Theortical Framework

UNIT 4 ACCOUNTING STANDARDS

Structure
4.0 Objectives
4.1 Concept of a Accounting Standards
4.2 Benefits of Accounting Standards
4.3 Procedure for Issuing AS in India
4.4 Salient Features of First Time Adoption of Indian Accounting Standards
(Ind-AS):101
4.5 Currently Prevailing Accounting Standards in India
4.6 International Financial Reporting Standards
4.7 Need and Procedure of IFRS
4.8 Convergence to IFRS
4.9 Distinction between Indian AS and International AS
4.10 Measurement of Business Income
4.11 Objectives of Measurement of Business Income
4.12 Approaches for Measuring Income
4.13 Accounting Concept that is relevant to Measurement of Business Income-
Realization Concept
4.14 Let Us Sum Up
4.15 Key Words
4.16 Some Useful Books
4.17 Terminal Questions

4.0 OBJECTIVES
After studying this unit, you should be able to:
 explain the concept of the accounting standards;
 discuss the benefits of accounting standards;
 discuss the procedures of issuing accounting Standards in India;
 describe International Financial Reporting Standards, GAAP, IAS etc;
 develop the insights about the need and procedure of issuing IFRS;
 understand how Indian economy is converging towards implementing IFRS.
 make comparison between Indian AS and International AS;
 describe the procedure for measuring business income;
 explain the accounting concepts that are relevant to measurement of business
income; and
 state the objectives of measurement of business income of business income.

4.1 CONCEPT OF ACCOUNTING STANDARDS

Accounting is the language of business. All financial information (i.e. nature of
60 financial activities, financial position, financial results, present trend and further
prospects etc.) are available through accounting. The so-called financial Acounting Standards
information is communicated to the users (both internal as well as external) of
accounting information by preparing and presenting the financial statements. As
such, it becomes necessary to develop some Generally Accepted Accounting
Principles (GAAP) while preparing the financial statements by which the language
of the business can be communicated to the users.

As per section 129 of Companies Act, 2013 the financial statements of a

company must present a true and fair view of the income and financial position
of the company. However, it does not define what constitutes a true and fair
view of a company. Since the beginning of accounting, a number of Generally
Accepted Accounting Principles have been developed consisting of accounting
concepts and conventions so as to bring comparability and uniformity in the
financial statements of various business organizations. However, even these
GAAP allow many alternatives for the treatment of same item that can be
followed by the business organizations while preparing financial statements which
leads to lack of consistency, uniformity and comparability among the financial
statements of different originations. In addition, there must not be any ambiguity
and uncertainty relating to the facts, figures and terms which are contained in
the financial statements and will be presented to the users of accounting
information.

Hence, there is a need to develop some standards which must be followed

by all the organizations so as to achieve uniformity in the financial statements.
For this purpose, International Accounting Standards Committee (IASC) was
established on 29th June, 1973. The Institute of Chartered Accountants of India
and Institute of Cost Accountants of India are members of IASC. ICAI is also
developing its own accounting standards patterned on International Accounting
Standards modified to the requirements of Indian accounting community.

Definition

In the words of Kohler, an accounting standard may be defined as ‘a

code of conduct imposed on accountants by custom, law or professional
body.’

Thus, accounting standards may be defined as the accounting principles and

rules which are to be followed for various accounting treatments while preparing
financial statements on uniform basis and which will reveal the same meaning
to all the interested groups who will use the same. Thus, the Standards are
considered as a guide for maintaining and preparing accounts.

Nature of Accounting Standards

On the basis of forgoing discussion, we can say that accounting standards are
guide, dictator, service provider and harmonizer in the field of accounting process.

Serve as a guide to the accountants: Accounting standards serve the

accountants as a guide in the accounting process. They provide basis on which
accounts are prepared. For example, they provide the method of valuation of
inventories. 61
Theortical Framework Act as a dictator: Accounting standards act as a dictator in the field of
accounting. Like a dictator, in some areas accountants have no choice of their
own but to opt for practices other than those stated in the accounting standards.
For example, Cash Flow Statement should be prepared in the format prescribed
by accounting standard.

Serve as a service provider: Accounting standards comprise the scope of

accounting by defining certain terms, presenting the accounting issues,
specifying standards, explaining numerous disclosures and implementation date.
Thus, accounting standards are descriptive in nature and serve as a service
provider.

