2

Meaning

2-3

1.3

Definitions

3-4

1.4

Objective of Accounting Standard

5-6

Ch.2

REVIEW OF LITERATURE

2.1

Introduction.

2.2

Accounting Standard issued by the institute of C.A.

9
9-11

of India.
2.3

Disclose of accounting policies.

11

2.4

Accounting for Government grants.

11

Ch.3

RESEARCH METHODOLOGY

3.1

Earnings per Share.

12-14

3.2

Accounting For taxes on Income.

14-15

3.3

Interim Financial Reporting.

3.4
3.5

Data Collection.
Reserch Methods.

Ch.4

ANALYSIS AND INTERPRETATION OF DATA

15
15
19

Analysis.
4.1

Comliance with Accounting Standards

24-25

4.2

International Management Review.

29-30

4.3

Concluding Remark.

30-31

4.4
Ch.5

31
FINDINGS, SUGGESTION AND
CONCLUSION.

5.1

Findings of the study.

32-34

5.2

Suggestion

34-35

5.3

Conclusion of the study

36

INDIAN ACCOUNTING STANDARDS -

A PERSPECTIVE

1.1 Introduction
The paradigm shift in the economic environment in India during last few years has
led to increasing attention being devoted to accounting standards as a means towards
ensuring potent and transparent financial reporting by corporate. Further, cross-border
raising of huge amount of capital has also generated considerable interest in the generally
accepted accounting principles in advanced countries such as USA. Initiatives taken by
International Organisation Securities Commission (IOSCO) towards propagating
International Accounting Standards (IASs)/ International Financial Reporting Standards
(IFRSs), issued by the International Accounting Standards Board (IASB), as the uniform
language of business to protect the interests of international investors have brought into
focus the IASs/ IFRSs.
The Institute of Chartered Accountants of India, being a premier accounting body in
the country, took upon itself the leadership role by establishing Accounting Standards
Board, more than twenty five years ago, to fall in line with the international and national
expectations. Today, accounting standards in India have come a long way. Presented
hereinafter are some salient features of the accounting standard-setting endeavours in
India.

RATIONALE OF ACCOUNTING STANDARDS

Accounting Standards are formulated with a view to harmonise different accounting
policies and practices in use in a country. The objective of Accounting Standards is,
therefore, to reduce thev accounting alternatives in the preparation of financial statements
within the bounds of rationality, thereby ensuring comparability of financial statements of
different enterprises with a view to provide meaningful information to various users of
financial statements to enable them to make informed economic decisions. The Companies
Act, 1956, as well as many other statutes in India require that the financial statements of an
enterprise should give a true and fair view of its financial position and working results.
This requirement is implicit even in the absence of a specific statutory provision to
this effect. The Accounting Standards are issued with a view to describe the accounting
principles and the methods of applying these principles in the preparation and presentation
of financial statements so that they give a true and fair view. The Accounting Standards not
only prescribe appropriate accounting treatment of complex business transactions but also
foster greater transparency and market discipline. Accounting Standards also helps the
regulatory agencies in benchmarking the accounting accuracy.

International Harmonisation of Accounting Standards

Recognising the need for international harmonisation of accounting standards, in

1973, the International Accounting Standards Committee (IASC) was established. It may be
mentioned here that the IASC has been reconstituted as the International Accounting
Standards Board (IASB). The objectives of IASC included promotion of the International
Accounting Standards for worldwide acceptance and observance so that the accounting
standards in different countries are harmonised. In recent years, need for international
harmonisation of Accounting Standards followed in different countries has grown
considerably as the cross-border transfers of capital

FEATURES OF USEFUL FINANCIAL INFORMATION

CONSISTENCY

CLARITY

FINANCIAL

INFORMATION

ACCURACY

RELIABILITY

RELEVANCE TIMELINESS

1.2 Meaning
The meaning of accounting standards
Accounting as a "language of business" communication the financial
results of an enterprise to various interested parties by means of financial
statmetns which have to exhinit a "true and fair" view of its state of affairs.
Accounting standards which seek to sugest rules and criteria of
accounitng measurements, have to keep the set of rules, social needs, legal
requirments and technological developmetns in view.
Formulation of proper accounting standards, therefore is a vital step in
developing accounting as a business lanuguage.

Accounting is the art of recording transactions in the best manner possible, so as to enable
the reader to arrive at judgments/come to conclusions, and in this regard it is utmost
necessary that there are set guidelines. These guidelines are generally called accounting
policies. The intricacies of accounting policies permitted Companies to alter their
accounting principles for their benefit. This made it impossible to make comparisons. In
order to avoid the above and to have a harmonised accounting principle, Standards
needed to be set by recognised accounting bodies. This paved the way for Accounting
Standards to come into existence.
Accounting Standards in India are issued By the Institute of Chartered Accountanst of India
(ICAI). At present there are 30 Accounting Standards issued by ICAI.

1.3 Definitions
DEFINITION OF 'ACCOUNTING STANDARD'
A principle that guides and standardizes accounting practices. The
Generally Accepted Accounting Principles (GAAP) are a group of
accounting standards that are widely accepted as appropriate to the field
of accounting. Accounting standards are necessary so that financial
statements are meaningful across a wide variety of businesses;
otherwise, the accounting rules of different companies would make
comparative analysis almost impossible.

