Title: AS 28
1Compliance with Accounting Standards
Presented by CA. Rajeev Bansal ACA,
D.I.S.A.(ICA) B. Com. M/s Rajeev Lakshmi Bansal
Co. Chartered Accountants
2Rationale behind Accounting Standards
- Measurements are within a conceptual framework
which emphasises prudence, going concern, cost
(not current value), accrual, substance over
form, consistency and materiality - Test each auditing issue for its capacity for
adding credibility to given propositions/assertion
s -
3Mandatory documents on accounting
- The standards describe the
- accounting principles and
- methods of applying these principles in the
preparation and presentation of financial
statements - so that they give a true and fair view
Purpose
- In the event of any deviation from a mandatory
standard the auditor is required to make adequate
disclosure in his report
Reporting
4Auditors duty in relation to a mandatory
accounting standard in case of companies
Ascertain accounting policy followed and
disclosure made by the enterprise
Is disclosure as per standard?
Is accounting policy as per standard?
No
No
Make negative statement under section 227(3)(d)
Make negative statement under section 227(3)(d)
Make positive statement under section 227(3)(d)
Yes
Yes
Is there a violation of legal requirements?
Yes
No
Is effect of deviation material?
Yes
Is true and fair view affected?
Yes
Qualify the audit report
No
No further action required
No
5Standard setting
- ICAI took up the task of laying down accounting
standards in 1977 - accounting standards issued by the ICAI were
however mandatory only for its members - Companies (Amendment) Act, 1999 gave recognition
to accounting standards thereby making it
mandatory for companies - Standards to be formulated by ASB/ICAI Council
- Standards to be prescribed by the Central
Government in consultation with the National
Advisory Committee on Accounting Standards (NACAS)
COMPLIANCE WITH ACCOUNTING STANDARDS IS A LEGAL
REQUIREMENT !!
6Companies (Accounting Standards) Rules, 2006
Central Government, in consultation with NACAS,
has issued the Companies (Accounting Standards)
Rules, 2006 notifying accounting standards 1-7
and 9-29, effective for COMPANIES for accounting
periods commencing on or after 7 December 2006
7Applicability
ICAI
RULES
- The Rules stipulate only two categories
- Small and Medium Sized Company (SMC) which is
entitled to certain exemptions and - (ii) other companies
- ICAI classifies enterprises into three categories
- Level I (large),
- Level II (medium) and
- Level III (small)
Unlike ICAI, no distinction between small and
medium companies
The prescribed standards are mandatory for all
companies except as exempted/relaxed for SMCs.
8Level II Enterprises
- Enterprises which are not Level I Enterprises but
fall in any one or more of the following category
- All commercial, industrial and business reporting
enterprises, whose turnover for the immediately
preceding accounting period on the basis of
audited financial statements exceeds Rs. 40 lakhs
but does not exceeds Rs. 50 crore. - All commercial, industrial and business reporting
enterprises having borrowings, including public
deposit, in excess of Rs. 1 crore but not in
excess of Rs. 10 crore at any time during the
accounting period - Holding and subsidiary enterprises of any of the
above at any time during the accounting period
9Auditors Duty Mandatory Accounting
Standard
- According to Para 6.1 of the Preface to the
statement of Accounting Standard (Revised 2004) - The Accounting Standards will be mandatory from
the respective date(s) mentioned in the
Accounting Standard(s). The mandatory status of
an Accounting Standard implies that while
discharging their attest functions, it will be
the duty of the members of the Institute to
examine whether the Accounting Standard is
complied with in the presentation of financial
statements covered by their audit. In the event
of any deviation from the Accounting Standard, it
will be their duty to make adequate disclosures
in their audit reports so that the users of
financial statements may be aware of such
deviation.
10Question - Answer
- Do the Accounting Standard issued by ICAI apply
in respect of Tax Audit under section 44AB of the
Income Tax Act, 1961 ? -
- Do the Accounting Standard issued by ICAI apply
to co-operative society ? - Do the Accounting Standard issued by ICAI apply
to Charitable entities ?