Act as a harmonizer: Accounting standards are not biased and bring uniformity
in accounting methods. They remove the effect of diverse accounting practices
and policies. On many occasions, accounting standards develop and provide
solutions to specific accounting issues. It is thus, clear that whenever there is
any conflict on accounting issues, accounting standards act as harmonizer and
facilitate solutions for accountants.

4.2 BENEFITS OF ACCOUNTING STANDARDS

There are many benefits of accounting standards. Let us discuss the main benefits
of Accounting Standards one by one.

1) Standardized Accounting: Perhaps the most important advantage of the

FASB standard setting for businesses is the uniform set of accounting
principles it promotes. The FASB clearly states the generally-accepted
accounting principles that businesses must follow to avoid confusion. For
example, the FASB prevents businesses from using one method for
calculating inventory at the beginning of a fiscal year and finishing the year
with another method. Without the accounting standards set forth by the
FASB, businesses could use accounting methods that portray financial data
inaccurately to investors.

2) Problem Identification: The FASB standard setting provides a framework

upon which potential accounting problems are identified and corrected.
Because all businesses in the US use the same accounting principles, any
problems or inadequacies in the accounting process are quickly identified
and reported to the FASB. The FASB then investigates the problem and,
if needed, modifies or writes a new accounting rule for the accounting
process. For example, if businesses find that reporting a certain type of
liability on their income statement unfairly lowers their net income, they can
appeal to the FASB so that it can identify problems with the standard
setting.

3) Private Regulation: The FASB is a private entity with no affiliation to

the US government. Despite this, the Securities and Exchange Commission
relies on the FASB to set the accounting rules that all companies in the
US must follow. The SEC can technically create an accounting oversight
board or government agency to set accounting rules. However, using the
FASB eases the burden on the US government and lets the private sector
dictate accounting rules.
62
4) International Accounting Standard: The FASB is advantageous because Acounting Standards
it actively promotes an internationally recognized set of accounting rules.
Globalization has deeply connected foreign financial markets; a standard
set of accounting rules would make financial reporting more accurate and
fair between countries. One of the goals of the FASB is to make financial
reporting more uniform globally with the cooperation of the International
Accounting Standards Board (IASB).

4.3 PROCEDURE FOR ISSUING AS IN INDIA

There is a set procedure for issuing AS in India. Let us discuss this prodedure
in detail.

1) Determination of the need of an AS

First, the Accounting Standard Board determines the broad areas in which
accounting standards needs to be formulated.
2) Constituting Study Group
Study Group will be constituted consisting the members of the Institute
of Chartered Accountants of India. The motive behind constitution of this
group is to assist the accounting Standard Board in its activities.
3) Drafting the Standard
The Study Group Prepares draft of the proposed Standard. The proposed
draft enlists the following areas:
a) Objective of the standard.
b) Scope of the Standard.
c) Definitions of the terms used in the standard
d) Recognition & Measurement Principles
e) Presentation & Disclosure requirements.
4) Analyzing the Draft
ASB in this stage considers the Preliminary draft prepared by the Study
Group. In case anything needs to be revised than Accounting Standard
Board takes the following steps.
a) ASB makes the revision
b) ASB refers the same to the study Group
5) Circulation of the Draft
In this step, the ASB circulates the AS draft to the council members of
the Institute of Chartered Accountants of India and the following specifies
bodies for their comments.
a) The Institute of Works & Cost Accountants of India
b) The Institute of Company Secretaries of India.
c) Ministry of Company Affairs. 63
Theortical Framework d) Comptroller & Auditor General of India
e) Central Board of Direct Taxes
f) Standing Committee of Public Enterprises
g) Reserve Bank of India
h) Indian Banks Association.
i) Securities & Exchange Board of India.
j) Associated Chamber of Commerce & Industry, Confederation of
Indian Industry and Federation of Indian Chambers of Commerce &
Industry.
k) Any other body considered relevant by the ASB.
6) Holding Discussion and Finalizing Exposure Draft
ASB holds meeting with the representatives of above mentioned bodies for
the purpose of determining their views on the Draft Accounting Standard.
Based on analyses of the discussion, ASB finalizes the exposure draft of
proposed accounting standards.
7) Circulation of Exposure Draft
The exposure Draft of the proposed standards is issued for comments the
members of the ICAI and the public.
8) Finalizing the Exposure Draft
Based on the comments received, the ASB finalizes the draft of the
proposed standards. Finally ASB submits the same to the council of the
ICAI.
9) Modifying & Issuing the Accounting Standard
The council of the ICAI then considers the finalized draft standard and
if necessary modifies the same in consultation with the ASB. The ICAI then
issues the Accounting Standard after modification if any on the relevant
subject.