INVESTOPEDIA EXPLAINS 'ACCOUNTING STANDARD'

An accounting standard is a guideline for financial accounting, such as
how a firm prepares and presents its business income and expense,
assets and liabilities. The Generally Accepted Accounting Principles is
comprised of a large group of individual accounting standards. GAAP
standards apply to financial reporting in the United States and may be
eventually phased out in favor of the International Accounting Standards.

OBJECTIVE OF ACCOUNTING STANDARDS

Objective of Accounting Standards is to standarize the diverse accounting
policies and practices with a view to eliminate to the extent possible the noncomparability of financial statements and the reliability to the financial statements.
The institute of Chatered Accountants of India, recognizing the need to harmonize
the diversre accounting policies and practices, constituted at Accounting Standard
Board (ASB) on 21st April, 1977.

COMPLIANCE WITH ACCOUNTING STANDARDS ISSUED BY

ICAI
Sub Section(3A) to section 211 of Companies Act, 1956 requires that every
Profit/Loss Account and Balance Sheet shall comply with the Accounting Standards.
'Accounting Standards' means the standard of accounting recomended by the ICAI and
prescribed by the Central Government in consultation with the National Advisory
Committee on Accounting Standards(NACAs) constituted under section 210(1) of
companies Act, 1956.

ACCOUNTING STANDARDS ISSUED BY THE INSTITUTE OF

CHATERED ACCOUNTANTS OF INDIA ARE AS BELOW:

Present status of Accounting Standards in India in harmonisation with the
International
Accounting Standards
As indicated earlier, Accounting Standards are formulated on the basis of the
International
Financial Reporting Standards (IFRSs)/ International Accounting Standards (IASs)
issued by the
IASB. Of the 41 IASs issued so far, 29 are at present in force, the remaining standards
have
been withdrawn. Apart from this, 8 IFRSs have also been issued by the IASB.
Corresponding to
the IASs/IFRSs, so far, 30 Indian Accounting Standards on the following subjects have
been
issued:

AS 1 Disclosure of Accounting Policies

AS 2 Valuation of Inventories
AS 3 Cash Flow Statements
AS 4 Contingencies and Events Occurring after the Balance Sheet Date
AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in
Accounting Policies
AS 6 Depreciation Accounting
AS 7 Construction Contracts
AS 8 Accounting for Research and Development (Withdrawn pursuant to
AS 26 becoming mandatory)
AS 9 Revenue Recognition
AS 10 Accounting for Fixed Assets
AS 11 The Effects of Changes in Foreign Exchange Rates
AS 12 Accounting for Government Grants

AS 13 Accounting for Investments

AS 14 Accounting for Amalgamations
AS 15 Employee Benefits
AS 16 Borrowing Costs
AS 17 Segment Reporting
AS 18 Related Party Disclosures
AS 19 Leases
AS 20 Earnings Per Share
AS 21 Consolidated Financial Statements
AS 22 Accounting for Taxes on Income
AS 23 Accounting for Investments in Associates in Consolidated Financial
Statements
AS 24 Discontinuing Operations
AS 25 Interim Financial Reporting
AS 26 Intangible Assets
AS 27 Financial Reporting of Interests in Joint Ventures
AS 28 Impairment of Assets
AS 29 Provisions, Contingent Liabilities and Contingent Assets
AS 30 Financial Instruments: Recognition and Measurement
AS 31 Financial Instruments: Presentation

DISCLOSURE OF ACCOUNTING POLICIES:

Accounting Policies refer to specific accounting principles and the method of applying
those principles adopted by the enterprises in preparation and presentation of the
financial statements
VALUATION OF INVENTORIES:
The objective of this standard is to formulate the method of computation of cost
of inventories / stock, determine the value of closing stock / inventory at which the
inventory is to be shown in balance sheet till it is not sold and recognized as revenue.

CASH FLOW STATEMENTS:

Cash flow statement is additional information to user of financial statement. This
statement exhibits the flow of incoming and outgoing cash. This statement assesses
the ability of the enterprise to generate cash and to utilize the cash. This statement is
one of the tools for assessing the liquidity and solvency of the enterprise.

Contigencies and Events occuring after the balance sheet date:

In preparing financial statement of a particular enterprise, accounting is done by
following accrual basis of accounting and prudent accounting policies to calculate the
profit or loss for the year and to recognize assets and liabilities in balance sheet. While
following the prudent accounting policies, the provision is made for all known liabilities
and losses even for those liabilities / events, which are probable. Professional
judgement is required to classify the likehood of the future events occuring and,
therefore, the question of contingencies and their accounting arises.
Objective of this standard is to prescribe the accounting of contigencies and the events,
which take place after the balance sheet date but before approval of balance sheet by
Board of Directors. The Accounting Standard deals with Contingencies and Events
occuring after the balance sheet date.

Net Profit or Loss for the Period, Prior Period Items and change in Accounting
Policies :
The objective of this accounting standard is to prescribe the criteria for certain
items in the profit and loss account so that comparability of the financial statement can
be enhanced. Profit and loss account being a period statement covers the items of the
income and expenditure of the particular period. This accounting standard also deals
with change in accounting policy, accounting estimates and extraordinary items.

Depreciation Accounting :
It is a measure of wearing out, consumption or other loss of value of a
depreciable asset arising from use, passage of time. Depreciation is nothing but
distribution of total cost of asset over its useful life.

