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CA Intermediate · Advanced Accounting

Applicability of Accounting Standards for CA Inter: Levels and Exemptions

Applicability of Accounting Standards decides which AS an entity must follow. Companies are Non-SMC or SMC; non-company entities are Level I, II or III based on listing, turnover, borrowings and holding or subsidiary links. Solve by testing the entity against the Level I conditions first, then Level II, else Level III, then apply the matching exemptions.

What this chapter covers

This chapter does not teach any single accounting standard. It tells you which standards apply to which entity. Before you apply AS 2 or AS 10 in a problem, you must know whether the entity has to follow it at all, or only in a relaxed form.

The core idea is classification. Non-company entities such as firms, trusts and sole proprietors are sorted into Level I, Level II and Level III using tests on listing, business type, turnover, borrowings and holding or subsidiary links. Companies follow the Companies (Accounting Standards) Rules and are treated as Non-SMC or SMC (Small and Medium Sized Company). Higher levels follow every standard in full. Lower levels get exemptions or simpler disclosure.

The chapter connects to the whole paper. Every later chapter on individual standards, financial statements and company accounts assumes you know the entity must comply. It is also a source of short, quick MCQs: classify an entity from a few facts, or say whether a standard applies.

This chapter is small, but the questions are fast to answer once the tests are clear. A typical MCQ gives you turnover, borrowings and listing status, and asks for the level or whether an exemption applies. You can earn these marks in under a minute each, with no calculation beyond comparing numbers. Weak classification also hurts you elsewhere: if you cannot say whether a standard applies, you may apply it wrongly in a written answer. A few hours of careful study here pays back across the paper.

Applicability of Accounting Standards: topics in the order to study them

  1. 1Applicability of Accounting Standards: OverviewStart here to understand why classification exists and how it links to the standards you study later.
  2. 2Classification of Companies: Level I, II and III EntitiesLearn the tests and thresholds next, because the exemptions only make sense once you can place an entity in its category.
  3. 3Exemptions and Relaxations for Level II and III EntitiesStudy this last, because it builds directly on the classification and needs standard-wise detail you should memorise after the tests are firm.

How to prepare Applicability of Accounting Standards

Treat this as a decision-tree chapter. Your goal is to run any entity through the same checks in the same order, every time.

  1. Read the overview once and note the two groups: companies (Non-SMC or SMC) and non-company entities (Level I, II, III).
  2. Write the Level I conditions on one page: listed or in process of listing, banks, financial institutions and insurance entities, turnover above ₹250 crore, borrowings above ₹50 crore, and holding or subsidiary links to such entities.
  3. Write the Level II conditions below it: not Level I, with turnover above ₹50 crore up to ₹250 crore, or borrowings above ₹10 crore up to ₹50 crore, or holding or subsidiary links to a Level II entity. Everything else is Level III.
  4. Note the measurement rules: turnover excludes other income and is for the immediately preceding accounting year. Borrowings are tested at any time during that year. Check the exact wording in the study material.
  5. Learn the exemptions standard by standard from the study material, in a table you make yourself. Revise the table, not the paragraphs.
  6. Practise 15 to 20 short MCQs where you classify an entity from a few facts. Always test Level I first, then Level II, else Level III.
  7. Practise two or three short written answers in this format: state the tests, apply the facts, conclude the level, then name the relief available.

Common mistakes in Applicability of Accounting Standards

  • Testing Level II before Level I

    Fix: Always run the Level I checks first: listing, bank or insurance status, turnover, borrowings, holding or subsidiary link. Only then move to Level II.

  • Including other income in turnover

    Fix: Use turnover from the business, excluding other income, as the study material specifies. If a question gives other income separately, leave it out.

  • Requiring all conditions to be met

    Fix: Any one Level I condition is enough to place the entity in Level I. Read the conditions as separate triggers.

  • Ignoring the holding and subsidiary link

    Fix: Check whether the entity holds or is held by a higher-level entity. Such a link can lift it into that level regardless of its own size.

  • Confusing the boundary values

    Fix: Mark each limit with its direction. For example, turnover must exceed ₹250 crore for Level I. Exactly ₹250 crore is not above it, so that test fails and Level II applies if other conditions fit.

  • Memorising exemptions as a paragraph

    Fix: Build a one-page table with standards on one side and the level on the other. Revise it repeatedly, and recite it from memory before the exam.

Last-day revision: Applicability of Accounting Standards

  • Non-company entities are classified into Level I, Level II and Level III. Companies are Non-SMC or SMC.
  • Test in order: Level I first, then Level II, and anything left is Level III.
  • Level I includes entities with listed or about-to-be-listed securities, and banks, financial institutions and insurance entities.
  • Level I also includes entities with turnover above ₹250 crore or borrowings above ₹50 crore.
  • Level II covers turnover above ₹50 crore up to ₹250 crore, or borrowings above ₹10 crore up to ₹50 crore, if not Level I.
  • Turnover for the test excludes other income.
  • Turnover and borrowings are looked at for the immediately preceding accounting year; borrowings at any time in that year.
  • A holding or subsidiary of a Level I entity is itself Level I. The same link rule applies for Level II.
  • Level I entities follow all Accounting Standards in full.
  • Level II and III entities get exemptions and relaxations from specified standards; learn them from your own table.
  • Meeting any one Level I condition is enough. You do not need to meet all of them.
  • Companies fall under the Companies (Accounting Standards) Rules, and Schedule III governs the format of their financial statements.

Applicability of Accounting Standards practice questions

Applicability of Accounting Standards in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Applicability of Accounting Standards: frequently asked questions

What is the difference between Level I, II and III entities?

They are categories for non-company entities, set by listing status, type of business, turnover, borrowings and holding or subsidiary links. Level I follows all standards in full. Level II and III get progressively more relaxations.

Does this chapter apply to companies or only to non-company entities?

Both are covered. Non-company entities use the Level I, II and III scheme. Companies are treated as Non-SMC or SMC under the Companies (Accounting Standards) Rules. Learn both and be clear which one a question is asking about.

How are MCQs asked from this chapter?

Most give you a few facts about an entity and ask for its level, or ask whether a particular standard applies or is relaxed. Use the same order of tests every time. There is no negative marking, so always attempt every MCQ.

Should I memorise the exemptions standard by standard?

Yes. These lists are direct recall. Make your own table from the study material, and revise it often. Check it against the current material before the exam.