4.4 SALIENT FEATURES OF FIRST TIME

ADOPTION OF INDIAN ACCOUNTING
STANDARDS (Ind-AS):101
Ind-AS 101 lays out the accounting principles for first-time adoption of
Ind-AS. It prescribes the various requirements to be fulfilled during the transition
period when a company adopts Ind-AS for the first time, i.e., when it moves
from making the financial statements in accordance with Accounting Standards
(Indian GAAP) to make them in accordance with Ind-AS.
Conceptually, the accounting under Ind-AS should be applied retrospectively
at the time of transition of companies from applying Accounting Standards (Indian
GAAP) to Ind-AS. However, for and easy transition, Ind-AS 101 has provided
some exemptions for retrospective application of Ind-AS. The exemptions are
64
clearly categorised into those which are mandatory in nature (i.e., cases where Acounting Standards
the company is prohibited to apply Ind-AS retrospectively) and those which
are voluntary in nature (i.e., it is upto the company to apply or not to apply
certain requirements of Ind-AS retrospectively).
Ind-AS 101 also lists out presentation and disclosure requirements to explain
the transition to the users of financial statements. It also requires a company
to explain how the transition will affect its reported balance sheet, financial
performance and cash flows. It does not provide any exemption from the
disclosure requirements in other Ind-AS.
Objective of Ind-AS 101
The objective of Ind-AS 101 is to ensure that the entity’s first Ind-AS Financial
Statements, and its interim financial reports for the period covered by those
financial statements, contain high quality information that:
1. Is transparent for users and comparable over all periods presented,
2. Provide a suitable starting point for accounting in accordance with the Indian
Accounting Standards (Ind-AS), and
3. Can be generated at a cost that does not exceed benefits.
Scope of Ind-AS 101
An entity shall apply the Indian Accounting Standard-101 (first time adoption
of Indian Accounting Standards) in:
a) First Financial Statements after implementing Ind-AS.
b) Each Interim Financial Report in accordance with Ind-AS 34 Interim
Financial Reporting for the part of the period covered by its first Ind-
AS financial Statements.

4.5 CURRENTLY PREVAILING ACCOUNTING

STANDARDS IN INDIA
Section 133 of Companies Act, 2013 requires the companies to comply with
the prevailing accounting standards. As on 1st April, 2016 there are 32 accounting
standards specified by ICAI, all of which are mandatory to be complied by
the companies. Following is the list of these standards:
 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 (revised 2002)
 AS 8 Accounting Policies, Chanages in Accounting estimates and Errors. 65
Theortical Framework  AS 9 Revenue Recognition
 AS 10 Accounting for Fixed Assets
 AS 11 The Effects of Changes in Foreign Exchange Rates (revised 2003),
 AS 12 Accounting for Government Grants
 AS 13 Accounting for Investments
 AS 14 Accounting for Amalgamations
 AS 15 Employee Benefits (revised 2005)
 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
 AS 32 Financial Instruments: Disclosure
Check Your Progress A
1. Define the term ‘Accounting Standard’.
................................................................................................................
................................................................................................................
................................................................................................................
2. What are the main objectives of accounting standards?
................................................................................................................
................................................................................................................
................................................................................................................
3. Discuss the procedure of issuing accounting standards in India.
................................................................................................................
................................................................................................................
................................................................................................................
66
4. Give any three limitations of accounting. Acounting Standards

................................................................................................................
................................................................................................................
................................................................................................................

4.6 INTERNAT1IONAL FINANCIAL REPORTING

STANDARDS
Accounting provides companies, investors, regulators and others with a standardized
way to describe the financial performance of an entity. Accounting standards
present and prepares of financial statements with a set of rules to abide by
when preparing an entity’s accounts, ensuring this standardization across the
market. Companies listed on public stock exchanges are legally required to
publish financial statements in accordance with the relevant accounting standards.
International Financial Reporting Standards (IFRS) is a single set of accounting
standards, developed and maintained by the International Accounting Standards
Board with the intention of those standards being capable of being applied on
a globally consistent basis — by developed, emerging and developing economies.
Thus, providing investors and other users of financial statements with the ability
to compare the financial performance of publicly listed companies on a like-
for-like basis with their international peers.
IFRS are now mandated for use by more than 100 countries, including the
European Union and by more than two-thirds of the G20. The G20 and other
international organisations have consistently supported the work of the Board
and its mission of global accounting standards.

