Introduction to Accounting Standards (GAAP, AS and Convergence to Ind AS): formula sheet

Key formulas

Meaning of GAAP

GAAP = Laws + Accounting Standards + Regulator rules + Professional guidance + Accepted practice

Use this as a memory line for the sources in an answer.

Dual aspect concept

Assets = Capital + Liabilities

Every transaction has two equal effects, which is why the books balance.

Business entity concept

Owner and business are separate for accounting

Owner's drawings are not business expenses.

Matching concept

Profit = Revenue of the period − Expenses of the same period

Expenses are matched to the revenue they helped earn, not to cash paid.

Conservatism

Provide for all expected losses; do not anticipate profits

A prudence convention, for example stock at lower of cost and net realisable value.

Consistency

Same policy from period to period unless a change is justified

A change should be disclosed with its effect.

Materiality

Disclose and treat separately only items that could influence a user's decision

Small amounts may be treated simply, such as expensing a low-value item.

Meaning of accounting standards

Accounting standards = written rules on recognition + measurement + presentation + disclosure

Use this as the core of any definition answer.

Objectives of the ASB (Preface, para 2.1)

Suggest areas for new standards; formulate standards; adapt IFRSs; review and revise standards; give interpretations and guidance; take part with national and international bodies

The Preface also lists carrying out other functions relating to accounting and accounting standards.

Main function of the ASB (para 2.2)

Formulate standards, taking into account applicable laws, customs, usages and business environment in India

Quote this when asked how Indian conditions shape standards.

Approach to IFRS (para 2.3)

Give due consideration to IFRSs and integrate them to the extent possible, in light of Indian conditions and practices

Do not say India copies IFRS fully under the AS; the wording is 'to the extent possible'.

Small and Medium Sized Company (Rule 2(e), Companies (Accounting Standards) Rules, 2021)

Not listed or in process of listing; not a bank, financial institution or insurance company; turnover (excluding other income) ≤ ₹250 crore; borrowings ≤ ₹50 crore at any time; not holding or subsidiary of a non-SMC

All five conditions must be met, tested as at the end of the relevant accounting period. Companies failing it are Non-SMCs.

Date and body of formation

ICAI constituted ASB on 21 April 1977

Purpose: harmonise diverse accounting policies and practices in India.

Main function of ASB

Formulate standards, considering Indian laws, customs, usages, business environment and IFRSs

IFRSs are integrated to the extent possible, in light of conditions and practices in India.

Framework versus Standard

If conflict: Accounting Standard prevails over Framework

The Framework is not an Accounting Standard and overrides no specific standard.

Legal force chain

ASB drafts → ICAI → NACAS/NFRA recommendation → Central Government notifies Rules under Companies Act

Notified rules make standards mandatory for companies.

SMC test (all must hold)

Not listed or in process of listing; not a bank, FI or insurer; turnover (excluding other income) ≤ ₹250 crore in preceding year; borrowings ≤ ₹50 crore at any time in preceding year; not holding/subsidiary of a non-SMC

Conditions are checked as at the end of the relevant accounting period. Companies failing the test are Non-SMCs.

SMC test

SMC = unlisted AND not bank/FI/insurer AND turnover ≤ ₹250 crore AND borrowings ≤ ₹50 crore AND not holding/subsidiary of a non-SMC

All five conditions must hold at the end of the relevant accounting period. Failing any one makes the company a Non-SMC. Turnover excludes other income. The limits are 'does not exceed'.

Standard not applicable to SMCs

AS 17 Segment Reporting

The only standard not applicable to SMCs in its entirety.

AS 15 relaxations for SMCs

Non-vesting short-term accumulating compensated absences; discounting beyond 12 months; defined benefit plans; other long-term benefits

For defined benefit plans and other long-term benefits the SMC must still provide the actuarial liability using the Projected Unit Credit Method, with the discount rate from government bond yields at the balance sheet date.

Other SMC relaxations

AS 19: some disclosures; AS 20: diluted EPS exempt; AS 28: value in use by reasonable estimate; AS 29: paragraphs 66 and 67 disclosures not applicable

In AS 28, an SMC that does not use the present value technique also need not give the disclosure in paragraph 121(g).

Non-company entities

Level I: all AS in full; Levels II to IV: relief by level

AS 3 is not applicable to Levels II, III and IV. AS 10 and AS 11 apply to Levels III and IV with disclosure exemption. AS 14 is not applicable to Level IV. AS 15 is applicable with exemptions to Levels II, III and IV.

IASB role

IASB develops and issues IFRS; IFRS Foundation oversees the IASB

Do not say the IASB is a government body. It is an independent standard-setter.

IAS vs IFRS

IAS = issued by IASC (before 2001); IFRS = issued by IASB (from 2001)

Both are in force together unless withdrawn or replaced.

