Advanced Accounting · Applicability of Accounting Standards

Applicability of Accounting Standards: Overview for CA Inter Students

Updated 4 October 2026 · Fact-checked

Applicability of Accounting Standards tells you which standards a reporting entity must follow. For companies, the Companies (Accounting Standards) Rules, 2006, as amended, prescribe AS under section 133 of the Companies Act, 2013, after the Government examines NFRA's recommendations. Non-company entities follow ICAI's level-based scheme. To solve questions, identify the entity, check Ind AS or AS, then apply the relief.

Understand Applicability of Accounting Standards: Overview

Accounting Standards (AS) are written policies that fix how transactions are recognised, measured, presented and disclosed. They make financial statements of different entities comparable. The question this chapter answers is simple: for a given entity, which standards apply, and in what form?

ICAI is the body that formulates the Accounting Standards in India. It does the technical work and makes recommendations to NFRA. ICAI is a professional body, so its standards bind its members directly. Where a member audits financial statements and the entity has not followed the standards that apply to it, ICAI's professional requirements expect the member to deal with it in the audit report. If the non-compliance is material, the member should disclose it or qualify the report. This is a professional duty under ICAI's requirements, not a statutory reporting provision for entities outside the Companies Act.

For companies, the legal force comes from the Companies Act, 2013. Section 133 lets the Central Government prescribe standards, in consultation with the National Financial Reporting Authority (NFRA) and after examining the recommendations made by NFRA. ICAI formulates the standards and makes recommendations to NFRA. NFRA then recommends them to the Central Government, which prescribes them under section 133. Section 129 requires a company's financial statements to give a true and fair view and to comply with the standards notified under section 133. The Companies (Accounting Standards) Rules, 2006, as amended, are the current notified set of AS for companies. The Companies (Accounting Standards) Amendment Rules, 2021 amended the 2006 Rules, mainly to align them with Schedule III and for certain disclosure changes. They did not replace the 2006 Rules.

Companies split into two tracks. Companies that must follow Ind AS under the separate Companies (Indian Accounting Standards) Rules, 2015 do so. All other companies follow the AS in the 2006 Rules, as amended. Within the AS track, smaller companies get relaxations in some standards.

Non-company entities are firms, sole proprietors, trusts, societies and similar bodies. They are not under the Companies Act. ICAI classifies them into levels based on size criteria, and the classification has been revised by ICAI over time. Check the current levels and criteria in your ICAI study material for your exam attempt, and do not rely on an old list of levels. The top level follows all AS in full. The lower levels get exemptions or relaxations in some standards. The detailed tests for each level are covered in separate topics. Here you only need the big picture.

Key rules to remember

Source of AS for companies: Section 133, Companies Act, 2013 + Companies (Accounting Standards) Rules, 2006 as amended; The Central Government prescribes the standards in consultation with NFRA and after examining NFRA's recommendations. ICAI formulates and recommends to NFRA; NFRA recommends to the Government. Do not say ICAI itself notifies them for companies.
Compliance duty of a company: Section 129: financial statements must comply with the notified standards; Schedule III sets the format. Accounting Standards set the recognition, measurement and disclosure rules.
Two tracks for companies: Ind AS (Rules, 2015) for covered companies; AS (Rules, 2006 as amended) for all others; A company is on one track, never both.
Non-company entities: ICAI's level-based classification, using the current ICAI criteria; The top level applies all AS in full. Lower levels get relaxations, so check the exemption for the specific standard. Use the levels and criteria in your current ICAI study material.
Role of ICAI: ICAI formulates and recommends to NFRA; NFRA recommends to the Central Government, which prescribes for companies; ICAI standards bind members; Use this sentence in theory answers.

How to solve Applicability of Accounting Standards: Overview questions

Use this method for any applicability question, whether it is an MCQ or a descriptive scenario.

1Identify the entity: company, or non-company (firm, trust, society, sole proprietor).
2If it is a company, decide the track: Ind AS or AS. If the facts say Ind AS applies, stop; AS rules are not the answer.
3If it is on the AS track, name the source: Companies (Accounting Standards) Rules, 2006, as amended, under section 133 of the Companies Act, 2013.
4If it is a non-company entity, place it in its ICAI level using the facts and criteria given.
5Check whether the standard in the question has an exemption or relaxation for that class of entity.
6State the consequence: full compliance or relaxed compliance. If a member audits the entity and non-compliance is material, note that ICAI's professional requirements expect the member to disclose it or qualify the audit report.
7Write the conclusion in one clear sentence that names the entity, the framework and the standard.

Quickest way: Entity, track, relief in three lines

When to use it: Use this for MCQs and for short 3-5 mark theory questions where time is tight.

MCQs: spot the entity type in the stem first. Eliminate any option that mixes up the Companies Act with ICAI as the notifying authority.
MCQs: eliminate options that say Ind AS and AS both apply to the same company, or that say the 2021 Rules replaced the 2006 Rules.
Written: use three labelled lines: Entity, Framework, Relief. This is easy for the examiner to give step marks on.
Always cite section 133 and the Companies (Accounting Standards) Rules, 2006, as amended, for AS-track companies.
If unsure about a threshold in a case, write the rule in words and show your classification reasoning, rather than guessing a figure.