4.7 NEED AND PROCEDURE OF IFRS

With the increasing globalization of financial markets and of companies, the use
of a single set of financial reporting standards across countries is viewed as
having increased the comparability of financial statements across borders. It also
reduces the cost of preparing the consolidated financial statements of groups
made up of companies conducting business all around the world.
Financial reporting standards have been in the spotlight since the banking crisis,
more specifically those requiring the measurement of financial assets and
liabilities at fair value. In September 2009, G20 leaders in Pittsburgh asked
the accounting standard setters IASB and, its US counterpart, the FASB to
work towards a single set of high quality global accounting standards by
June 2011. Convergence, however, is proving challenging and is likely to be
pushed back.
Initially, IFRS begun as an academic project aimed at creating a single set of
global standards, their actual use was kick-started by the European Union.
An EU regulation requires listed companies in Europe to adhere to International
Financial Reporting Standards (IFRS) from financial years commencing on or
after 1 January 2005 when preparing their consolidated accounts. In implementing
this in UK legislation, the Government has not yet made the use of IFRS
compulsory for any further categories of accounts, but the legislation permits
all companies to use them for individual and consolidated accounts if they wish.
67
Theortical Framework Changes have been made to UK tax legislation to accommodate these new
rules for tax purposes.
International Financial Reporting Standards (IFRS) are developed through an
international consultation process, the “due process”, which involves interested
individuals and organisations from around the world.
The due process comprises six stages, with the Trustees of the IFRS
Foundation having the opportunity to ensure compliance at various points
throughout:
1. Setting the agenda
2. Planning the project
3. Developing and publishing the Discussion Paper, including public consultation
4. Developing and publishing the Exposure Draft, including public consultation
5. Developing and publishing the Standard.
6. Procedures after a Standard are issued.
The IFRS issued by IASB and the corresponding Ind- AS are given below:

