Corporate Accounting and Financial Management · Accounting Standards

Introduction to Accounting Standards in India

Updated 11 October 2026 · Fact-checked

Accounting standards are written policy documents that fix how transactions are recognised, measured, presented and disclosed in financial statements. In India, ICAI formulates them, the Central Government notifies them under the Companies Act, and NFRA advises on them. Companies follow either AS or Ind AS, depending on the notified rules.

Understand Introduction to Accounting Standards in India

A company can record the same sale or asset in several ways. If every company chose its own way, nobody could compare two balance sheets. Accounting standards remove that freedom. They set common rules for recognition, measurement, presentation and disclosure.

The main objectives are to harmonise accounting policies, make financial statements comparable across companies and across years, improve reliability, and give investors and lenders information they can trust. The benefits follow: transparency, accountability of management, comparability and better decisions by users. The limitations are real too. Standards cannot cover every situation, they allow some choices and estimates, they can become rigid, and rules cannot replace honest judgement.

In India, the ICAI formulates the standards. Under the Companies Act, the Central Government notifies them as rules (the Companies (Accounting Standards) Rules, 2021 and the Companies (Indian Accounting Standards) Rules, 2015). NFRA, the National Financial Reporting Authority, recommends accounting and auditing standards to the Government and monitors compliance. Companies must follow the notified standards in their financial statements, and the auditor reports on non-compliance.

Two sets exist side by side. AS are the older, India-specific standards (AS 1 to AS 29 in the rules). Ind AS are the standards converged with IFRS. Which set a company follows depends on the notified rules, not on choice. Ind AS rests on the Conceptual Framework for Financial Reporting under Ind AS. Its purpose is to help ICAI build Ind AS on consistent concepts, to help preparers develop consistent accounting policies when no Ind AS applies to a transaction or when an Ind AS allows a choice, and to help everyone understand and interpret Ind AS.

For companies on AS, the rules also give relief to Small and Medium Sized Companies (SMCs). The rest are Non-SMCs. This split decides which standards apply in full, with relaxations, or not at all.

Key rules to remember

SMC test: all five conditions: SMC = not listed (or in process of listing) AND not a bank, financial institution or insurance company AND turnover (excluding other income) ≤ ₹250 crore in the preceding year AND borrowings (including public deposits) ≤ ₹50 crore at any time in the preceding year AND not a holding or subsidiary of a non-SMC; Fail any one condition and the company is a Non-SMC. The conditions are tested as at the end of the relevant accounting period.
Standards not applicable to SMCs in entirety: AS 17 Segment Reporting; SMCs are exempt from AS 17. Other standards carry only partial relaxations.
AS 20 relief for SMCs: Diluted EPS disclosure is exempt for SMCs; Basic EPS is still required.
AS 28 relief for SMCs: Value in use may be a reasonable estimate instead of the present value technique; If so, the discount rate provisions do not apply to that SMC.
AS 15 relief for SMCs (defined benefit plans): Full recognition and measurement rules for defined benefit plans are relaxed, but the liability must still be actuarially determined using the Projected Unit Credit Method; The discount rate is the market yield on government bonds at the balance sheet date.
Interim reporting (AS 25): AS 25 applies only if an entity is required or elects to present an interim financial report; Listed Non-SMCs preparing quarterly results under SEBI rules apply its recognition and measurement requirements.
Ind AS Conceptual Framework dates: Standard-setting: from April 1, 2020. Preparers: accounting periods beginning on or after April 1, 2021; Known dates for the framework under Ind AS.

How to solve Introduction to Accounting Standards in India questions

Use this method for theory questions, case-based applicability questions and short notes on this topic.

1Read the question and decide the type: definition or objectives, institutional role, AS vs Ind AS, or applicability to a given company.
2Start with a one-line definition or the provision involved, for example what an accounting standard is or what the SMC definition says.
3For applicability questions, list the facts: listed or not, bank or insurer, turnover, borrowings, holding or subsidiary links.
4Test each fact against the stated condition one by one. Show the comparison with numbers.
5Name the consequence: SMC or Non-SMC, and which standards are exempt or relaxed (for example AS 17 exempt, diluted EPS exempt).
6For role questions, assign each body its job: ICAI formulates, the Government notifies under the Companies Act, NFRA recommends and monitors, the auditor reports.
7Close with a clear conclusion in one sentence that answers the exact question asked.

Quickest way: Five-condition SMC check

When to use it: Any question that gives company facts and asks whether it is an SMC or which standards apply.

Write the five conditions as a short list: listing, type of entity, turnover ₹250 crore, borrowings ₹50 crore, holding or subsidiary link.
Tick or cross each condition using the facts given.
Stop at the first cross: the company is a Non-SMC.
If all five tick, it is an SMC. State the reliefs that matter, such as AS 17 exempt and diluted EPS exempt.
Write the conclusion in one line.