Common mistakes in Applicability of Accounting Standards: Overview

Saying ICAI notifies Accounting Standards for companies.
ICAI formulates the standards, so students assume it also gives them legal force.
Fix: Write: ICAI formulates and recommends to NFRA, NFRA recommends to the Central Government, the Government prescribes under section 133 after examining NFRA's recommendations, and the Rules make them binding on companies.
Saying the Companies (Accounting Standards) Rules, 2021 replaced the 2006 Rules.
The 2021 name looks like a fresh set of rules.
Fix: The 2021 Rules are amendment rules. They amended the 2006 Rules, which remain the base set. Cite the AS Rules as Companies (Accounting Standards) Rules, 2006 as amended.
Applying AS to a company that must follow Ind AS.
Students stop at the word company and do not check the track.
Fix: Check Ind AS applicability first. Only if it does not apply should you move to the AS rules.
Treating non-company entities as free of any standards.
They are outside the Companies Act, so students think nothing applies.
Fix: Remember ICAI standards apply to them through ICAI's level-based scheme. A member auditing such an entity should disclose or qualify the report where non-compliance is material, as ICAI's professional requirements expect.
Assuming lower-level entities are exempt from all standards.
Relaxation is confused with exemption.
Fix: The relief is standard-by-standard. Name the standard and check the exemption instead of giving a blanket answer.
Mixing up Schedule III and Accounting Standards.
Both deal with company financial statements.
Fix: Schedule III gives the format and minimum disclosures. Accounting Standards give recognition, measurement and disclosure principles. Both must be followed.

Worked examples

Example 1

Explain the role of ICAI and the Central Government in making Accounting Standards applicable to companies in India. (4 marks)

Show the solution

Provision: Section 133 of the Companies Act, 2013 empowers the Central Government to prescribe standards of accounting.
Role of ICAI: ICAI formulates the standards and makes recommendations to NFRA. NFRA then recommends them to the Central Government. The Central Government prescribes them in consultation with NFRA and after examining NFRA's recommendations.
Notified form: The prescribed standards are contained in the Companies (Accounting Standards) Rules, 2006, as amended (the 2021 Amendment Rules amended the 2006 Rules).
Compliance: Section 129 requires a company's financial statements to comply with the notified standards.
Conclusion: ICAI formulates and recommends to NFRA, NFRA recommends to the Government, the Government prescribes, and the company must comply.

Answer: ICAI formulates Accounting Standards and makes recommendations to NFRA, which recommends them to the Central Government. The Central Government prescribes them for companies under section 133 of the Companies Act, 2013, in consultation with NFRA and after examining its recommendations, through the Companies (Accounting Standards) Rules, 2006, as amended. Companies must comply with them in their financial statements under section 129.

Example 2

Mehta & Sons, a partnership firm, is not a company. Its accountant says no Accounting Standards apply because the Companies Act does not cover firms. Is this correct? Which is the right framework? (3 marks)

Show the solution

Entity: Mehta & Sons is a non-company entity. The Companies (Accounting Standards) Rules, 2006, as amended, do not govern it.
Framework: ICAI's Accounting Standards apply to non-company entities according to ICAI's level-based classification.
Classification: The firm must be placed in a level using the criteria given in the question or ICAI's current scheme. That level decides which standards apply in full and which have relief.
Consequence: Where the firm is audited by an ICAI member and non-compliance with an applicable standard is material, ICAI's professional requirements expect the member to disclose it or qualify the audit report. This is a professional duty, not a statutory reporting provision.
Conclusion: The accountant's view is wrong.

Answer: The accountant is incorrect. The Companies Act does not apply, but ICAI's Accounting Standards apply to the firm as a non-company entity under ICAI's level-based classification, with relief for some standards at lower levels. If the firm is audited by an ICAI member, material non-compliance should be disclosed or the audit report qualified, as ICAI's professional requirements expect.

Exam tips

Write the full name: Companies (Accounting Standards) Rules, 2006, as amended, with section 133 of the Companies Act, 2013. This earns the provision mark.
In MCQs, watch for the word notified. For companies the Government prescribes the standards. ICAI formulates and recommends to NFRA.
Do the entity, track, relief check in every scenario question. Name the entity first.
Do not quote money thresholds in this topic unless the question gives them. Study the level tests in the classification topics.
Keep theory answers to the provision, the facts, and a one-line conclusion.

Practice questions from Applicability of Accounting Standards

Applicability of Accounting Standards: Overview 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: Overview: frequently asked questions

What are the Companies (Accounting Standards) Rules, 2006, as amended?

They are the rules notified by the Central Government under section 133 of the Companies Act, 2013, which set out the Accounting Standards that apply to companies not covered by Ind AS. The Companies (Accounting Standards) Amendment Rules, 2021 amended them; they did not replace them.

Do Accounting Standards apply to non-company entities?

Yes. ICAI's standards apply to non-company entities under ICAI's level-based classification. Lower levels get relaxations in some standards, so you must check each standard and use the current criteria in your ICAI study material.

How should I study this chapter for CA Intermediate?

First learn the roles of ICAI, NFRA and the Central Government in one clear sentence. Then learn the company tracks (Ind AS versus AS) and the levels for non-company entities as given in your current study material. Finish by practising short scenario questions with the entity, track, relief check.

Is this chapter more theory or numerical?

It is mostly theory and is usually tested through MCQs and short scenario answers. The marks come from naming the right framework and provision, not from calculations.