Construction Contracts :
Accounting for long term construction contracts involves question as to when
revenue should be recognized and how to measure the revenue in the books of
contractor. As the period of construction contract is long, work of construction starts in
one year and is completed in another year or after 4-5 years or so. Therefore question
arises how the profit or loss of construction contract by contractor should be
determined. There may be following two ways to determine profit or loss: On year-toyear basis based on percentage of completion or On cpmpletion of the contract.

Revenue Recognition :
The standard explains as to when the revenue should be recognized in profit and
loss account and also states the circumstances in which revenue recognition can be
postponed. Revenue means gross inflow of cash, receivable or other consideration
arising in the course of ordinary activities of an enterprise such as:- The sale of goods,
Rendering of Services, and Use of enterprises resources by other yeilding interest,
dividend and royalties. In other words, revenue is a charge made to customers / clients
for goods supplied and services rendered.

Accounting for Fixed Assets :

It is an asset, which is:- Held with intention of being used for the purpose of
producing or providing goods and services. Not held for sale in the normal course of
business. Expected to be used for more than one accounting period.

The Effects of changes in Foreign Exchange Rates :

Effect of Changes in Foreign Exchange Rate shall be applicable in Respect of
Accounting Period commencing on or after 01-04-2004 and is mandatory in nature.
This accounting Standard applicable to accounting for transaction in Foreign currencies
in translating in the Financial Statement Of foreign operation Integral as well as nonintegral and also accounting for For forward exchange.Effect of Changes in Foreign
Exchange Rate, an enterprises should disclose following aspects:

Amount Exchange Difference included in Net profit or Loss;

Amount accumulated in foreign exchange translation reserve;

Reconciliation of opening and closing balance of Foreign Exchange translation

reserve;

Accounting for Government Grants :

Government Grants are assistance by the Govt. in the form of cash or kind to an
enterprise in return for past or future compliance with certain conditions. Government
assistance, which cannot be valued reasonably, is excluded from Govt. grants, Those
transactions with Governement, which cannot be distinguished from the normal trading
transactions of the enterprise, are not considered as Government grants.

Accounting for Investments :

It is the assets held for earning income by way of dividend, interest and rentals,
for capital appreciation or for other benefits.

Accounting for Amalgamation :

This accounting standard deals with accounting to be made in books of
Transferee company in case of amalgamation. This accounting standard is not
applicable to cases of acquisition of shares when one company acquires / purchases
the share of another company and the acquired company is not dissolved and its
separate entity continues to exist. The standard is applicable when acquired company
is dissolved and separate entity ceased exist and purchasing company continues with
the business of acquired company

Employee Benefits :
Accounting Standard has been revised by ICAI and is applicable in respect of
accounting periods commencing on or after 1st April 2006. The scope of the accounting
standard has been enlarged, to include accounting for short-term employee benefits
and termination benefits.

Borrowing Costs :

Enterprises are borrowing the funds to acquire, build and install the fixed assets
and other assets, these assets take time to make them useable or saleable, therefore
the enterprises incur the interest (cost of borrowing) to acquire and build these assets.
The objective of the Accounting Standard is to prescribe the treatment of borrowing cost
(interest + other cost) in accounting, whether the cost of borrowing should be included
in the cost of assets or not.

Segment Reporting :
An enterprise needs in multiple products/services and operates in different
geographical areas. Multiple products / services and their operations in different
geographical areas are exposed to different risks and returns. Information about
multiple products / services and their operation in different geographical areas are
called segment information. Such information is used to assess the risk and return of
multiple products/services and their operation in different geographical areas.
Disclosure of such information is called segment reporting.

Related Patty Disclosure :

Sometimes business transactions between related parties lose the feature and
character of the arms length transactions. Related party relationship affects the volume
and decision of business of one enterprise for the benefit of the other enterprise. Hence
disclosure of related party transaction is essential for proper understanding of financial
performance and financial position of enterprise.

Accounting for leases :

Lease is an arrangement by which the lesser gives the right to use an asset for
given period of time to the lessee on rent. It involves two parties, a lesser and a lessee
and an asset which is to be leased. The lesser who owns the asset agrees to allow the
lessee to use it for a specified period of time in return of periodic rent payments.

Earnings Per Share :

Earnings per share (EPS) is a financial ratio that gives the information regarding
earning available to each equity share. It is very important financial ratio for assessing
the state of market price of share. This accounting standard gives computational
methodology for the determination and presentation of earning per share, which will
improve the comparison of EPS. The statement is applicable to the enterprise whose
equity shares or potential equity shares are listed in stock exchange.

Consolidated Financial Statements :

The objective of this statement is to present financial statements of a parent and
its subsidiary (is) as a single economic entity. In other words the holding company and

its subsidiary (is) are treated as one entity for the preparation of these consolidated
financial statements. Consolidated profit/loss account and consolidated balance sheet
are prepared for disclosing the total profit/loss of the group and total assets and
liabilities of the group. As per this accounting standard, the consolidated balance sheet
if prepared should be prepared in the manner prescribed by this statement.

Accounting for Taxes on Income :

This accounting standard prescribes the accounting treatment for taxes on
income. Traditionally, amount of tax payable is determined on the profit/loss computed
as per income tax laws. According to this accounting standard, tax on income is
determined on the principle of accrual concept. According to this concept, tax should be
accounted in the period in which corresponding revenue and expenses are accounted.
In simple words tax shall be accounted on accrual basis; not on liability to pay basis.

