Checklist for compliance of Accounting Standards
INDIAN ACCOUNTING STANDARDS COMPLIANCE CHECKLIST
Objective of the checklist
The checklist is designed to verify compliance with Accounting Standards issued by the Institute of Chartered Accountants of India (ICAI) and can be used by accountants, auditors, audit committee members, etc. When a more thorough understanding of a Standard is needed, reference should be made to the full text of the original pronouncement. The checklist is not to be regarded as a substitute for a detail understanding or interpretation of the Standards.
Members duty in respect of Accounting Standards
The Preface to the Statements of Accounting Standards issued by ICAI states that while discharging their attest functions, it will be the duty of members of ICAI to ensure that the Accounting Standards are implemented in the presentation of financial statements covered by their audit reports. In the event of any deviation from the Standards, it will be also their duty to make adequate disclosure in their reports so that the users of such financial statements may be aware of such deviations.
Accounting Standards and the Companies Act
Section 217(2AA) requires that the board’s report should include a directors responsibility statement indicating therein:
that in the preparation of the annual accounts, the applicable accounting standards have been followed along with proper explanation relating to material departures;
that the directors had selected such accounting policies and applied them consistently and made judgements and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company at the end of the financial year and of the profit or loss of the company for that period;
that the directors had taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of this Act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities; and
that the directors had prepared the annual accounts on a going concern basis.
Section 211 (3B) requires where the profit and loss account and the balance sheet of the company do not comply with the accounting standards, such companies shall disclose in its profit and loss account and the balance sheet, the following:
the deviation from the accounting standards;
the reasons for such deviation; and
the financial effect, if any arising due to such deviations.
Section 227(3)(d) of the Companies Act also requires the auditor’s report to state whether in his opinion, the profit and loss account and balance sheet comply with the Accounting Standards referred to in sub-section (3C) of section 211(specified standards). The standards of accounting specified by ICAI shall be deemed to be accounting standards until the accounting standards are prescribed by the Central Government under section 211(3C) of the Act. Other than AS 3, all standards issued upto AS 18, Related Party Disclosures, are specified standards. Insofar as AS 18 is concerned, it is mandatory to only the following enterprises and not to all enterprises:
Listed or to be listed enterprises
All other commercial enterprises whose turnover for an accounting period exceeds Rs 50 crores.
In respect of new accounting standards issued after AS 18, the accounting standards specified by ICAI are those accounting standards which have been made mandatory by ICAI as indicated in the standard or a separate announcement. The statutory auditors of such companies are required to give an assertion in respect of compliance with the specified accounting standards while reporting under section 227(3)(d) of the Companies Act. In making this announcement it appears that ICAI has not highlighted the fact that AS 25 in respect of ‘Interim Financial Reporting’ (other than paragraph 25 of AS 25) and AS 21 ‘Consolidated Financial Statements’ does not apply to annual financial statements under the Companies Act and therefore logically are not specified standards.
As regards tax accounts, ICAI is of the view that the mandatory accounting standards would apply to tax accounts, even if these are not adopted by the tax authorities. Therefore where mandatory accounting standards are not complied with in the tax accounts, the auditor would be required to qualify such accounts.
SEBI and Accounting Standards
SEBI requires the auditors in their half yearly limited review report in respect of listed companies to opine whether they are prepared in accordance with accounting standards. SEBI circular SMDRP/Policy/Cir -44/01 dated August 31, 2001 requires compliance with mandatory accounting standards in the preparation of quarterly results. However, the preparation of consolidated financial statements on a quarterly basis is voluntary but mandatory for disclosure in the annual report. Related party disclosures are not required to be made on a quarterly basis, but disclosure is mandatory in the annual financial statements. Similarly, cash flow statements are to be presented only on an annual basis under the indirect method in AS 3. Segmental disclosures on an annual basis are made on the basis of AS 17. For quarterly disclosures, SEBI has devised its own format for disclosure of segment information. EPS for quarterly and annual financial statements should be determined in accordance with AS 20. The disclosure requirements under various other mandatory standards should be complied with in the annual financial statements, though for quarterly disclosure purposes SEBI’s format should be adhered to. The accounting treatment required to be given under these mandatory standards should nevertheless be adhered to in the preparation of quarterly and annual financial statements.
