What are Accounting Standards?
The Accounting Standard is the collection of the accounting procedures, common principles, and Accounting Standards which forms the foundation of policies, financial accounting, and financial principles. The Accounting Standards are used for improving transparency of financial reporting across the world. The Generally Accepted Accounting Principles make up the accounting set standard that is widely accepted for the preparation of financial statements. The international companies follow IFRS, which are set by the International Accounting Standards Board, and it also serves as a guideline to GAAP and non-US companies as a measure of reporting financial statements.
Accounting Standards Formulation in the Country
The Accounting Standard board (ASB) is a committee belonging to the ICAI, which has the responsibility for the creation of Accounting Standards in India, after the passing of statute by the government of India. Let us have a brief look at the functioning of ASB and the procedure behind the Formulation of Accounting Standards in India.
ICAI is widely considered as the highest accounting body in India. The ASB, Accounting Standard board, is the committee of the ICAI that devises all Accounting Standards for Indian enterprises and companies. The entire process is completely transparent and incredibly thorough, plus it is fully independent of any government involvement or intervention. While devising the standards, ASB tries to incorporate and include the IFRS and its principles within the Indian framework and standards itself.
India has no plans to adopt the IFRS system and hence this process provides the merging of both the standards and takes advantage of both the standards. The ASB is responsible for modifying IFRS so that it aligns with the laws, common usages, and customs that are used and prevalent in the country.
The Accounting Standards board (ASB) is made up of representatives from various industries, regulatory authorities, government departments, academic and professional bodies, and financial institutions. The industry is represented on ASB by the associations CII, FICCI, and ASSOCHAM amongst others.
The process of formulating Accounting Standards in India is very detailed and comprehensive. We take a brief look.
The setting process of Accounting Standards has the following steps.
Identifying broad matters of ASB and preparing preliminary drafts.
Constituting study groups by ASB to prepare for preliminary drafts.
Considering preliminary drafts that are prepared by a study group involving ASB.
Circulating drafts among ICAI council members and within some outside bodies such as Indian banks association, SEBI, DCA, CAG, etc.
Meeting with representatives of outside bodies for their opinion on the proposed Accounting Standards draft.
Finalizing the draft for proposed Accounting Standards based on the comments received from various bodies.
Issuing the invite for exposure draft for public opinion.
Finalizing the draft for Accounting Standards and submitting to the ICAI council for consideration and then approving it for issuance.
Considering Accounting Standards drafts from institute council and modifications to be done in the drafts if necessary, in consultation with the ASB.
The finalized Accounting Standards are issued under the council authority.
Formulation of Accounting Standards in India
After the government passed a statute, the Accounting Standard Board (ASB) which is a committee of the ICAI took the responsibility for the formulation of the accounting standards in the nation, India. For this we need to take a brief look at the functioning of the ASB and the procedure which is behind the formulation of the accounting standards in India.
Accounting Standard Board
ICAI is recognised as the highest accounting body in the country, India. The ASB is a committee of the ICAI which devises all the accounting standards for the Indian Companies. The process is accurately transparent, the process is also very thorough and completely independent of any government intervention or involvement. While designing the standards, the ASB tries to incorporate the IFRS and its principles in the Indian standards itself. India does not plan to adopt the IFRS system, thus this process helps the merge of the two standards and thus reap the benefits of the both. So, the ASB modifies the IFRS to align with the laws, and the customs and the common usages that are used by the country.
FAQs on Accounting Standards Formulation in India
1. Who formulated the accounting standards in India?
The primary body responsible for the formulation of accounting standards in India is the Institute of Chartered Accountants of India (ICAI). ICAI is an autonomous professional body established under the Chartered Accountants Act, 1949, which develops, reviews, and issues accounting standards for application across various sectors. As India’s premier accounting institution, ICAI ensures these standards align with international practices while considering the country’s unique legal and economic environment. To summarize, ICAI plays a leading role in setting the framework for standardized accounting principles throughout the country, thereby improving financial reporting consistency and transparency.
2. Which organisation formulates accounting standards in India?
In India, the Institute of Chartered Accountants of India (ICAI) is the main organisation responsible for formulating accounting standards. The ICAI operates through its independent body, the Accounting Standards Board (ASB), which drafts and issues these standards after consultation with the government, industry representatives, and other key stakeholders. The role of ASB is crucial because it ensures the accounting standards are both relevant to Indian conditions and in harmony with international requirements. Overall, ICAI and its Accounting Standards Board form the backbone of standard-setting activities for accounting practices in India.
3. Who created accounting standards in India?
The creation of accounting standards in India is credited to the Institute of Chartered Accountants of India (ICAI), which formed the Accounting Standards Board (ASB) in 1977. The ASB is responsible for the design, drafting, and recommendation of standards that regulate accounting practices nationwide. These standards are developed through a consultative process involving experts, regulators, and industry representatives, ensuring they are both practical and robust. Thus, the ICAI, through its ASB, is the authority behind the establishment and continuous development of accounting standards in India.
