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					The Accounting Standards-setting Process

The accounting standard setting, by its very nature, involves reaching an
optimal balance of the requirements of financial information for various
interest-groups having a stake in financial reporting. With a view to reach
consensus, to the extent possible, as to the requirements of the relevant
interest-groups and thereby bringing about general acceptance of the
Accounting Standards among such groups, considerable research,
consultations and discussions with the representatives of the relevant
interest-groups at different stages of standard formulation becomes
necessary. The standard-setting procedure of the ASB, as briefly outlined
below, is designed in such a way so as to ensure such consultation and

     Identification of the broad areas by the ASB for formulating the
      Accounting Standards.
     Constitution of the study groups by the ASB for preparing the
      preliminary drafts of the proposed Accounting Standards.
     Consideration of the preliminary draft prepared by the study group by
      the ASB and revision, if any, of the draft on the basis of deliberations
      at the ASB.
     Circulation of the draft, so revised, among the Council members of the
      ICAI and 12 specified outside bodies such as Standing Conference of
      Public Enterprises (SCOPE), Indian Banks’ Association, Confederation
      of Indian Industry (CII), Securities and Exchange Board of India
      (SEBI), Comptroller and Auditor General of India (C& AG), and
      Department of Company Affairs, for comments.
     Meeting with the representatives of specified outside bodies to
      ascertain their views on the draft of the proposed Accounting
     Finalisation of the Exposure Draft of the proposed Accounting Standard
      on the basis of comments received and discussion with the
      representatives of specified outside bodies.
     Issuance of the Exposure Draft inviting public comments.
     Consideration of the comments received on the Exposure Draft and
      finalisation of the draft Accounting Standard by the ASB for submission
      to the Council of the ICAI for its consideration and approval for
     Consideration of the draft Accounting Standard by the Council of the
      Institute, and if found necessary, modification of the draft in
      consultation with the ASB.
The Accounting Standard, so finalised, is issued under the authority of the
Council Indian Accounting Standards on the following subjects have been

AS   1     Disclosure of Accounting Policies
AS   2     Valuation of Inventories
AS   3     Cash Flow Statements
AS   4     Contingencies and Events Occurring after the Balance Sheet
AS 5       Net Profit or Loss for the Period, Prior Period Items and Changes
           in Accounting Policies
AS 6       Depreciation Accounting
AS 7       Construction Contracts
AS 8       Accounting for Research and Development (Withdrawn pursuant
           to becoming mandatory)
AS   9     Revenue Recognition
AS   10    Accounting for Fixed Assets
AS   11    The Effects of Changes in Foreign Exchange Rates
AS   12    Accounting for Government Grants
AS   13    Accounting for Investments
AS   14    Accounting for Amalgamations
AS   15    Employee Benefits
AS   16    Borrowing Costs
AS   17    Segment Reporting
AS   18    Related Party Disclosures
AS   19    Leases
AS   20    Earnings per Share
AS   21    Consolidated Financial Statements
AS   22    Accounting for Taxes on Income
AS   23    Accounting for Investments in Associates in Consolidated
           Financial Statements
AS   24    Discontinuing Operations
AS   25    Interim Financial Reporting
AS   26    Intangible Assets
AS   27    Financial Reporting of Interests in Joint Ventures
AS   28    Impairment of Assets
AS   29    Provisions, Contingent Liabilities and Contingent Assets
AS   30    Financial Instruments: Recognition and Measurement
AS   31    Financial Instruments: Presentation
Accounting Standard 1:
Disclosure of Accounting Policies

     Significant Accounting Policies followed in preparation and presentation
      of financial statements should form part thereof and be disclosed at
      one place in the financial statements.
     Any change in the accounting policies having a material effect in the
      current period or future periods should be disclosed. The amount by
      which any item in financial statements is affected by such change
      should be disclosed to the extent ascertainable. If the amount is not
      ascertainable the fact should be indicated.
     If fundamental assumptions (going concern, consistency and accrual)
      are not followed, fact to be disclosed.
     Major considerations governing selection and application of accounting
      policies are i) Prudence, ii) Substance over form and iii) Materiality.
     The ICAI has made an announcement that till the issuance of
      Accounting Standards on (i) Financial Instruments : Presentation, (ii)
      Financial Instruments : Disclosures and (iii) Financial Instruments :
      Recognition and Measurement, an enterprise should provide
      information regarding the extent of risks to which an enterprise is
      exposed and as a minimum, make following disclosures in its financial
         a. category-wise quantitative data about derivative instruments
            that are outstanding at the balance sheet date,
         b. the purpose, viz. hedging or speculation, for which such
            derivative instruments have been acquired, and
         c. the foreign currency exposures that are not hedged by a
            derivative instrument or otherwise.
      This announcement is applicable in respect of financial statements for
      the accounting period(s) ending on or after March 31, 2006.
Accounting Standard 6:
Depreciation Accounting