IRDA and Accounting Standards
The notification of Insurance Regulatory and Development Authority requires insurance enterprises to follow the accounting standards issued by ICAI.
Do Accounting Standards override local legislation?
As per the preface to the accounting standards, by their very nature accounting standards cannot and do not override local regulations (include high court orders) which govern the preparation and presentation of financial statements. However, ICAI will determine the extent of disclosure to be made in the financial statements and the auditors report. Such disclosure may be by way of appropriate notes explaining the treatment of particular items. Such explanatory notes will be only in the nature of clarification and therefore need not be treated as adverse comments on the related financial statements. In a recent general clarification on AS 14 (amalgamations) ICAI has prescribed the nature of disclosure required when accounts are not drawn in accordance with AS 14 but are drawn in accordance with the high court order. Even in the case of high court orders dealing with situations other than amalgamations, which may be inconsistent with accounting standards, full disclosure in the financial statements and the auditors report would be sufficient. In these cases auditor may state that the mandatory accounting standards are not complied with, without giving a subject to or an adverse opinion on the true and fair view of the financial statements.
Audit Committee and Accounting Standards
As part of the SEBI Corporate Governance requirement, audit committees of listed enterprises are required to review accounting practices including compliance with accounting standards. Under section 292A of the Companies Act, every public company having paid up capital of not less than Rs 5 crores shall constitute an audit committee. Such audit committees would liase with internal and statutory auditors and may discuss amongst other things compliance with accounting standards.
Accounting Standards and Banks
It may be noted that all Accounting Standards are not mandatory in nature for all enterprises. The status of Accounting Standards is given below. The user of the checklist should first determine the applicability of the various accounting standards to his/her enterprise based on ICAI or SEBI requirements and accordingly proceed to complete the checklist. The applicability of certain new accounting standards in respect of banks is set out below.
Compliance by banks with Accounting Standards (AS) –
Applicability of AS 17,18,21 and 22
DBOD.No.BP.BC. 109 /21.04.018/2001-02
May 29, 2002
All Scheduled Commercial Banks
(excluding RRBs and LABs)
Compliance by banks with Accounting Standards (AS) –
Applicability of AS 17,18,21 and 22
As you are aware, in terms of the amended / new clauses of the revised listing agreement with stock exchanges, listed banks are required to mandatorily comply with all the Accounting Standards (AS) issued by the Institute of Chartered Accountants of India (ICAI) from time to time. Banks have expressed difficulties in complying with certain Accounting Standards especially AS 17 on Segment Reporting, AS 18 on Related Party Disclosure, AS 21 on Consolidated Financial Statements and AS 22 on Taxes on Income. The difficulties arise
due to absence of uniform disclosure formats,
due to absence of appropriate MIS to support the comprehensive disclosures, and
due to the likely impact on their regulatory compliances.
In accordance with the announcement made in Paragraph 73 of the Mid-Term Review of Monetary and Credit Policy for the year 2001-2002 in October 2001, the RBI has set up a Working Group under the Chairmanship of Shri. N.D.Gupta, the then President of the ICAI, with representatives, inter alia, of IBA, banks and RBI to identify the compliance as also gaps in compliance with Accounting Standards issued by the ICAI and recommend steps to eliminate/reduce the gaps. The difficulties expressed by the banks are being discussed in detail in the meetings of the above Working Group and the Working Group is expected to submit its recommendations shortly for eliminating / reducing the gaps in compliance by banks with the Accounting Standards. The constraints faced by banks in the interim have also been apprised to SEBI.
In view of the above, keeping in view the nature of operations of banks and the need to ensure uniformity in regulatory requirements, it has been decided that compliance with the following Accounting Standards be made optional for banks only for the financial year ended 31st March 2002 :
AS 17 on Segment Reporting,
AS 18 on Related Party Disclosure,
AS 21 on Consolidated Financial Statements, and
AS 22 on Taxes on Income.
It may be noted that the above exemption is limited to the financial year ended 31st March 2002. Banks would be required to conform to the above Accounting Standards by 31st March, 2003 in accordance with the detailed guidelines to be issued shortly on the basis of the recommendations of the above Working Group.