India's approach

IFRS → converged (with carve-outs) → Ind AS

India converged with IFRS. It did not adopt IFRS as issued.

Core aim

Harmonisation = comparability + transparency + quality across countries

Use these three words in theory answers.

Convergence vs adoption

Convergence = IFRS-aligned standards with Indian changes; Adoption = IFRS as issued, no change

India followed convergence. Ind AS are not a word-for-word copy of IFRS.

Phase I (Ind AS mandatory from 2016-17)

Net worth ≥ ₹500 crore (listed or unlisted) + their holding, subsidiary, associate and JV companies

Voluntary adoption was allowed from 2015-16. Also covers listed companies with net worth of ₹500 crore or more.

Phase II (Ind AS mandatory from 2017-18)

All other listed or soon-to-be-listed companies (not on SME exchanges) + unlisted companies with net worth ≥ ₹250 crore but < ₹500 crore + their group entities

Listed companies are covered whatever their net worth, except those listed only on SME exchanges.

Companies outside the roadmap

Follow AS notified in the Companies (Accounting Standards) Rules, 2021

Unlisted companies with net worth below ₹250 crore that are not group entities of an Ind AS company usually come here. Banks, insurers and NBFCs follow their own roadmaps.

SMC test (all five conditions must hold)

Not listed or in process of listing; not a bank, financial institution or insurer; turnover (excluding other income) ≤ ₹250 crore; borrowings ≤ ₹50 crore; not holding or subsidiary of a non-SMC

Turnover and borrowings are tested for the immediately preceding accounting year. Conditions are checked as at the end of the relevant accounting period.

AS 17 and SMCs

AS 17 Segment Reporting: not applicable to SMCs in its entirety

Other relaxations for SMCs are partial, for AS 15, 19, 20, 28 and 29.

Quick revision

• GAAP means the accepted principles, conventions, laws and standards used to prepare financial statements.
• Accounting Standards are written policy documents on recognition, measurement, presentation and disclosure.
• Standards aim at comparability, reliability and reduced choice of accounting treatments.
• ICAI formulates standards through its Accounting Standards Board (ASB).
• NFRA is the national body that oversees financial reporting and audit quality in India.
• Standards become binding on companies when notified under the Companies Act, 2013.
• IASB issues IFRS, the international financial reporting standards.
• Ind AS are Indian standards converged with IFRS, not copied word for word.
• Which set applies, AS or Ind AS, depends on the class and size of the entity.
• Check your study material for the exact applicability thresholds before the exam.
• Each later chapter in Paper 6 applies a specific standard, so link them to this list.

Common mistakes

• Treating GAAP as a single book or one Act. Fix: Say GAAP is a combination of law, standards, regulator rules, guidance and accepted practice.
• Confusing concepts with conventions. Fix: Remember that concepts are basic assumptions of recording, while conventions are practical customs like consistency, conservatism, materiality and full disclosure.
• Writing that standards are laws passed by Parliament. Fix: Say standards are formulated by the ASB for ICAI, and companies follow them as notified under the Companies (Accounting Standards) Rules, 2021.
• Saying the ASB copies IFRS entirely. Fix: Use the Preface wording: the ASB gives due consideration to IFRSs and integrates them to the extent possible, in light of Indian conditions.
• Saying ICAI notifies accounting standards for companies. Fix: Write that ASB formulates and ICAI establishes them, while the Central Government notifies them for companies.
• Treating the Framework as an Accounting Standard. Fix: Remember the Framework is not a standard, and in a conflict the standard prevails.
• Believing the AS list runs from AS 1 to AS 32, or has no gaps. Fix: Remember the list is AS 1 to AS 29 without AS 6 and AS 8.
• Treating a company with turnover of exactly ₹250 crore as a Non-SMC. Fix: Turnover up to and including ₹250 crore passes. Same for borrowings of ₹50 crore.
• Writing that India has adopted IFRS fully. Fix: Write: India has converged with IFRS through Ind AS, which keep a few carve-outs for Indian conditions.
• Treating IAS and IFRS as completely separate or one as replacing the other. Fix: Remember: IAS were issued by the IASC, IFRS by the IASB. The IASB adopted the existing IAS, so both are in force.

Exam tips

• For 'what is GAAP' questions, always list sources; this earns separate marks.
• In MCQs, spot the trigger word and match it to one concept or convention.
• Do not confuse GAAP with Ind AS; Ind AS is one source within the Indian GAAP framework.
• In a short note, use bullet points with one line of explanation each and add a small example.
• Attempt scenario questions by naming the concept first and then stating the amount effect.
• Learn the definition in one line, then add Indian context (ASB, ICAI, IFRS consideration) to stand out.
• For benefits and limitations questions, give both sides, numbered, with a reason for each point.
• In MCQs, watch for traps like 'standards are issued by the Government' or 'all alternatives are removed'; both are wrong.