11Question AnswerTax - Audit u/s 44AB
- According to Announcement VI of ANNOUNCEMENTS OF
THE COUNCIL REGARDING STATUS OF VARIOUS DOCUMENTS
ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS
OF INDIA - It is hereby clarify that the mandatory
Accounting Standard also apply in respect of
Financial Statements audited under section 44AB
of the Income Tax Act, 1961. Accordingly, members
should examine compliance with the mandatory
Accounting Standard when conducting such audit
12Question Answer Co-operative Societies
- According to Para 3.3 of the Preface to the
statement of Accounting Standard (Revised 2004) - Accounting Standards are designed to apply to the
general purpose financial statements and other
financial reporting, which are subject to the
attest function of the members of the ICAI. - Accounting Standards apply in respect of any
enterprise (whether organised in corporate,
co-operative or other forms) engaged in
commercial, industrial or business activities,
irrespective of whether it is profit oriented or
it is established for charitable or religious
purposes. - Further, even if a very small proportion of the
activities of a co-operative society is
considered to be commercial, industrial or
business in nature, then it can not claim
exemption from the application of Accounting
Standard (GC 12/2002 issued by ICAI)
13General Purpose Financial Statements
- This would include Balance Sheet , PL account,
Cash Flow Statement and other statements and
explanatory notes which form part thereof, issued
for the use of various stakeholders, government
and their agencies and the public. - Thus, it is concluded that accounts prepared
solely for Tax purpose and/or for use by lenders
would be considered to be General Purpose
Financial Statements
14Question Answer Charitable Entities
- No, Accounting Standard of ICAI do not apply to
charitable entities. For example, collecting
donations and distributing them to flood affected
people - However, if a charitable entity is also engaged
in the activities of a commercial, industrial or
business nature(very small in proportion), then
the accounting standard would apply to all its
activities including those which are not
commercial, industrial or business in nature.
15Relaxations/Exemptions available to SMCs
AS 3, Cash flow statements
AS 17, Segment reporting
Full exemption
AS 21, AS 23, AS 25, AS 27
AS 18, Related Party Disclosures
AS 28, Impairment of assets
AS 20, Earnings per share
Limited exemptions
AS 19, Leases
AS 29, Provisions, contingent liabilities and
contingent assets
16Issues to be resolved
What happens if ICAI revises an accounting
standard?
?
- It seems that till such time that the central
government prescribes the revised standard,
companies would be required to continue to apply
the notified (i.e. pre-revised) standard
What standards are applicable to enterprises
other than companies?
?
ICAIs existing standards, unless ICAI decides to
announce that such enterprises should also follow
Government notified standards
17Issues to be resolved
What happens if ICAI issues an accounting
standard on a topic not covered by any of the
notified accounting standards?
?
The prudent view would be that until an
accounting standard on a new topic issued by ICAI
is prescribed by the Central Government, it will
be deemed to be an accounting standard
18The four AXIOMS
- Incomplete information creates UNCERTAINTY
- Uncertainty creates RISK for Investors
Creditors - Risk makes investors creditors demand a higher
Rate of Return (ROR) - Higher ROR means higher cost of capital for the
company and produces LOWER market values of
companys securities
19Quality financial reporting
- More complete information that will reduce
uncertainty - Less uncertainty will reduce risk for investors
and creditors - Reduced risk makes investors and creditors
satisfied with a lower Rate of Return (ROR) - Lower ROR means lower cost of capital for the
company which produces higher stock market values
20Query
- ABC Ltd. Was set up in a notified area so that it
could avail the sales tax deferral benefit, under
which it would pay sales tax collected to the
government after 7 years. The sales tax
collected, which will be paid to the government
after 7 years, is reflected as unsecured loan in
the Balance-Sheet or will this borrowing be
included for the purposes of determining Level 1,
2 ,3 enterprise - ?
21Response
- Though borrowing are not defined, the use of term
Including Public Deposit in the threshold
criteria suggests that the amount has to be
actually borrowed from some entity. - Therefore, liabilities relating to sales tax
deferral or provision or creditors, etc would not
be borrowings for the above purposes.
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