Accounting for Investments in Associates in consolidated financial statements :

The accounting standard was formulated with the objective to set out the
principles and procedures for recognizing the investment in associates in the
consolidated financial statements of the investor, so that the effect of investment in
associates on the financial position of the group is indicated.

Discontinuing Operations :
The objective of this standard is to establish principles for reporting information
about discontinuing operations. This standard covers "discontinuing operations" rather
than "discontinued operation". The focus of the disclosure of the Information is about
the operations which the enterprise plans to discontinue rather than disclosing on the
operations which are already discontinued. However, the disclosure about discontinued
operation is also covered by this standard.

Interim Financial Reporting (IFR) :

Interim financial reporting is the reporting for periods of less than a year generally
for a period of 3 months. As per clause 41 of listing agreement the companies are
required to publish the financial results on a quarterly basis.

Intangible Assets :
An Intangible Asset is an Identifiable non-monetary Asset without physical
substance held for use in the production or supplying of goods or services for rentals to
others or for administrative purpose

Financial Reporting of Interest in joint ventures :

Joint Venture is defined as a contractual arrangement whereby two or more
parties carry on an economic activity under 'joint control'. Control is the power to
govern the financial and operating policies of an economic activity so as to obtain
benefit from it. 'Joint control' is the contractually agreed sharing of control over
economic activity.

Impairment of Assets :
The dictionary meaning of 'impairment of asset' is weakening in value of asset. In
other words when the value of asset decreases, it may be called impairment of an
asset. As per AS-28 asset is said to be impaired when carrying amount of asset is more
than its recoverable amount.

Provisions, Contingent Liabilities And Contingent Assets :

Objective of this standard is to prescribe the accounting for Provisions,
Contingent Liabilities, Contingent Assets, and Provision for restructuring cost.
Provision: It is a liability, which can be measured only by using a substantial degree of
estimation.
Liability: A liability is present obligation of the enterprise arising from past events the
settlement of which is expected to result in an outflow from the enterprise of resources
embodying economic benefits.

Financial Instrument:
Recognition and Measurement, issued by The Council of the Institute of
Chartered Accountants of India, comes into effect in respect of Accounting periods
commencing on or after 1-4-2009 and will be recommendatory in nature for An initial
period of two years. This Accounting Standard will become mandatory in respect of
Accounting periods commencing on or after 1-4-2011 for all commercial, industrial and
business Entities except to a Small and Medium-sized Entity. The objective of this
Standard is to establish principles for recognizing and measuring Financial assets,
financial liabilities and some contracts to buy or sell non-financial items. Requirements
for presenting information about financial instruments are in Accounting Standard.

Financial Instrument: presentation :

The objective of this Standard is to establish principles for presenting financial
instruments as liabilities or equity and for offsetting financial assets and financial
liabilities. It applies to the classification of financial instruments, from the perspective of
the issuer, into financial assets, financial liabilities and equity instruments; the

classification of related interest, dividends, losses and gains; and the circumstances in
which financial assets and financial liabilities should be offset. The principles in this
Standard complement the principles for recognizing and measuring financial assets and
financial liabilities in Accounting Standard Financial Instruments:

Financial Instruments, Disclosures And Limited Revision To Accounting

Standards:
The objective of this Standard is to require entities to provide disclosures in their
financial statements that enable users to evaluate:

the significance of financial instruments for the entitys financial position and
performance; and

The nature and extent of risks arising from financial instruments to which the
entity is exposed during the period and at the reporting date, and how the entity
manages those risks.

COMPLIANCE WITH ACCOUNTING STANDARDS

Accounting Standards issued by the ICAI have legal recognition through the Companies
Act,
1956, whereby every company is required to comply with the Accounting Standards and
the
statutory auditors of every company are required to report whether the Accounting
Standards
Have been complied with or not. Also, the Insurance Regulatory and Development
Authority
(IRDA) (Preparation of Financial Statements and Auditors Report of Insurance
Companies)
Regulations, 2000 requires insurance companies to follow the Accounting Standards
issued by
The ICAI. The Securities and Exchange Board of India (SEBI) and the Reserve Bank of

India
Also require compliance with the Accounting Standards issued by the ICAI from time to
time.
Section 211 of the Companies Act, 1956, deals with the form and contents of balance
sheet and
Profit and loss account. The Companies (Amendment) Act, 1999 has inserted new subsections
3A, 3B and 3C to Section 211, with a view to ensure that the financial statements are
prepared
In accordance with the Accounting Standards. The new sub-sections as inserted are
reproduced
below:
Section 211 (3A): Every profit and loss account and balance sheet of the company
shall
comply with the accounting standards
Section 211 (3B): Where the profit and loss account and the balance sheet of the
company do
not comply with the accounting standards, such companies shall disclose in its profit
and loss
account and balance sheet, the following, namely:a) the deviation from the accounting standards;
b) the reasons for such deviation; and
c) the financial effect, if any, arising due to such deviation
Section 211 (3C): For the purposes of this section, the expression accounting
standards
means the standards of accounting recommended by the Institute of Chartered
Accountants of
India, constituted under the Chartered Accountants Act, 1949 (38 of 1949), as may be
prescribed by the Central Government in consultation with the National Advisory
Committee on
Accounting Standards established under sub- section (1) of section 210A:

Provided that the standards of accounting specified by the Institute of Chartered