    Standard does not apply to depreciation in respect of forests,
     plantations and similar regenerative natural resources, wasting assets
     including expenditure on exploration and extraction of minerals, oils,
     natural gas and similar non-regenerative resources, expenditure on
     research and development, goodwill and livestock. Special
     considerations apply to these assets.
    Allocate depreciable amount of a depreciable asset on systematic basis
     to each accounting year over useful life of asset.
    Useful life may be reviewed periodically after taking into consideration
     the expected physical wear and tear, obsolescence and legal or other
     limits on the use of the asset.
    Basis for providing depreciation must be consistently followed and
     disclosed. Any change to be quantified and disclosed.
    A change in method of depreciation be made only if required by
     statute, for compliance with an accounting standard or for appropriate
     presentation of the financial statements. Revision in method of
     depreciation be made from date of use. Change in method of charging
     depreciation is a change in accounting policy and be quantified and
    In cases of addition or extension which becomes integral part of the
     existing asset depreciation to be provided on adjusted figure
     prospectively over the residual useful life of the asset or at the rate
     applicable to the asset.
    Where the historical cost undergoes a change due to fluctuation in
     exchange rate, price adjustment etc. depreciation on the revised
     unamortised amount should be provided over the balance useful life of
     the asset.
    On revaluation of asset depreciation should be based on revalued
     amount over balance useful life. Material impact on depreciation
     should be disclosed.
    Deficiency or surplus in case of disposal, destruction, demolition etc.
     be disclosed separately, if material.
    Historical cost, amount substituted for historical cost, depreciation for
     the year and accumulated depreciation should be disclosed.
    Depreciation method used should be disclosed. If rates applied are
     different from the rates specified in the governing statute then the
     rates and the useful life be also disclosed.

Accounting Standard 9:
Revenue Recognition

    Standard does not deal with revenue recognition aspects of revenue
     arising from construction contracts, hire-purchase and lease
     agreements, government grants and other similar subsidies and
     revenue of insurance companies from insurance contracts. Special
     considerations apply to these cases.
    Revenue from sales and services should be recognised at the time of
     sale of goods or rendering of services if collection is reasonably
     certain; i.e., when risks and rewards of ownership are transferred to
     the buyer and when effective control of the seller as the owner is lost.
    In case of rendering of services, revenue must be recognised either on
     completed service method or proportionate completion method by
     relating the revenue with work accomplished and certainty of
     consideration receivable.
    Interest is recognised on time basis, royalties on accrual and dividend
     when owner’s right to receive payment is established.
    Disclose circumstances in which revenue          recognition   has   been
     postponed pending significant uncertainties.

Accounting Standard 10:
Accounting for Fixed Assets

    Fixed asset is an asset held for producing or providing goods and/or
     services and is not held for sale in the normal course of the business.
    Cost to include purchase price and attributable costs of bringing asset
     to its working condition for the intended use. It includes financing cost
     for period up to the date of readiness for use.
   Self-constructed assets are to be capitalised at costs that are
    specifically related to the asset and those which are allocable to the
    specific asset.
   Fixed asset acquired in exchange or part exchange should be recorded
    at fair market value or net book value of asset given up adjusted for
    balancing payment, cash receipt etc. Fair market value is determined
    with reference to asset given up or asset acquired.
   Revaluation, if any, should be of class of assets and not an individual
   Basis of revaluation should be disclosed.
   Increase in value on revaluation be credited to Revaluation Reserve
    while the decrease should be charged to P & L A/c.
   Goodwill should be accounted only when paid for.
   Assets acquired on hire purchase be recorded at cash value to be
    shown with appropriate note about ownership of the same. (Not
    applicable for assets acquired after 1st April, 2001 in view of AS 19 –
    Leases becoming effective).
   Gross and net book values at beginning and end of year showing
    additions, deletions and other movements, expenditure incurred in
    course of construction and revalued amount if any be disclosed.
   Assets should be eliminated from books on disposal/when of no utility
   Profit/Loss on disposal be recognised on disposal to P & L statement.

   Amounts of earnings used as numerator for computing basic and
    diluted EPS and their reconciliation with Profit and Loss statement are
    disclosed. Also, the weighted average number of equity shares used in
    calculating the basic EPS and diluted EPS and the reconciliation
    between the two EPS is to be disclosed.
   Nominal value of shares is disclosed along with EPS.
   It has been clarified that if an enterprise discloses EPS for complying
    with requirements of any source or otherwise, should calculate and
    disclose EPS as per AS 20. Disclosure under Part IV of Schedule VI to
    the Companies Act, 1956 should be in accordance with AS 20 (ASI-
   Note: Earnings Per Share apply to the enterprise whose equity shares
    and potential equity shares are listed on a recognised stock exchange.
    If the enterprise is not so covered but chooses to present EPS, then it
    should calculate EPS in accordance with the standard.
Ethics in Accounting
   Ethics in accounting is of utmost importance to accounting
    professionals and those who rely on their services. Certified Public
    Accountants (CPAs) and other accounting professionals know that
    people who use their services, especially decision makers using
    financial statements, expect them to be highly competent, reliable,
    and objective. Those who work in the field of accounting must not only
    be well qualified but must also possess a high degree of professional
    integrity. A professional's good reputation is one of his or her most
    important possessions.