S. No. IFRS No. Title Corresponding

converged
Ind-AS

1) IFRS 1 First-time Adoption of Ind-AS 101

Indian Accounting Standards

2) IFRS 2 Share based Payment Ind-AS 102

2) IFRS 3 Business Combinations Ind-AS 103

3) IFRS 4 Insurance Contracts Ind-AS 104

4) IFRS 5 Non-current Assets Held for Sale Ind-AS 105

and Discontinued Operations

5) IFRS 6 Exploration for and Evaluation of Ind-AS 106

Mineral Resources

6) IFRS 7 Financial Instruments: Disclosures Ind-AS 107

7) IFRS 8 Operating Segments Ind-AS 108

8) IFRS 9 Financial Instruments Exposure Draft

Issued

9) IFRS 10 Consolidated Financial Statements Exposure Draft

Issued

10) IFRS 11 Joint Agreements Exposure Draft

Issued

11) IFRS 12 Disclosure of Interests in Exposure Draft

Other Entities Issued

12) IFRS 13 Fair Value Measurement Exposure Draft

Issued
68
 Acounting Standards
4.8 CONVERGENCE TO IFRS
For a country, there are two alternatives available for compliance and
implementation of the IFRS, which are (i) Adoption, (ii) Convergence
Adoption: It means acceptance of IFRS in its original form. If a country adopts
IFRS in its original form, then it is not allowed to make any change in the
language or format of the IFRS formed by IASB.
Convergence: It means implementing IFRS with modification wherever necessary
so as to suit the requirements of a particular country.
India has decided to converge it existing accounting standards to IFRS. In India,
the converged accounting standards are called Ind-AS
As per the road-map announced by Ministry of Corporate Affairs (MCA) in
March 2010, the Indian Accounting Standards (Ind-AS) converged with
International Financial Reporting Standards (IFRS) were to be applied to
specified class of companies in phases beginning with the financial year 1 April
2011. Audit observed that MCA could not notify the date of implementation
of Ind-AS as per its notified road-map. Slippages in the implementation of Ind-
AS were discussed in Chapter 4 of Audit Report No. 2 of 2014.
Subsequently, in pursuance of the Budget Statement of the Finance Minister
in February 2014, MCA after consultations with various stakeholders and
regulators, issued a press note on 2 January 2015 wherein a revised Road
map for implementation of Ind-AS converged with IFRS was laid down for
companies other than Banking Companies, Insurance Companies and Non-
Banking Finance Companies (NBFC). The Ind-AS shall be applicable to the
companies as follows:
(i) On voluntary basis for financial statements for accounting periods beginning
on or after 1 April 2015, with the comparatives for the periods ending
31 March, 2015 or thereafter;
(ii) On mandatory basis for the accounting periods beginning on or after 1
April 2016, with comparatives for the periods ending 31 March 2016,
or thereafter, for the companies specified below:
a) Companies whose equity and/or debt securities are listed or are in
the process of listing on any stock exchange in India or outside India
and having net worth of Rs. 500 crore or more.
b) Companies other than those covered in (ii) (a) above, having net worth
of Rs.500 crore or more.
c) Holding, subsidiary, joint venture or associate companies of companies
covered under (ii) (a) and (ii) (b) above.
(iii) On mandatory basis for the accounting periods beginning on or after 1
April 2017, with comparatives for the periods ending 31 March, 2017,
or thereafter, for the companies specified below:
a) Companies whose equity and/or debt securities are listed or are in
the process of being listed on any stock exchange in India or outside
India and having net worth of less than Rs. 500 crore .
69
Theortical Framework b) Companies other than those covered in paragraph (ii) and paragraph
(iii)(a) above that is unlisted companies having net worth of Rs. 250
crore or more but less than Rs. 500 crore.
c) Holding, subsidiary, joint venture or associate companies of companies
covered under paragraph (iii) (a) and (iii) (b) above.
However, companies whose securities are listed or in the process of listing
on SME exchanges shall not be required to apply Ind-AS. Such companies
shall continue to comply with the existing Accounting Standards unless they
choose otherwise.
(iv) Once a company opts to follow the Ind-AS, it shall be required to follow
the Ind-AS for all the subsequent financial statements.
(v) Companies not covered by the above roadmap shall continue to apply
existing Accounting Standards prescribed in Annexure to the Companies
(Accounting Standards) Rules, 2006.
Companies Act, 2013 specified that the financial statements shall comply
with accounting standards notified by Central Government and shall be in
form or forms as may be provided for class or classes of companies. This
would facilitate implementation of Ind-AS in phases. Accordingly, MCA
vide its notification dated 16 February 2015 notified the Companies (Indian
Accounting Standards) Rules 2015 specifying 39 Ind-AS to be implemented
as per the above road-map. The Ind-AS have been formulated by MCA
in consultation with National Advisory Committee on Accounting Standards
(NACAS).
Challenges to convergence
1. As Ind-AS are essentially based on the concept of fair value measurement
of assets and liabilities, corresponding standards under the Income Tax Act
are essential to ensure smooth and harmonised transition. Draft Income
Computation and Disclosure Standards released by Ministry of Finance in
this regard in January 2015 are under finalisation.
2. Banks and Insurance Companies have been kept out of the proposed road
map for transition to Ind-AS in view of the specific needs and concerns
of these two sectors.
3. Issues such as cost of compliance, capacity building, managing two sets
of standards (one for entities that seek transition and the other for those
which do not) and the impact of exceptions or ‘carve outs’ on the
achievement of objectives of convergence would need to be addressed
through a well-coordinated mechanism among MCA, DPE and ICAI.

4.9 DISTINCTION BETWEEN INDIAN AS AND

INTERNATIONAL AS
The detail of difference between Accounting Standards and Ind- AS is enormous.
Also, the impact of these differences vary from industry to industry and even
from company to company. However, the major differences are listed below.
Let us discuss them in defant.

70
 Acounting Standards
Basic of Accounting Ind-AS
Distinction Standards(AS)
Need When businesses were not Today, businesses have become
that complicated and complicated and a globalised world is
accounting was done at in the need of a comprehensive
local level, then accounting standards that can be
accounting standards consistently applied globally and
based on local GAAP facilitate compatibility. Introduction of
were enough. Ind-AS is the need of the hour for India
to compete in this globalised world
The basic objective of Ind-AS are Indian version of IFRS
Objective Accounting standards is to because it will be impractical to just
remove variation in the adopt the IFRS blindly without taking
treatment of several into consideration the current Indian
accounting aspects and to scenario. International Financial
bring about standardization Reporting Standards are principles
in presentation. They based standards, interpretation and the
intent to harmonize the framework adopted by the
diverse accounting policies
International Accounting Standards
in the preparation and
Board (IASB). Since India is a
presentation of financial
member country so it has to adopt
statements by different
these standards. However, any
reporting enterprises so as
to facilitate intra-firm and changes in these IFRS would have an
inter-firm comparison. impact on books of Indian companies
to adopt these IFRS as and when
amended. So to fill the difference, Ind-
AS have been introduced which is
nothing but IFRS. These standards
have been made applicable to Indian
companies through a road map i.e., in
a systematic manner. The benefit of
these standards is that any change in
IFRS would not impact Ind- AS
directly. The Ministry of corporate
affairs can analysis such changes and
incorporate the same in Ind-AS if it
thinks it is suitable.