Accountants of India shall be deemed to be the Accounting Standards until the
accounting
Standards are prescribed by the Central Government under this sub-section.
5
It may also be mentioned that the National Advisory Committee on Accounting
Standards
NACAS) has been constituted under section 210A as referred to under section 211 (3C)
to
advise the Central Government on formulation and laying down of the accounting
standards for
Adoption by companies or class of companies. It is of significance to note that on the
recommendation of NACAS, the Ministry of Company Affairs, has issued a Notification
dated 7th
December, 2006, whereby it has prescribed Accounting Standards 1 to 7 and 9 to 29,

as
recommended by the Institute of Chartered Accountants of India, which are included in
the said
Notification. As per the Notification, the Accounting Standards shall come into effect in
respect
of accounting periods commencing on or after the publication of these Accounting
Standards,
i.e., 7th December, 2006. Specific relaxations are given to particular kinds of
companies, termed
As Small and Medium Sized Companies, depending upon their size and nature.
The above legal provisions have cast a duty upon the management to prepare the
financial
Statements in accordance with the accounting standards. The corresponding provision
to report
on the compliance of accounting standards has been inserted under section 227 of the
Companies Act, 1956, thereby casting a duty upon the auditor of the company to report
on such
Compliance. A new clause (d) under sub-section 3 of Section 227 of the Companies
Act, 1956 is
read as under:
whether, in his opinion, the profit and loss account and balance sheet comply with the
accounting standards referred to in sub-section (3C) of section 211
As far as the reporting of compliance with the Accounting Standards by the
management is
concerned, clause (I) under the new sub-section 2AA of Section 217 of the Companies
Act,
1956, (inserted by the Companies Amendment Act, 2000) prescribes that the Boards
report
should include a Directors Responsibility Statement indicating therein that in the
preparation of
the annual accounts, the applicable accounting standards had been followed along with
proper
Explanation relating to material departures.

The conceptual frameworks of accounting

How can the credibility and usefulness of accounting and financial information
be ensured? Accounting
Operates within a framework. This framework is constantly changing and
evolving as new problems
Are encountered, as new practices and techniques are developed, and the
objectives of users of
Financial information is modified and revised.
The search for a definitive conceptual framework, a theoretical accounting
model, which may deal
With any new accounting problem that may arise, has resulted in many
conceptual frameworks having
Been developed in a number of countries worldwide. The basic assumption for
these conceptual
Frameworks are that financial statements must be useful. The general
structure of conceptual frameworks
Deals with the following six questions:
1. What is the purpose of financial statement reporting?
2. Who are the main users of accounting and financial information?
3. What type of financial statements will meet the needs of these users?
4. What type of information should be included in financial statements to satisfy
these needs?
5. How should items included in financial statements be defined?
6. How should items included in financial statements be recorded and
measured?
Figure 1.1
The Statement of Principles (Sop)
In 1989 the International Accounting Standards Board (IASB) issued a
conceptual framework
That largely reflected the conceptual framework of the Financial Accounting
Standards Board of the
USA issued in 1985. This was based on the ideas and proposals made by the
accounting profession
Since the 1970s in both the USA and UK. In 1999 the Accounting Standards
Board (ASB) in the

Progress check 1.1

What is meant by a conceptual framework of accounting?
The Statement of Principles (SOP)
The 1975 Corporate Report was the first UK attempt at a conceptual framework.
This, together
With the 1973 True blood Report published in the USA, provided the basis for
the conceptual framework
Issued by the IASB in 1989, referred to in the previous section. It was followed
by the publication
Of the SOP by the ASB in 1999. The SOP is a basic structure for determining
objectives,
In which there is a thread from the theory to the practical application of
accounting standards to
Transactions that are reported in published accounts. The SOP is not an
accounting standard and
Its use is not mandatory, but it is a statement of guidelines; it is, by virtue of the
subject, constantly
In need of revision.

The SOP identifies the main users of financial information as:

Investors
Lenders
Employees
Suppliers
Customers
Government
The general public.

The SOP focuses on the interests of investors and assumes

that each of the other users of financial
Information is interested in or concerned about the same issues as investors.
The sop consists of eight chapters that deal with the following topics:

1. The objectives of financial statements, which are fundamentally to provide

information that is
Useful for the users of that information.
2. Identification of the entities that are required to provide financial statement
reporting by virtue of
The demand for the information included in those statements.
3. The qualitative characteristics required to make financial information useful
to users:
Materiality (inclusion of information that is not material may distort the
usefulness of other
Information)
Relevance
Reliability
Comparability (enabling the identification and evaluation of differences and
similarities)
Comprehensibility.
4. The main elements included in the financial statements the building
blocks of accounting such
As assets and liabilities.
6
5. When transactions should be recognized in financial statements.
6. How assets and liabilities should be measured.
7. How financial statements should be presented for clear and effective
communication.
8. The accounting by an entity in its financial statements for interests in other
entities.
The UK SOP can be seen to be a very general outline of principles relating to the
reporting of financial
Information. The SOP includes some of the basic concepts that provide the
foundations for the
Preparation of financial statements. These accounting concepts will be
considered in more detail in
The next section.

Accounting concepts are the principles underpinning the preparation of

accounting information
Relating to the ethical rules, boundary rules and recording and measurement
rules of accounting.
Ethical rules, or principles, are to do with limiting the amount of judgment (or
indeed
Creativity) that may be used in the reporting of financial information. Boundary
rules are to do
With which types of data, and the amounts of each, that should be held by
organizations, and
Which elements of financial information should be reported? Recording and
measurement rules
Of accounting relate to how the different types of data should be recorded and
measured by the
Organization.
Fundamental accounting concepts are the broad, basic assumptions, which
underlie the periodic
Financial accounts of business enterprises. The five most important concepts,
which are discussed in
FRS 18, Accounting Policies, is as follows.