   The general ethical standards of society apply to people in professions
    such as medicine and accounting just as much as to anyone else.
    However, society places even higher expectations on professionals.
    People need to have confidence in the quality of the complex services
    provided by professionals. Because of these high expectations,
    professions have adopted codes of ethics, also known as codes of
    professional conduct. These ethical codes call for their members to
    maintain a level of self-discipline that goes beyond the requirements of
    laws and regulations.


    By joining their professional organizations, people who work in the
    field of accounting agree to uphold the high ethical standards of their
    profession. Each of the major professional associations for accountants
    has a code of ethics. The Code of Professional Conduct of the American
    Institute of CPAs (AICPA), the national professional association for
    CPAs, sets forth ethical principles and rules of conduct for its
    members. The principles are positively stated and provide general
    guidelines that CPAs (or any professionals, for that matter) should
    strive to follow. The rules of conduct are much more explicit as to
    specific actions that should or should not be taken. The Institute of
    Management Accountants (IMA) Standards of Ethical Conduct applies
    to practitioners of management accounting and financial management,
    and the Institute of Internal Auditors (IIA) Code of Ethics applies to its
    members and to Certified Internal Auditors (CIAs).

    A distinguishing mark of professions such as medicine and accounting
    is acceptance of their responsibilities to the public. The AICPA Code of
    Professional Conduct describes the accounting profession's public as
    consisting of "clients, credit grantors, governments, employers,
    investors, the business and financial community, and others who rely
    on the objectivity and integrity of CPAs to maintain the orderly
    functioning of commerce." Many, but not all, CPAs work in firms that
    provide accounting, auditing, and other services to the general public;
    these CPAs are said to be in public practice. Regardless of where CPAs
    work, the AICPA Code applies to their professional conduct, although
    there are some special provisions for those in public practice. Internal
    auditors, management accountants, and financial managers most
    commonly are employees of the organizations to which they provide
    these services; but, as professionals, they, too, must also be mindful
    of their obligations to the public.

   The responsibilities placed on accounting professionals by the three
    ethics codes and the related professional standards have many
    similarities. All three require professional competence, confidentiality,
    integrity, and objectivity. Accounting professionals should only
    undertake tasks that they can complete with professional competence,
    and they must carry out their responsibilities with sufficient care and
    diligence, usually referred to as due professional care or due care. The
    codes of ethics of the AICPA, IMA, and IIA all require that confidential
    information known to accounting professionals not be disclosed to
    outsiders. The most significant exception to the confidentiality rules is
    that accounting professionals' work papers are subject to subpoena by
    a court; nothing analogous to attorney-client privilege exists.

    Maintaining integrity and objectivity calls for avoiding both actual and
    apparent conflicts of interest. This notion is termed independence.
    Being independent in fact and in appearance means that one not only
    is unbiased, impartial, and objective but also is perceived to be that
    way by others. While applicable to all accounting professionals,
    independence is especially important for CPAs in public practice. The
    AICPA's rules pertaining to independence for CPAs who perform audits
    are detailed and technical. For instance, a CPA lacks independence and
    thus may not audit a company if he or she (or the spouse or
    dependents) owns stock in that company and/or has certain other
    financial or employment relationships with the client.

    To a large extent, the accounting profession is self-regulated through
    various professional associations rather than being regulated by the
    government. The AICPA, the IMA, and the IIA have internal means to
    enforce the codes of ethics. Furthermore, the professional
    organizations for CPAs in each state, known as state societies of CPAs,
    have mechanisms for enforcing their codes of ethics, which are usually
    very similar to the AICPA Code. Violations of ethical standards can lead
    to a person's being publicly expelled from the professional
    organization. Because of the extreme importance of a professional
    accountant's reputation, expulsion is a strong disciplinary measure.
    However, ethical violations can lead to even more adverse
    consequences for CPAs because of state and federal laws.

   The state government issues a CPA's license to practice, usually
    through an organization known as the state board of accountancy.
    Since state laws governing the practice of accountancy typically
    include important parts of the AICPA Code, the Code thus gains legal
    enforceability. Consequently, ethical violations can result in the state's
    revoking a CPA's license to practice on a temporary or even permanent
    basis. Because a licensed CPA is also likely to belong to the AICPA and
    the state society of CPAs, investigations of ethics violations may be
    carried out jointly by the AICPA, the state society, and the state board
    of accountancy.

   CPAs in public practice who audit the financial statements of public
    corporations are subject to federal securities laws and regulations,
    including the Securities Exchange Act of 1934. The Securities and
    Exchange Commission (SEC), which administers these laws, has broad
    powers to regulate corporations that sell their stock to the public. One
    important SEC requirement is that these corporations' financial
    statements be audited by an independent CPA. The SEC has the
    authority to establish and enforce auditing standards and procedures,
    including what constitute independence for a CPA. The SEC has largely
    delegated standard setting to the private sector but retains oversight
    and enforcement responsibilities. In 1998 the SEC and the AICPA
    jointly announced the creation of the Independence Standards Board
    (ISB), a private-sector body whose mission is to improve auditor
    independence standards.