Accounting Standard and Mutual Funds
As per the Preface on Accounting Standards issued by ICAI, accounting standards apply to general purpose financial statements of enterprises which includes trusts. ICAI would make efforts to issue accounting standards which are in conformity with the provisions of the applicable laws, customs, usages and business environment in India. However, if due to subsequent amendmends in the law, a particular accounting standard is found to be not in conformity with such law, the provisions of the said law will prevail and the financial statements would be prepared in conformity with such law. In relation to mutual funds accounting treatment and disclosure requirements as required under SEBI mutual fund regulations should be followed. Where for a particular matter SEBI regulations have not prescribed the accounting treatment, ICAI standards should be followed. Where an accounting standard is inconsistent with SEBI’s mutual fund regulations and the financial statements are appropriately prepared in accordance with SEBI regulations, an auditors qualification on mandatory standards issued by ICAI is inappropriate, though a clarificatory note should be included in the audit report. AS 13 specifically excludes AMC’s and mutual funds, therefore in that regard SEBI mutual fund regulations on accounting, disclosure and valuation of investments should be followed.
Accounting Standards and Co-operative Societies – GC 12/2002
ICAI has issued GC 12/2002 clarifying the applicability of accounting standards to co-operative societies, which is reproduced below and is self explanatory.
Paragraph 3.3 of the ‘Preface to the Statements of Accounting Standards’ provides, inter alia, as below:
“3.3 The Institute will issue the Accounting Standards for use in the presentation of the general purpose financial statements issued to the public by such commercial, industrial or business enterprises as may be specified by the Institute from time to time and subject to the attest function of its members.”
In view of the above, the accounting standards issued by the Institute shall apply in respect of financial statements of co-operative societies, which carry on commercial, industrial or business activities, and are subject to the attest function of the members of the Institute. The Accounting Standards made mandatory by the Institute, as specified in the respective standards or made mandatory by separate announcements, are also mandatory in respect of co-operative societies.
For the removal of doubts, it is clarified that even if a very small proportion of the activities of a co-operative society is considered to be commercial, industrial or business in nature, then it can not claim exemption from the application of Accounting Standards. The Accounting Standards would apply to all its activities including those which are not commercial, industrial or business in nature
It is reiterated that mandatory status of an accounting standard implies that it will be the duty of the members of the Institute to examine whether the Accounting Standard is complied with in the presentation of financial statements covered by their audit. In the event of any deviation from the Accounting Standard, it will be their duty to make adequate disclosures in their audit reports so that the users of financial statements may be aware of such deviations.
Though the clarification has been issued in the context of co-operative societies its application is much wider.
Checklist on Interim financial statements
The checklist does not include requirements of AS 25 – Interim Financial Reporting because it predominantly applies to interim financial statements and is therefore included in the chapter on AS 25 – Interim Financial Reporting. As per AS 25, if an estimate of an amount reported in an interim period is changed significantly during the final interim period of the financial year but a separate financial report is not prepared and presented for that final interim period, the nature and amount of that change in estimate should be disclosed in a note to the annual financial statements for that financial year. As mentioned elsewhere, AS 25 applies to SEBI quarterly accounts only to the extent of recognition and measurement principles and not in respect of the disclosure requirements, which are superseded by SEBI disclosure requirements. However, AS 25 would prevail in respect of the disclosures to be made in regards to annual financial statements. To that extent, this AS 25 requirement will have to be complied with in the annual financial statements.
General clarifications and Accounting Standard Interpretations
ICAI has been issuing accounting standard interpretations and general clarifications on accounting standards. The status of these promulgations and the authority attached to it is not clear. Whether non-compliance with the accounting standards interpretations and general clarifications would tantamount to non-compliance with the accounting standards under section 211 of the Companies Act. Ofcourse the best authority to clarify this would be ICAI itself. In its absence a conservative view that these promulgations are equivalent to an accounting standard should be taken, which is the approach taken in the context of accounting standards interpretation statement under IAS. The checklist includes accounting standards interpretation and general clarifications, where relevant.