Pervasiveness AS are not so pervasive or Ind-AS are pervasive and cover every
widespread. area comprising reported revenues,
expenses, assets, liabilities and equity.
Basis AS are driven by ‘legal’ Ind-AS focus on ‘substance’ rather
form in a number of areas than the legal form. They are principal
and are rule based. based, Ind-AS will also result in
accounting which more closely reflects
the underlying business rationale and
true economics of transaction.
Disclosure Disclosure requirements Disclosure requirements are more
requirements are comparatively less comprehensive and multifold under
detailed. Ind-AS to enhance the transparency
and accountability of financial
statements.
71
Theortical Framework The government of India has issued notification regarding Ind- AS. Following
is the list of Ind-AS notified:
1) Ind-AS 1 Presentation of Financial Statements
2) Ind-AS 2 Inventories
3) Ind-AS 7 Statement of Cash Flows
4) Ind-AS 8 Accounting Policies, Changes in Accounting Estimates and
Errors
5) Ind-AS 10 Events after the Reporting Period
6) Ind-AS 11 Construction Contracts
7) Ind-AS 12 Income Taxes
8) Ind-AS 16 Property, Plant and Equipment
9) Ind-AS 17 Leases
10) Ind-AS 18 Revenue
11) Ind-AS 19 Employee Benefits
12) Ind-AS 20 Accounting for Government Grants and Disclosure of
Government Assistance
13) Ind-AS 21 The Effects of Changes in Foreign Exchange Rates
14) Ind-AS 23 Borrowing Costs
15) Ind-AS 24 Related Party Disclosures
16) Ind-AS 27 Consolidated and Separate Financial Statements
17) Ind-AS 28 Investments in Associates
18) Ind-AS 29 Financial Reporting in Hyper-inflationary Economies
19) Ind-AS 31 Interests in Joint Ventures
20) Ind-AS 32 Financial Instruments: Presentation
21) Ind-AS 33 Earnings per Share
22) Ind-AS 34 Interim Financial Reporting
23) Ind-AS 36 Impairment of Assets
24) Ind-AS 37 Provisions, Contingent Liabilities and Contingent Assets
25) Ind-AS 38 Intangible Assets
26) Ind-AS 39 Financial Instruments: Recognition and Measurement
27) Ind-AS 40 Investment Property
Check Your Progress B
1. Define the term ‘IFRS’.
.................................................................................................................
.................................................................................................................
72 .................................................................................................................
2. What is the need of forming IFRS? Acounting Standards

.................................................................................................................
.................................................................................................................
.................................................................................................................
3. What are the challenges of converging accouniting standards to IFRS in
India?
.................................................................................................................
.................................................................................................................
.................................................................................................................
4. Describe the difference between AS and Ind-AS?
.................................................................................................................
.................................................................................................................
.................................................................................................................
.................................................................................................................

4.10 MEASUREMENT OF BUSINESS INCOME

One of the most significant accounting concepts is “Concept of Income”.
Similarly, measurement of a business income is also an important function of
an accountant. In General term, payment received in lieu of services or goods
are called income. But we are here more concerned for a business income.
Surplus revenue over expenses incurred is called as “Business Income.
Measurement of Business Income
There are following two factors which are helpful in the estimation of an income 
 Revenues - Sale of goods and rendering of services are the way to
generate revenue. Therefore, it can be defined as consideration, recovered
by the business for rendering services and goods to its customers.
 Expenses - An expense is an expired cost. We can say the cost that
have been consumed in a process of producing revenue are the expired
cost. Expenses tell us - how assets are decreased as a result of the services
performed by a business.
Measurement of Revenue - Measurement of the revenue is based on an accrual
concept. Accounting period, in which revenue earned, is the period of revenue
accrues. Therefore, a receipt of cash and revenue earned are the two different
things. We can say that revenue is earned only when it is actually realized and
not necessarily, when it is received.
Measurement of Expenses
 In case of delivery of goods to its customers is a direct identification with
the revenue.
 Rent and office salaries are an indirect association with the revenue. 73
Theortical Framework There are four types of events (given below) that need proper consideration
about as an expense of a given period and expenditure and cash payment made
in connection with those items
 Expenditure, which are expenses of the current year.
 Some expenditure, which are made prior to this period and has become
expense of the current year.
 Expenditure, which is made this year, becomes expense in the next
accounting periods. For example, purchase of fixed assets and depreciation
in next up-coming years.
 Expense of this year, which will be paid in next accounting years. For
example, outstanding expenses.