The prudence concept

Prudence means being careful or cautious. The prudence concept is an ethical
concept that is based
On the principle that revenue and profits are not anticipated, but are included in
the income statement
Only when realized in the form of either cash or other assets, the ultimate cash
realization of
Which can be assessed with reasonable certainty? Provision must be made for
all known liabilities
And expenses, whether the amount of these is known with certainty or is a best
estimate in the light
Of information available, and for losses arising from specific commitments,
rather than just guesses.
Therefore, companies should record all losses as soon as they are known, but
should record profits
Only when they have actually been achieved in cash or other assets.
The consistency concept
The consistency concept is an ethical rule that is based on the principle that
there is uniformity of

Accounting treatment of like items within each accounting period and from one
period to the next.
However, as we will see in Chapter 3, judgment may be exercised as to the
application of accounting
Rules to the preparation of financial statements. For example, a company may
choose from a variety
Of methods to calculate the depreciation of its machinery and equipment, or
how to value its inventories.
Until recently, once a particular approach had been adopted by a company for
one accounting
period then this approach should normally have been adopted in all future
accounting periods, unless
there were compelling reasons to change. The ASB now prefers the approaches
adopted by companies
to be revised by them, and the ASB encourages their change, if those changes
result in showing
a truer and fairer picture. If companies do change their approaches then they
have to indicate this in
their annual reports and accounts.

The going concern concept

The going concern concept is a boundary rule that assumes that the entity
will continue in operational
existence for the foreseeable future. This is important because it allows the
original, historical
costs of assets to continue to be used in the balance sheet on the basis of their
being able to generate
future income. If the entity was expected to cease functioning then such assets
would be worth only
what they would be expected to realise if they were sold off separately (their
break-up values) and
therefore usually considerably less.
The accruals concept
The accruals concept (or the matching concept) is a recording and
measurement rule that is
based on the principle that revenues and costs are recognised as they are
earned or incurred, are
matched with one another, and are dealt with in the income statement of the
period to which

they relate, irrespective of the period of receipt or payment. It would be

misleading to report
profit as the difference between cash received and cash paid during a period
because some trading
and commercial activities of the period would be excluded, since many
transactions are based on
credit.
Most of us are users of electricity. We may use it over a period of three months
for heating, lighting
and running our many home appliances, before receiving an invoice from the
electricity supplier for
the electricity we have used. The fact that we have not received an invoice until
much later doesnt
mean we have not incurred a cost for each month. The costs have been accrued
over each of those
months, and we will pay for them at a later date.
The separate valuation concept
The separate valuation concept is a recording and measurement rule that
relates to the determination
of the aggregate amount of any item. In order to determine the aggregate
amount of an
asset or a liability, each individual asset or liability that makes up the aggregate
must be determined
separately. This is important because material items may reflect different
economic circumstances.
There must be a review of each material item to comply with the appropriate
accounting
standards:
IAS 16 (Property, Plant and Equipment)
IAS 36 (Impairment of Assets)
IAS 37 (Provisions, Contingent Liabilities and Contingent Assets).
(See the later section, which discusses UK and international accounting and
financial reporting standards
called Financial Reporting Standards (FRSs) , International Financial
Reporting Standards
(IFRSs) , and International Accounting Standards (IASs) .)
Note the example of the Millennium Dome 2000 project, which was developed
in Greenwich, London,
throughout 1999 and 2000 and cost around 800m. At the end of the year 2000
a valuation of

the individual elements of the attraction resulted in a total of around 100m.

The further eight fundamental accounting concepts are as follows.

The substance over form concept

Where a conflict exists, the substance over form concept , which is an
ethical rule, requires the structuring
of reports to give precedence to the representation of financial or economic
reality over strict adherence
to the requirements of the legal reporting structure. This concept is dealt with in
IAS 17, Leases.
When a company acquires an asset using a finance lease, for example a
machine, it must disclose the
asset in its balance sheet even though not holding legal title to the asset, whilst
also disclosing separately
in its balance sheet the amount that the company still owes on the machine.
The reason for showing the
asset in the balance sheet is because it is being used to generate income for
the business, in the same way
as a purchased machine. The substance of this accounting transaction (treating
a leased asset as though
it had been purchased) takes precedence over the form of the transaction (the
lease itself ).
The business entity concept
The business entity concept is a boundary rule that ensures that financial
accounting information
relates only to the activities of the business entity and not to the other activities
of its owners. An
owner of a business may be interested in sailing and may buy a boat and pay a
subscription as a member
of the local yacht club. These activities are completely outside the activities of
the business and
such transactions must be kept completely separate from the accounts of the
business.
The periodicity concept
The periodicity concept (or time interval concept) is a boundary rule. It is the
requirement to
produce financial statements at set time intervals. This requirement is
embodied, in the case of UK
companies, in the Companies Act 2006 (all future references to the Companies
Act will relate to the