Common mistakes in Introduction to Accounting Standards in India

Saying turnover must include other income when testing for SMC
Students use total income from the statement of profit and loss.
Fix: Use turnover excluding other income. Compare it with ₹250 crore.
Treating a company with ₹50 crore borrowings in one month as an SMC because the year-end figure is low
Students look only at the closing balance sheet.
Fix: The test is borrowings (including public deposits) not exceeding ₹50 crore at any time during the preceding accounting year. One breach makes it a Non-SMC.
Ignoring the group link and calling a small subsidiary an SMC
Students check only the company's own size.
Fix: A company that is a holding or subsidiary of a company that is not an SMC cannot be an SMC.
Saying SMCs are exempt from all accounting standards
Students over-read the word relaxation.
Fix: Only AS 17 is exempt in entirety. Others carry relaxations, such as parts of AS 15, AS 19, AS 20, AS 28 and AS 29.
Saying NFRA issues the accounting standards
Students mix up recommending and formulating.
Fix: ICAI formulates the standards. NFRA recommends standards to the Government, which notifies them, and NFRA monitors compliance.
Calling AS and Ind AS the same with different numbering
Both deal with financial reporting.
Fix: Ind AS are converged with IFRS and rest on their own Conceptual Framework. AS are the older India-specific standards. A company follows one set, as notified.

Worked examples

Example 1

Sunrise Fabrics Pvt Ltd is unlisted and is not a bank, financial institution or insurer. Its turnover (excluding other income) for the preceding year was ₹180 crore. Its highest borrowings at any time in that year were ₹42 crore. It is a subsidiary of Sunrise Holdings Ltd, which is itself an SMC. Is it an SMC? Is AS 17 applicable to it?

Show the solution

Provision: a company is an SMC only if all five conditions in the definition are met.
Listing: unlisted, so the first condition is met.
Type: not a bank, financial institution or insurer, so the second is met.
Turnover: ₹180 crore does not exceed ₹250 crore, so the third is met.
Borrowings: the highest figure ₹42 crore does not exceed ₹50 crore, so the fourth is met.
Group link: the holding company is an SMC, so the company is not a subsidiary of a non-SMC. The fifth is met.
All five are met, so it is an SMC. AS 17 Segment Reporting is not applicable to SMCs.

Answer: Sunrise Fabrics Pvt Ltd is an SMC, and AS 17 does not apply to it.

Example 2

Explain the role of ICAI, the Central Government and NFRA in accounting standards in India, and state how AS differ from Ind AS.

Show the solution

Provision: standards are notified under the Companies Act as rules, and ICAI formulates them.
ICAI formulates the standards. For Ind AS it works to a Conceptual Framework meant to give consistent concepts.
The Central Government notifies the standards as the Companies (Accounting Standards) Rules, 2021 and the Companies (Indian Accounting Standards) Rules, 2015.
NFRA recommends accounting and auditing standards to the Government and monitors compliance.
Companies apply them in financial statements, and the auditor reports on non-compliance.
AS are the older India-specific standards with relaxations for SMCs. Ind AS are converged with IFRS, rest on the Ind AS Conceptual Framework, and apply to companies as notified.
The Ind AS framework applies to standard-setting from April 1, 2020 and to preparers for periods beginning on or after April 1, 2021.

Answer: ICAI formulates, the Government notifies, and NFRA recommends and monitors. AS are India-specific; Ind AS are IFRS-converged and apply to companies as notified.

Exam tips

Write the five SMC conditions from memory and test every fact. Marks go for the check, not just the label.
Use exact figures: ₹250 crore turnover (excluding other income) and ₹50 crore borrowings at any time.
In role questions give one clear job per body: ICAI formulates, Government notifies, NFRA recommends and monitors.
For AS vs Ind AS, give three or four points and end with who follows which set under the notified rules.
Learn the SMC reliefs by standard: AS 17 exempt, diluted EPS exempt, AS 28 value in use estimate, AS 29 certain disclosures.

Practice questions from Accounting Standards

Introduction to 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.

Introduction to Accounting Standards in India: frequently asked questions

What is the purpose of accounting standards?

They set common rules for recognising, measuring, presenting and disclosing items in financial statements. This makes statements comparable and reliable. Users such as investors and lenders can then rely on them.

Who issues accounting standards in India?

ICAI formulates them. The Central Government notifies them as rules under the Companies Act. NFRA recommends standards to the Government and monitors compliance.

What is the difference between AS and Ind AS?

AS are the older India-specific standards. Ind AS are converged with IFRS and rest on the Conceptual Framework for Financial Reporting under Ind AS. A company follows one set according to the notified rules.

Is every small company an SMC?

No. A company must meet all five conditions in the definition, including no listing, not a bank or insurer, turnover up to ₹250 crore, borrowings up to ₹50 crore and no link as holding or subsidiary of a non-SMC. Missing one makes it a Non-SMC.

Do SMCs have to follow AS 17?

No. AS 17 Segment Reporting is not applicable to SMCs in its entirety.