4.11 OBJECTIVES OF MEASUREMENT OF

BUSINESS INCOME
The measurement of income is useful for more than one purpose and therefore
its objectives may be studied form different points of view:
i) As a guide to future investment: The current income positively influences
the expectations about the future. The prospective investor looks to the
income of the business enterprise as a guide to his investments decisions
of the future. The investors attempt to maximize their returns on their
investments and their decisions will be guided by income. So the allocation
of investment funds and selections of securities depend upon income levels
of an enterprise.
ii) As a tax base: Though the Income Tax Act does not define yet it does
specify what is taxable and what is deductible in arriving at the taxable
income. Accounting income provides income of a business enterprise. The
tax authorities can conveniently mobilize the revenues through taxes which
are one of the main sources of the Government’s income.
iii) As a guide to dividend policy: The dividend policy at present is directed
to determine the proportion of the current income which should be retained
and the proportion which should be distributed as dividends. So long as
dividends are aid out of current income, the rights of the creditors are
adequately protected since other resources of the business enterprise would
not be used to pay dividends. There are clear rules for measurement of
distributable profits in the Companies Act with a view to protect the interests
of the creditors.
iv) As an indicator of managerial efficiency: The efficiency of management
as decision makers and as trustees of resources is judged by the reported
income of the current year. The auditors therefore certify that the income
statement presents true and fair view of operational results. The measurement
of business income therefore provides a suitable criterion for the efficiency
of management in a competitive economy.
v) As a measure of overall efficiency and credit worthiness: Income is the
lifeblood of any business enterprise and therefore it provides that basic
standard by which the overall efficiency of the business is assessed. For
74
 creditors, profitable enterprise faces no difficulty in making timely payment Acounting Standards
on its debts. Banks and other credit institutions too depend upon current
income levels as a guide about a firm’s ability to repay loan out of future
income.

4.12 APPROACHES FOR MEASURING

INCOME
In order to measure income, four main methods or approaches can be used:
the operation approach, activities approach, balance sheet approach, or value
added approach. Let’s take a look at each of these.
Transaction/Operation Approach
Transactions are mostly related to production or the purchase of goods and
the sale of goods and all these transactions directly or indirectly related to the
revenue or to the cost. Therefore, surplus collection of the revenue by selling
goods, spent over for production or purchasing the goods is the measure of
income. This system is widely followed by the enterprises where double entry
system adopted.
The Balance Sheet or value added Approach: Comparison of the closing
values (Assets minus outsider’s liabilities) of a firm with the values at the beginning
of that accounting period is called as Balance Sheet approach. In above value,
an addition to capital will be subtracted and addition of drawings will be added
while computing the business income of a firm. Since, income is calculated with
the help of Balance Sheet hence called as Balance Sheet approach.

4.13 ACCOUNTING CONCEPT THAT IS

RELEVANT TO MEASUREMENT OF
BUSINESS INCOME -REALIZATION
CONCEPT
Realization concept in accounting, also known as revenue recognition principle,
refers to the application of accruals concept towards the recognition of revenue
(income). Under this principle, revenue is recognized by the seller when it is
earned irrespective of whether cash from the transaction has been received or
not.
In case of sale of goods, revenue must be recognized when the seller transfers
the risks and rewards associated with the ownership of the goods to the buyer.
This is generally deemed to occur when the goods are actually transferred to
the buyer. Where goods are sold on credit terms, revenue is recognized along
with a corresponding receivable which is subsequently settled upon the receipt
of the due amount from the customer.
In case of the rendering of services, revenue is recognized on the basis of stage
of completion of the services specified in the contract. Any receipts from the
customer in excess or short of the revenue recognized in accordance with
the stage of completion are accounted for as prepaid income or accrued income as
appropriate.

75
Theortical Framework Example: Motor Hundai is a car Dealer. It receives orders from the customers
in advance against 20% down payment. Motor PLC delivers the cars to the
respective customers within 30 days upon which it receives the remaining 80%
of the list price. In accordance with the revenue realization principle, motor
Hundai must not recognize any revenue until the cars are delivered to the
respective customers as that is the point when the risks and rewards incidental
to the ownership of the cars are transferred to the buyers.
Importance
Application of the realization principle ensures that the reported performance
of an entity, as evidenced from the income statement, reflects the true extent
of revenue earned during a period rather than the cash inflows generated during
a period which can otherwise be gauged from the cash flow statement.
Recognition of revenue on cash basis may not present a consistent basis for
evaluating the performance of a company over several accounting periods due
to the potential volatility in cash flows.