Companies Act 2006 unless otherwise stated). Both annual and interim financial
statements are required
to be produced by public limited companies (plcs) each year.
Internal reporting of financial information to management may take place within
a company on a
monthly, weekly, daily, or even an hourly basis. But owners of a company, who
may have no involvement
in the running of the business or its internal reporting, require the external
reporting of their
companys accounts on a six-monthly and yearly basis. The owners of the
company may then rely on
the regularity with which the reporting of financial information takes place,
which enables them to
monitor company performance, and compare figures year on year.
The money measurement concept
The money measurement concept is a recording and measurement rule that
enables information relating
to transactions to be fairly compared by providing a commonly accepted unit of
converting quantifiable amounts into recognisable measures. Most quantifiable
data are capable of being converted,
using a common denominator of money, into monetary terms. However,
accounting deals only with
those items capable of being translated into monetary terms, which imposes a
limit on the scope of accounting
to report such items. You may note, for example, that in a universitys balance
sheet there is no
value included for its human resources, that is its lecturers, managers, and sec
retarial and support staff .
The historical cost concept
The historical cost concept is a recording and measurement rule that relates
to the practice of valuing
assets at their original acquisition cost. For example, you may have bought a
mountain bike two years
ago for which you were invoiced and paid 150, and may now be wondering
what it is currently worth.

True and fair view 11

One of your friends may consider it to be worth 175 because they feel that the
price of new mountain
bikes has increased over the past two years. Another friend may consider it to
be worth only 100 because
you have used it for two years and its condition has deteriorated. Neither of
your friends may be

incorrect, but their views are subjective and they are different. The only
measure of what your bike is
worth on which your friends may agree is the price shown on your original
invoice, its historical cost.
Although the historical cost basis of valuation may not be as realistic as using,
for instance, a current
valuation, it does provide a consistent basis for comparison and almost
eliminates the need for
any subjectivity.
The realisation concept
The realisation concept is a recording and measurement rule and is the
principle that increases in value
should only be recognised on realisation of assets by arms-length sale to an
independent purchaser.
This means, for example, that sales revenue from the sale of a product or
service is recognised in accounting
statements only when it is realised. This does not mean when the cash has been
paid over by
the customer; it means when the sale takes place, that is when the product or
service has been delivered,
and ownership is transferred to the customer. Very often, salespersons
incorrectly regard a sale
as the placing of an order by a customer because they are usually very
optimistic and sometimes forget
that orders can get cancelled. Accountants, being prudent individuals, ensure
that sales are correctly
recorded through the issuing of an invoice when services or goods have been
delivered (and installed).
The dual aspect concept
The dual aspect concept is the recording and measurement rule that provides
the basis for doubleentry
bookkeeping. It reflects the practical reality that every transaction always
includes both the
giving and receiving of value. For example, a company may pay out cash in
return for a delivery into
its warehouse of a consignment of products that it subsequently aims to sell.
The companys reduction
in its cash balance is reflected in the increase in its inventory of products.

The materiality concept

Information is material if its omission or misstatement could influence the
economic decisions of
users taken on the basis of the financial statements. Materiality depends on the
size of the item or
error judged, its significance, in the particular circumstances of its omission or
misstatement. Thus,
materiality provides a threshold or cut-off point rather than being a primary
qualitative characteristic
that information must have if it is to be useful. The materiality concept is the
overriding recording
and measurement rule, which allows a certain amount of judgement in the
application of all the other
accounting concepts. The level of materiality, or significance, will depend on the
size of the organisation
and the type of revenue or cost, or asset or liability being considered. For
example, the cost of
business stationery is usually charged as an expense regardless of whether or
not all the items have
been used; it would be pointless to try and attribute a value to such relatively
low-cost unused items.
True and fair view
The term true and fair view was introduced in the Companies Act 1947,
requiring that companies
reporting of their accounts should show a true and fair view. It was not defi ned
in that Act and has
not been defined since. Some writers have suggested that conceptually it is a
dynamic concept but
over the years it could be argued that it has failed, and various business
scandals and collapses have
12
occurred without users being alerted. The concept of true and fair was adopted
by the European
Community Council in its fourth directive, implemented by the UK in the
Companies Act 1981, and
subsequently in the implementation of the seventh directive in the Companies
Act 1989 (sections 226
and 227). Conceptually the directives require additional information where
individual provisions are
insufficient.
In practice true and fair view relates to the extent to which the various
principles, concepts and

standards of accounting have been applied. It may therefore be somewhat

subjective and subject
to change as new accounting rules are developed, old standards replaced and
new standards introduced.
It may be interesting to research the issue of derivatives and decide whether
the true and fair
view concept was invoked by those companies that used or marketed these
financial instruments, and
specifically consider the various collapses or public statements regarding losses
incurred over the past
few years. Before derivatives, the issue which escaped disclosure in financial
reporting under true
International accounting standards
The International Accounting Standards Committee (IASC), set up in 1973,
which is supported by
each of the major professional accounting bodies, fosters the harmonisation of
accounting standards
internationally. To this end each UK FRS (Financial Reporting Standard) includes
a section explaining
its relationship to any relevant international accounting standard.
There are wide variations in the accounting practices that have been developed
in diff erent countries.
These refl ect the purposes for which financial information is required by the diff
erent users of
that information, in each of those countries. There is a diff erent focus on the
type of information and
the relative importance of each of the users of financial information in each
country. This is because
each country may diff er in terms of:
who finances the businesses individual equity shareholders, institutional
equity shareholders,
debenture holders, banks, etc.
tax systems either aligned with or separate from accounting rules
the level of government control and regulation
the degree of transparency of information.
The increase in international trade and globalisation has led to a need for
convergence, or harmonisation,
of accounting rules and practices. The IASC was created in order to develop
international

