Advanced Accounting · Introduction to Accounting Standards

Process of Formulation of Accounting Standards in India

Updated 4 October 2026 · Fact-checked

Accounting Standards in India are formulated by the Accounting Standards Board (ASB) of ICAI, which prepares drafts after consulting stakeholders and issues them with Council approval. For companies, ICAI's recommended standards go to NFRA, which examines and recommends them to the Central Government. The MCA then notifies them as Companies (Accounting Standards) Rules.

Understand Process of Formulation of Accounting Standards in India

Accounting Standards are written policy documents that tell you how to recognise, measure, present and disclose transactions in financial statements. They exist so that two companies reporting the same transaction show it in the same way. Someone must write them, and someone must give them legal force. That is the whole topic.

The drafting body is the Accounting Standards Board (ASB), set up by ICAI in 1977. The ASB has representatives from ICAI, government departments, the regulators, industry bodies and academic institutions. This is deliberate. A standard affects preparers, users, auditors and regulators, so their views are heard before it is finalised.

The ASB works in stages. It identifies the area where a standard is needed and considers the existing law, customs and business practices. It also considers international standards, such as those of the IASB, and adapts them to Indian conditions. It then prepares an exposure draft and circulates it for comments to the public, including ICAI members, regulators and industry bodies. After considering the comments, the ASB finalises the draft and submits it to the ICAI Council. The Council considers it and issues it as an Accounting Standard.

Issue by ICAI is not the end for companies. Under the Companies Act, 2013, the Central Government prescribes Accounting Standards. ICAI (through the ASB) submits its recommended standards to the National Financial Reporting Authority (NFRA). NFRA examines them and recommends them to the Central Government, which then prescribes them. The Ministry of Corporate Affairs (MCA) notifies them through the Companies (Accounting Standards) Rules, 2006, as amended (for example, by the 2016 and 2021 amendment rules). Once notified, a company must follow them, and the auditor must report on compliance.

So remember two layers. ICAI, through the ASB, writes and issues the standards, which bind its members. The Government, through NFRA's recommendation and MCA's notification, gives them statutory force for companies.

Key rules to remember

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.

How to solve Process of Formulation of Accounting Standards in India questions

Use this method for any question on how Accounting Standards are made, issued or notified.

1Read the question and decide what is asked: the role of ASB, the sequence of steps, or the legal route for companies.
2Open with a one-line definition: an Accounting Standard is a written policy that governs recognition, measurement, presentation and disclosure.
3Name the drafting body: the ASB of ICAI, and mention its mixed composition.
4List the stages in order: identification, study of law and practice and international standards, exposure draft, comments, final draft, Council approval.
5Then add the statutory layer: ICAI submits its recommended standards to NFRA, NFRA examines and recommends them to the Central Government, the Central Government prescribes them, and MCA notifies them under the Companies Act, 2013.
6Close with the effect: notified standards bind companies, and the auditor reports on compliance.
7For short MCQs, match the verb to the body: ASB drafts, ICAI Council issues, NFRA recommends to the Government, MCA notifies.

Quickest way: Who does what: one-line recall

When to use it: Use this for MCQs and for the first line of any written answer when time is short.

Write the chain: ASB drafts → ICAI Council issues → ICAI submits to NFRA → NFRA recommends to Government → MCA notifies.
In an MCQ, look for the verb. Drafts or prepares means ASB. Notifies means MCA. Recommends to the Central Government means NFRA.
Eliminate any option that says ICAI notifies standards for companies. ICAI issues them; the Government notifies them.
In a written answer, use two short paragraphs: first the ICAI process, then the statutory process. Number the stages so the examiner can award a mark for each.