4.14 LET US SUM UP

1. Accounting Standards are defined as written statements of accounting rules
and guidelines or practices for preparing the uniform and consistent financial
statements.
2. Objectives of issuing accounting standards are to provide information, to
harmonise different accounting processes and to facilitate uniformity,
consistency and comparability.
3. Benefits of accounting standards – (i) true and fair financial position, (ii)
easy comparability, (iii) enhances the value of accounting information, (iv)
efficiency of management, (v) useful to accountants and auditors and (vi)
enhances credibility and reliability.
4. The authority to make accounting standards in India is Accounting Standard
Board. It follows the prescribed procedure to issue an accounting standard.
5. Procedure for issuing accounting standards-ASB assisted by study group-
exposure draft- circulation- ASB after incorporating suggestions submit to
ICAI. After that ICAI will issue standard.
6. Ind-AS 101 lays out the accounting principles for first-time adoption of
Ind-AS. It prescribes the various requirements to be fulfilled during the
transition period in moving from Accounting Standards (Indian GAAP) to
Ind-AS.
7. Section 133 of Companies Act, 2013 requires the companies to comply
with the prevailing accounting standards. As on 1st April, 2016 there are
32 accounting standards specified by ICAI, all of which are mandatory
to be complied by the companies.
8. International Financial Reporting Standards is a single set of accounting
standards, developed and maintained by the International Accounting
Standards Board with the intention of those standards being capable of
being applied on a globally consistent basis.

76
9. With the increasing globalisation of financial markets and of companies, the
use of a single set of financial reporting standards across countries is viewed
as having increased the comparability of financial statements across borders.
10. India has decided to converge its existing accounting standards to IFRS.
In India, the converged accounting standards are called Ind-AS.

4.15 KEY WORDS

Accounting Standards: Accounting Standards are defined as written
statements of accounting rules and guidelines or practices for preparing the
uniform and consistent financial statements.
ASB: The board constituted by ICAI to concieve, formulate, examine and
review the accounting standards.
GAAP: Generally Accepted Accounting Principles consist of accounting
concepts and conventions so as to bring comparability and uniformity in the
financial statements of various business organizations.
International Financial Reporting Standards: IFRS is a single set of
accounting standards, developed and maintained by the International Accounting
Standards Board with the intention of those standards being capable of being
applied on a globally consistent basis.
ICAI: Institute of Chartered Accountants of India- the apex body of accounting
professionals of India.
Ind-AS: In India, the converged accounting standards are called Ind-AS.
Ind-AS 101: Ind-AS 101 lays out the accounting principles for first-time
adoption of Ind-AS.

4.16 SOME USEFUL BOOKS

Monga, J.R., 2018. “Financial Accounting: Concepts and Applications”,
Mayoor Paper Backs, New Delhi.
Maheshwari, S.N. and S.K. Maheshwari, 2018. “Financial Accounting”,
Vikas Publishing House, New Delhi.
Sehgal, Ashok, and Deepak Sehgal, 2018. “Advanced Accounting”, Part-
I, Taxmann Applied Services, New Delhi.
Tulsian, P.C., 2018. “Advanced Accounting”, Tata Mc Graw Hill, New Delhi.
Materiality, Full Disclosure, Conservatism and Consistency.
Gupta & Chaturvedi., 2018. ‘‘Financial Accounting’’, Shree Mahavir Book
Depot (Publishers), 2603, Nai Sarak New Delhi.
Goel D. K., 2018. Accountancy (Arya Publications), 1569/30 Naiwala,
Karol Bagh, New Delhi 110 005.
Maheshwari, S.N., 2018. Introduction to Accounting, Vikas Publishing
House: New Delhi.
Gupta, R.N. & M.Radhaswamy, 2018. Advanced Accountancy, Sultan
Chand and Sons: New Delhi.
77
Theortical Framework
4.17 TERMINAL QUESTIONS
1. What are Accounting standards? What is the need of issuing accounting
standards?
2. Describe the procedure of issuing AS in India.
3. Explain the concept of IFRS.
4. Describe the convergence of AS to Ind-AS.
5. What is business income? Why income should be computed?
6. What are the principles that govern the measurement of accounting
income?
7. What are the features of Ind-AS 101?

78