CA Intermediate · Advanced Accounting

Introduction to Accounting Standards: formula sheet

Full chapter guide

Key formulas

Drafting body: ASB (ICAI) → drafts Accounting Standards; The ASB was constituted by ICAI in 1977 with members from ICAI, government, regulators, industry and academia.
Sequence of formulation: Identify area → study law, practice and international standards → exposure draft → comments → final draft → ICAI Council approval → issue; Learn this order. Exam answers often ask for the steps in sequence.
Statutory route for companies: ICAI (ASB) submits to NFRA → NFRA examines and recommends to Central Government → Central Government prescribes → MCA notifies (Companies (Accounting Standards) Rules); This is what gives a standard legal force for companies under the Companies Act, 2013.
Two-layer rule: ICAI issues = professional authority; MCA notifies = legal authority for companies; Use this to separate who writes a standard from who makes it mandatory.
Five conditions for an SMC (all must be met): SMC = (1) not listed or in process of listing in India or abroad (equity or debt) AND (2) not a bank, financial institution or insurance company AND (3) turnover (excluding other income) ≤ ₹250 crore in the immediately preceding year AND (4) borrowings (including public deposits) ≤ ₹50 crore at any time in the immediately preceding year AND (5) not a holding or subsidiary of a company that is not an SMC; Failing any one condition makes the company a Non-SMC. Turnover excludes other income. Borrowings are checked at any time in the year, not just at year end.
Non-SMC: Non-SMC = every company following AS that is not an SMC; It must comply with all the Accounting Standards in full.
Company ceases to be an SMC: Status is tested on the immediately preceding year's figures. If the company fails the test → no SMC exemption or relaxation in the current accounting period; The company is treated as a Non-SMC for that period.
Non-SMC becomes an SMC: A company that was a Non-SMC and becomes an SMC → exemptions are available only after it remains an SMC for two consecutive accounting periods; This rule applies to a company that moves from Non-SMC to SMC. Until the two consecutive periods are complete, treat the company as a Non-SMC for exemptions.
Cash flow and segment reporting: AS 3 (Cash Flow Statements): not required for an SMC, required for a Non-SMC. AS 17 (Segment Reporting): applies only to enterprises whose equity or debt securities are listed or in process of listing; An SMC is unlisted, so it is not required to give segment reporting. An unlisted Non-SMC is also not required to give segment reporting under AS 17. Check listing for AS 17 and SMC status for AS 3.
Earnings per share: AS 20 applies to listed or in-process-of-listing enterprises and to any enterprise that discloses EPS. An SMC that discloses EPS need not disclose diluted EPS when it discloses basic EPS; The EPS relaxation covered on this page is for diluted EPS. It does not remove AS 20 for an enterprise that discloses EPS.
Disclosure when relaxations are used: SMC using any exemption or relaxation → disclose that it is an SMC and has complied with the AS only to the extent applicable; Write this in the financial statements. It is not optional.

Quick revision

Accounting Standards are policy documents that standardise recognition, measurement, presentation and disclosure.
Main aims: uniformity, comparability, reliability and removal of alternative treatments where possible.
Standards help users compare the financial statements of different entities and periods.
Standards cannot cover every situation and may limit judgement, so they have limitations.
Standards must work within the law, and the law overrides a standard in case of conflict.
In India, ICAI's Accounting Standards Board prepares draft standards, which then go through review and approval.
Standards for companies are notified under the Companies Act, 2013 by the Central Government.
Learn which entities follow AS and which follow Ind AS from the study material.
Ind AS are converged with international standards, not identical to them in every respect.
Convergence means moving Indian standards towards global standards, with carve-outs where needed.
Companies Act, 2013 financial statements follow Schedule III.
MCQs here need recall only, so learn exact terms.

Common mistakes

Saying standards eliminate all alternative treatments. Fix: Write that standards reduce or narrow alternatives. Some choices remain, for example in cost formulas.
Confusing objectives with benefits. Fix: Objectives are what standards aim to do, such as harmonisation. Benefits are what users gain, such as comparability and credibility. Keep two separate lists.
Saying that ICAI notifies Accounting Standards for companies. Fix: Write that ICAI issues and MCA notifies. Companies are bound only through the Companies (Accounting Standards) Rules.
Saying that NFRA drafts Accounting Standards. Fix: Write that the ASB drafts and ICAI submits the recommended standards to NFRA. NFRA examines them and recommends them to the Central Government, which prescribes them through MCA notification.
Treating a company as an SMC because its turnover is below ₹250 crore, without checking the other four conditions. Fix: Test all five conditions every time. Write them as a checklist in the margin and tick each one.
Including other income when testing the turnover limit. Fix: Use turnover only, excluding other income, as the Rules define it.

Exam tips

Prepare short lists of objectives, benefits and limitations, each with three to five points.
Use numbered points with one explanatory line; this earns more than a paragraph.
In MCQs, watch for absolute words like 'all' or 'eliminate'. They are usually wrong.
Link the topic to later standards by naming one example, such as AS 2 for inventories, to show applied understanding.
Cite section 133 of the Companies Act, 2013 as the basis for notifying Accounting Standards for companies, and be accurate with any other section numbers or dates you quote.
Learn the chain of bodies by verb: ASB drafts, Council issues, NFRA recommends to the Government, MCA notifies. Most MCQs test this.
In a written answer, number the stages. Each stage can earn a mark.
Always write both layers, the ICAI process and the statutory process, when the question says formulation and notification.