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Financial Accounting · Introduction to Accounting Standards (GAAP, AS and Convergence to Ind AS)

Accounting Standards Setting Process in India: ICAI, ASB and NFRA

Updated 10 October 2026 · Fact-checked

In India, the ICAI's Accounting Standards Board (ASB) formulates accounting standards, keeping in view Indian laws and practices and the IFRSs. Under the Companies Act, 2013, the Central Government notifies the standards through the Companies (Accounting Standards) Rules, after the advice of NACAS or NFRA. You solve questions by naming the body and its role.

Understand Standard-Setting Process and Role of ICAI, ASB and NFRA

An accounting standard is a written rule on how to recognise, measure, present and disclose items in financial statements. Without standards, two companies could report the same transaction in very different ways. Standards make statements comparable and reliable.

In India, the Institute of Chartered Accountants of India (ICAI) recognised the need to harmonise the diverse accounting policies and practices in use. It therefore constituted the Accounting Standards Board (ASB) on 21st April, 1977.

The ASB's main function is to formulate accounting standards so that the ICAI can establish them in India. While doing so, it takes into account the applicable laws, customs, usages and business environment in India. It also gives due consideration to the International Financial Reporting Standards (IFRSs) issued by the IASB and tries to integrate them to the extent possible, in the light of Indian conditions and practices.

The ASB is broad-based, so that all interest groups take part. Besides elected ICAI Council members, it includes nominees of the Central Government (for example the Department of Company Affairs, the Comptroller and Auditor General's office and the Central Board of Direct Taxes), a representative of the Institute of Cost and Works Accountants of India, the Institute of Company Secretaries of India, industry associations (ASSOCHAM, CII, FICCI), RBI, SEBI, academic institutions, financial institutions and co-opted eminent professionals.

A standard drafted by the ASB does not bind companies by itself. Legal force for companies comes from the Companies Act, 2013, under which the Central Government notifies standards as the Companies (Accounting Standards) Rules, 2021. The advisory roles of NACAS (National Advisory Committee on Accounting Standards) and NFRA (National Financial Reporting Authority) sit in this notification step. In your answer, state that the Central Government notifies on their recommendation or advice, without going into section details beyond what you are sure of.

Key rules to remember

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.

How to solve Standard-Setting Process and Role of ICAI, ASB and NFRA questions

Use this method for any question on who sets, recommends or notifies standards in India.

  1. 1Read the question and spot the verb: formulate, recommend, advise, notify, enforce or apply.
  2. 2Match the verb to the body. Formulate: ASB of ICAI. Notify: Central Government. Advise or recommend: NACAS or NFRA.
  3. 3State the legal base: Companies Act, 2013 and the Companies (Accounting Standards) Rules, 2021.
  4. 4Add the Indian angle: the ASB considers Indian laws, customs, usages and business environment, and IFRSs.
  5. 5If the question is about applicability, test the company against the SMC conditions one by one.
  6. 6Close with the point that standards prevail over the Framework in a conflict.

Quickest way: Verb-to-body matching

When to use it: Use for MCQs and for the opening lines of a short note.

  1. Underline the action word in the question.
  2. Formulate = ASB. Notify = Central Government. Advise = NACAS/NFRA.
  3. Eliminate options that give ICAI power to make standards binding on companies on its own.
  4. For SMC questions, look for one failed condition such as listing, ₹250 crore turnover or ₹50 crore borrowings.

Common mistakes in Standard-Setting Process and Role of ICAI, ASB and NFRA

  • Saying ICAI notifies accounting standards for companies.

    ICAI issues the standards, so students assume it also gives them legal force.

    Fix: Write that ASB formulates and ICAI establishes them, while the Central Government notifies them for companies.

  • Treating the Framework as an Accounting Standard.

    Both documents come from the ICAI and are read together.

    Fix: Remember the Framework is not a standard, and in a conflict the standard prevails.

  • Ignoring Indian conditions and IFRSs in the ASB's function.

    Students memorise only the formation date.

    Fix: Mention both: it considers Indian laws and practices, and gives due consideration to IFRSs.

  • Calling a company with ₹250 crore turnover or ₹50 crore borrowings a Non-SMC.

    Students misread the limit as a minimum.

    Fix: The limits are 'does not exceed' and 'not in excess of', so exactly ₹250 crore or ₹50 crore still passes that test.

  • Forgetting that all SMC conditions must hold together.

    Students stop after checking turnover.

    Fix: Check all five conditions. Failing even one makes the company a Non-SMC.

Worked examples

Example 1

Explain who formulates accounting standards in India and how they become binding on companies.

Show the solution
  1. The ICAI constituted the Accounting Standards Board on 21 April 1977 to harmonise diverse accounting policies and practices.
  2. The ASB formulates the standards, considering applicable laws, customs, usages and business environment in India, and giving due consideration to IFRSs.
  3. The ASB includes elected Council members and nominees and representatives of government, other professional bodies, industry associations, regulators and academics, so all interest groups take part.
  4. Standards become binding on companies when the Central Government notifies them as the Companies (Accounting Standards) Rules under the Companies Act, with NACAS or NFRA advising.

Answer: The ASB of ICAI formulates the standards; the Central Government makes them binding on companies by notifying the Companies (Accounting Standards) Rules, with NACAS/NFRA recommending.

Example 2

Pragati Foods Ltd is unlisted and not a bank, financial institution or insurer. Its turnover (excluding other income) last year was ₹240 crore. Its highest borrowing at any time last year was ₹55 crore. It is not a holding or subsidiary of a non-SMC. Is it an SMC?

Show the solution
  1. Listing: unlisted, so the condition is met.
  2. Nature: not a bank, FI or insurer, so met.
  3. Turnover: ₹240 crore does not exceed ₹250 crore, so met.
  4. Borrowings: ₹55 crore exceeds ₹50 crore at some time, so this condition fails.
  5. All conditions must be satisfied, so one failure is enough.

Answer: Pragati Foods Ltd is not an SMC; it is a Non-SMC because its borrowings exceeded ₹50 crore.

Exam tips

  • Write the full chain in short notes: ASB drafts, ICAI establishes, Central Government notifies.
  • Use the exact formation date, 21 April 1977, in 2-mark answers.
  • In SMC problems, tabulate each condition as met or not met before concluding.
  • Do not quote section numbers unless you are sure; name the Companies Act, 2013 and the Rules instead.

Practice questions from Introduction to Accounting Standards (GAAP, AS and Convergence to Ind AS)

Standard-Setting Process and Role of ICAI, ASB and NFRA in other exams

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

Standard-Setting Process and Role of ICAI, ASB and NFRA: frequently asked questions

What is the role of the Accounting Standards Board of ICAI?

The ASB formulates accounting standards so that ICAI can establish them in India. It also reviews standards at regular intervals and gives interpretations and guidance. It considers Indian laws and practices and the IFRSs.

What do NACAS and NFRA do?

They advise or recommend to the Central Government on accounting standards for companies. The Central Government then notifies the standards as Rules under the Companies Act, 2013.

Is the Framework an Accounting Standard?

No. The Framework sets out concepts for preparing financial statements and overrides no specific standard. If it conflicts with a standard, the standard prevails.

Is ICAI's ASB the only body involved in the process?

No. The ASB includes representatives from government, regulators, industry and other institutes. For companies, the Central Government notifies the final Rules.