4. Who formulates cost accounting standards in India?
Cost accounting standards in India are formulated by the Institute of Cost Accountants of India (ICMAI), formerly known as ICWAI. This professional body sets guidelines and frameworks to standardize cost accounting methods across industries, ensuring consistency and uniformity. The Cost Accounting Standards Board (CASB), a committee of ICMAI, is tasked specifically with developing, reviewing, and issuing cost accounting standards. By setting these norms, ICMAI aids businesses in having comparable, transparent, and fair cost information for better decision-making and regulatory compliance throughout India.
5. What is the process of formulating accounting standards in India?
The process of formulating accounting standards in India is systematic and involves multiple stages to ensure quality and consensus. The Accounting Standards Board (ASB) of ICAI leads this effort by following these steps:
- Identifying the need for a new standard or revision.
- Preparing a draft standard and circulating it to stakeholders for feedback.
- Holding public consultations and considering inputs from regulators and experts.
- Finalizing the standard and forwarding it to the council of ICAI for approval.
- Issuing the standard for mandatory or recommendatory adoption.
6. Why are accounting standards important in India?
Accounting standards play an essential role in India by ensuring the uniformity and reliability of financial statements. They provide a systematic way for businesses to report transactions, making it easier for investors, regulators, and other stakeholders to assess financial health. Accounting standards also foster transparency and help prevent fraud or misrepresentation. By aligning Indian practices with international norms, these standards increase investor confidence and facilitate global business. In conclusion, accounting standards form the foundation for trust and accuracy in India’s financial reporting ecosystem.
7. How are Indian accounting standards aligned with international standards?
India has undertaken significant initiatives to align its accounting standards with International Financial Reporting Standards (IFRS). Through the adoption of Indian Accounting Standards (Ind AS), the Accounting Standards Board ensures that local standards closely mirror global principles, enabling comparability and reliability. The process involves reviewing IFRS, making suitable adjustments for Indian conditions, and then issuing Ind AS. This convergence improves transparency for multinational investors and enables easier access to international capital markets. As a result, Indian accounting practices now reflect a high degree of global compatibility while retaining relevance for domestic needs.
8. What challenges are faced in formulating accounting standards in India?
Formulating accounting standards in India presents several challenges due to the country’s diverse economic landscape and regulatory environment. Key issues include:
- Balancing international norms with local business practices.
- Addressing varying stakeholder expectations from different sectors.
- Ensuring timely incorporation of frequent regulatory changes.
- Managing resistance to change and awareness among small enterprises.
9. What is the role of ICAI in the development of accounting standards in India?
The Institute of Chartered Accountants of India (ICAI) plays a key leadership role in developing accounting standards for the country. ICAI, through its Accounting Standards Board (ASB), initiates proposals, drafts, and finalizes the standards after obtaining feedback from various stakeholders, including government bodies and industry. It also provides guidance and training to help in the effective implementation and compliance. By actively steering the formulation and regular updating of standards, ICAI upholds the credibility and consistency of financial reporting in India’s corporate sector.
10. How does the Accounting Standards Board (ASB) function in India?
The Accounting Standards Board (ASB) in India operates as an independent technical committee under the ICAI. Its main tasks include drafting new standards, revising existing ones, and soliciting comments from a diverse group of stakeholders. The ASB conducts meetings, holds public consultations, and evaluates global practices to ensure the relevance and quality of Indian Accounting Standards (Ind AS). Through this transparent and inclusive approach, the ASB ensures that the standards are practical, up-to-date, and beneficial for all users of financial statements in India.
11. When were accounting standards first introduced in India?
Accounting standards were first introduced in India in 1977. This move came after the formation of the Accounting Standards Board (ASB) by the Institute of Chartered Accountants of India (ICAI). The Board’s initial task was to create a framework that would bring uniformity to accounting and reporting practices. The first few standards focused on disclosure requirements and basic recognition rules, setting a strong foundation for future financial reporting. Over the years, the scope and coverage of accounting standards in India have expanded significantly, reflecting global trends and the country’s evolving economic landscape.
12. What is the difference between Accounting Standards and Indian Accounting Standards (Ind AS)?
Accounting Standards (AS) are the original set of principles issued by ICAI to regulate financial reporting in India. Indian Accounting Standards (Ind AS), on the other hand, are standards that have been converged with International Financial Reporting Standards (IFRS) to ensure global comparability.
- AS are rule-based and were mandatory for most Indian companies before Ind AS adoption.
- Ind AS follows a principle-based approach closely aligned with IFRS, making them suitable for companies involved in international business.