Common mistakes in Process of Formulation of Accounting Standards in India

Saying that ICAI notifies Accounting Standards for companies.
ICAI issues the standards, so students assume it also gives them legal force.
Fix: Write that ICAI issues and MCA notifies. Companies are bound only through the Companies (Accounting Standards) Rules.
Saying that NFRA drafts Accounting Standards.
NFRA is a standard-setting body in the news, so its role gets mixed up with the ASB.
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.
Skipping the exposure draft and comments stage.
Students remember only the start (ASB) and the end (issue).
Fix: Always include the exposure draft circulated for public comments before the final draft goes to the Council.
Forgetting that the ASB has members from outside ICAI.
The word Board is read as an internal ICAI committee.
Fix: Mention representatives of government, regulators, industry bodies and academic institutions, as well as ICAI.
Treating the process as only Indian and ignoring international standards.
Students focus on Indian bodies and forget the study stage.
Fix: State that the ASB considers international standards and adapts them to Indian law, customs and business practice.

Worked examples

Example 1

Explain the process followed by the Accounting Standards Board of ICAI in formulating an Accounting Standard.

Show the solution

Define the body: the ASB was set up by ICAI in 1977 to formulate Accounting Standards. It includes representatives of ICAI, government departments, regulators, industry bodies and academic institutions.
Stage 1: The ASB identifies the area where a standard is needed.
Stage 2: It studies the applicable laws, customs, business practices and international standards, and adapts them to Indian conditions.
Stage 3: It prepares an exposure draft and circulates it to the public, members, regulators and industry for comments.
Stage 4: It considers the comments and finalises the draft.
Stage 5: The final draft goes to the ICAI Council, which considers it and issues the standard.

Answer: The ASB identifies the need, studies law, practice and international standards, issues an exposure draft, considers comments, finalises the draft, and submits it to the ICAI Council, which issues the Accounting Standard.

Example 2

ICAI has issued an Accounting Standard. Explain how it becomes binding on a company under the Companies Act, 2013.

Show the solution

State the starting point: an ICAI-issued standard binds ICAI members professionally, but a company needs a statutory prescription.
State the recommendation: ICAI submits its recommended standard to NFRA, which examines it and recommends it to the Central Government.
State the prescription: the Central Government prescribes the standards, and the MCA notifies them as the Companies (Accounting Standards) Rules.
State the effect: once notified, a company must prepare its financial statements in line with them, and the auditor reports on compliance.

Answer: ICAI submits the standard to NFRA, NFRA examines and recommends it to the Central Government, the Central Government prescribes it and the MCA notifies it through the Companies (Accounting Standards) Rules. Only then is it mandatory for companies, and the auditor reports on compliance.

Exam tips

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.
Remember the statutory route: ICAI's recommended standards go to NFRA, NFRA recommends to the Central Government, and the MCA notifies the Rules.
Do not name specific section numbers unless you are certain. The rule stated in plain words earns the marks.
If an MCQ offers ICAI as the body that notifies standards for companies, treat it as a trap.

Practice questions from Introduction to Accounting Standards

Process of Formulation of Accounting Standards in India in other exams

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

Process of Formulation of Accounting Standards in India: frequently asked questions

Who formulates Accounting Standards in India?

The Accounting Standards Board of ICAI prepares the drafts. The ICAI Council then issues them. For companies, they take legal effect when the MCA notifies them.

What is the role of NFRA in Accounting Standards?

ICAI submits its recommended standards to NFRA. NFRA examines them and recommends them to the Central Government under the Companies Act, 2013. It does not draft them in the way the ASB does.

Who notifies Accounting Standards in India?

The Ministry of Corporate Affairs notifies them for companies through the Companies (Accounting Standards) Rules, 2006, as amended. Until notified, they bind ICAI members professionally but do not by themselves bind companies.

What is an exposure draft?

It is a draft of a proposed standard circulated for public comment before it is finalised. The ASB considers the comments and then prepares the final draft for the ICAI Council.

Why does the ASB include members from outside ICAI?

A standard affects preparers, users, auditors and regulators. Including government, regulators, industry and academic representatives helps the ASB reflect their views and keeps the standards practical.