accounting standards, but these have been slow in appearing because of the
diffi culties in bringing
together diff erences in accounting procedures. Until 2000 these standards were
called International
Accounting Standards (IASs) . The successor to the IASC, the IASB (International
Accounting Standards
Board), was set up in April 2001 to make financial statements more comparable
on a worldwide
basis. The IASB publishes its standards in a series of pronouncements called
International Financial
Reporting Standards (IFRSs) . It has also adopted the body of standards issued
by the IASC, which
continue to be designated IASs.
The former chairman of the IASB, Sir David Tweedie, who retired in June 2011,
said that the aim
of the globalisation of accounting standards is to simplify accounting practices
and to make it easier
for investors to compare the financial statements of companies worldwide. He
also said that this will
break down barriers to investment and trade and ultimately reduce the cost of
capital and stimulate
growth ( Business Week , 7 June 2004). On 1 January 2005 there was
convergence in the mandatory
application of the IFRSs by listed companies within each of the European Union
member states. The
impact of this should be negligible with regard to the topics covered in this
book, since UK accounting
standards have already moved close to international standards. The reason for
this is that the UK SOP
was drawn up using the 1989 IASB conceptual framework for guidance. A list of
current IFRSs and
IASs is shown in Appendix 1 at the end of this book.
At the time of writing this book, major disagreements between the EU and
accountants worldwide
over the infl uence of the EU on the process of developing International
Accounting Standards
are causing concern that the dream of the globalisation of accounting standards
may not be possible
(see the article below from the 5 April 2010 edition of the Financial Times
).Progress check

tererrth

Accounting Standards-setting in India

The Institute of Chartered Accountants of India (ICAI) being a member body of the IASC,
constituted the Accounting Standards Board (ASB) on 21st April, 1977, with a view to
harmonise the diverse accounting policies and practices in use in India. After the avowed
adoption of liberalisation and globalisation as the corner stones of Indian economic policies
in
early 90s, and the growing concern about the need of effective corporate governance of
late,
the Accounting Standards have increasingly assumed importance.
While formulating accounting standards, the ASB takes into consideration the applicable
laws,
customs, usages and business environment prevailing in the country. The ASB also gives
due
consideration to International Financial Reporting Standards (IFRSs)/ International
Accounting
Standards (IASs) issued by IASB and tries to integrate them, to the extent possible, in the
light
of conditions and practices prevailing in India.
Composition of the Accounting Standards Board
The composition of the ASB is broad-based with a view to ensuring participation of all
interestgroups
in the standard-setting process. These interest-groups include industry, representatives
of various departments of government and regulatory authorities, financial institutions and
academic and professional bodies. Industry is represented on the ASB by their apex level
associations, viz., Associated Chambers of Commerce & Industry (ASSOCHAM),
Confederation
of Indian Industries (CII) and Federation of Indian Chambers of Commerce and Industry
(FICCI). As regards government departments and regulatory authorities, Reserve Bank of
India, Ministry of Company Affairs, Comptroller & Auditor General of India, Controller
General of
Accounts and Central Board of Excise and Customs are represented on the ASB. Besides
these
interest-groups, representatives of academic and professional institutions such as
Universities,
Indian Institutes of Management, Institute of Cost and Works Accountants of India and
Institute
of Company Secretaries of India are also represented on the ASB. Apart from these
interestgroups,
certain elected members of the Central Council of ICAI are also on the ASB.

The Accounting Standards-setting Process

The accounting standard setting, by its very nature, involves reaching an optimal balance of
the
requirements of financial information for various interest-groups having a stake in financial
reporting. With a view to reach consensus, to the extent possible, as to the requirements of
the
relevant interest-groups and thereby bringing about general acceptance of the Accounting
Standards among such groups, considerable research, consultations and discussions with
the
representatives of the relevant interest-groups at different stages of standard formulation
becomes necessary. The standard-setting procedure of the ASB, as briefly outlined below,
is
designed in such a way so as to ensure such consultation and discussions:
Identification of the broad areas by the ASB for formulating the Accounting Standards.
Constitution of the study groups by the ASB for preparing the preliminary drafts of the
proposed Accounting Standards.
Consideration of the preliminary draft prepared by the study group by the ASB and
revision,
if any, of the draft on the basis of deliberations at the ASB.
Circulation of the draft, so revised, among the Council members of the ICAI and 12
specified
outside bodies such as Standing Conference of Public Enterprises (SCOPE), Indian Banks
Association, Confederation of Indian Industry (CII), Securities and Exchange Board of India
3
(SEBI), Comptroller and Auditor General of India (C& AG), and Department of Company
Affairs, for comments.
Meeting with the representatives of specified outside bodies to ascertain their views on
the
draft of the proposed Accounting Standard.
Finalisation of the Exposure Draft of the proposed Accounting Standard on the basis of
comments received and discussion with the representatives of specified outside bodies.
Issuance of the Exposure Draft inviting public comments.

Consideration of the comments received on the Exposure Draft and finalisation of the
draft
Accounting Standard by the ASB for submission to the Council of the ICAI for its
consideration and approval for issuance.
Consideration of the draft Accounting Standard by the Council of the Institute, and if
found
necessary, modification of the draft in consultation with the ASB.
The Accounting Standard, so finalised, is issued under the authority of the Council.