Introduction to the Framework of Accounting Standards

Executive Summary  

• Accounting Standards apply in respect of any entity engaged in commercial, industrial or business activities. 
• There are Three sets of accounting standards – Ind AS (Not dealt with in this article), AS notified by Companies (Accounting Standard) Rules and AS notified by ICAI (Generally referred to as IGAAP which is the subject matter of the present article);
• These Accounting Standards are numbered from 1 to 29, but since AS 6 and AS 8 stand withdrawn, there are only 27 Standards that are presently in force.
• Certain exemptions were given from the applicability, measurement or disclosure of certain accounting standards depending on whether the entity is a Company or a Non-Corporate Entity. Further bifurcation of Companies into SMCs and others & and Non-Corporates into Level I to IV are made so as to prescribe applicability of certain provisions of the Standards;
• Small and Medium Company (SMC) refers to Companies whose securities are not listed or proposed to be listed in any stock exchange, which is not a bank, Financial Institution or Insurance Company, whose turnover does not exceed Rs. 250 Crores, whose borrowings does not exceed Rs. 50 Crores and one which is not a holding or subsidiary of a Non-SMC company;
• The following exemptions are applicable to SMCs :
  1. AS 17 – Segment Reporting – Not Applicable
  2. AS 3 – Cash Flow Statements – not applicable for SMCs with paid up capital upto 50 Lakhs and turnover upto 200 Lakhs;
  3. Exemptions from certain specific disclosure requirements under AS 15 ‘Employee Benefits’, AS 19 ‘Leases’ and AS 20 ‘Earnings Per Share’
• Non Corporate Entities are bifurcated into Levels I to IV as under :
  1. Level I – Entities which are not listed in stock exchanges, which are not a Bank, FI or Insurance entity, whose turnover is more than 250 Crores or borrowing exceeds 50 Crores or the entity is a holding or subsidiary of any of the above referred entity;
  2. Level II –turnover between 50 – 250 Crs and borrowings between 10-50 Crs.
  3. Level III –turnover between 10-50 Crs. and borrowings between 2 to 10 Crs
  4. Level IV – entities other than Level I to III;
• Certain exemptions from applicability, measurement and disclosures are prescribed based on the level in which a non-corporate entity is falling under;

Underlying principle of applicability of Accounting Standards (AS)

Accounting Standards apply in respect of any entity engaged in commercial, industrial or business activities. Exclusion of an entity from the applicability of the Accounting Standards is permissible only if no part of the activity of such entity is commercial, industrial or business in nature. Even if where a very small proportion of the activities of an entity were considered to be commercial, industrial or business in nature, the Accounting Standards would apply to all its activities including those, which are not commercial, industrial or business in nature.

The Standards are mandatory from the respective date(s) mentioned in the Accounting Standard(s). The mandatory status means that it is the duty and responsibility of Auditors of the entity, to examine whether the provisions of AS are complied with in the preparation and presentation of financial statements covered by the audit. As provided under the Companies Act, it is also the duty of Auditors of the entity to bring to notice of users, deviations if any from Standards.   However, ensuring compliance with AS is the responsibility of the management of the reporting entity. Financial Statements cannot be described as complying with the Accounting Standards unless they comply with all the requirements of each applicable Standard.   

The Accounting Standards are developed through a diligent process adopted by Accounting Standards Board (of ICAI), and are based on principles laid down under say, for example, the Conceptual Framework for Financial Reporting under AS.  The Revised Framework is operative for Standard Setting Activity from April 1, 2020.  On the same lines, the revised Framework is applicable for Preparers of Financial Statements for accounting periods commencing on or after 1^st April 2021.

Three Sets of Accounting Standards

At present, there are three sets of Accounting Standards:

• Indian Accounting Standards (Ind AS) for specified class of companies;
• Accounting Standards (AS) notified under Companies (Accounting Standards) Rules, 2021, for companies other than those following Ind AS (these became operative from 1^st April 2021) and
• Accounting Standards (AS) prescribed by ICAI for entities other than companies.

1. Indian Accounting Standards (Ind AS) for Companies

Ind AS have been notified by the Ministry of Corporate Affairs.  These are applicable to all listed companies and Non-Banking Financial Companies (NBFCs) and to unlisted companies and unlisted NBFCs with net worth of INR 250 crores or more. Ind AS are also applicable to holding companies, subsidiaries, joint ventures or associates of such companies.  Applicability of Ind AS is not addressed in this note. 

2. Accounting Standards (AS) for Companies other than following Ind AS

Companies that are not covered under Ind AS, are required to apply Accounting Standards (AS) notified under the Companies Act as Companies (Accounting Standards) Rules, 2021. These updated rules came into effective for these companies, for accounting periods commencing on or after 1^st April 2021.  As on date, Accounting Standards (AS) 1 to 5, 7 and 9 to 29 are effective and operative.  These rules, that is, Companies (Accounting Standards) Rules, 2021, incorporate certain exemptions and relaxations for Small and Medium Companies (SMCs). This area of applicability is touched upon in this note. 

3. Accounting Standards (AS) prescribed by ICAI for entities other than companies.

These entities are generally referred to as non-corporate entities. Having regard to the fact that items (i) and (ii) above, including exemptions notified under Companies Act for SMCs, will only be applicable to companies, ICAI have announced a Scheme for applicability of Accounting Standards (AS) to non-company (or non-corporate) entities.  

Limited Liability Partnerships incorporated under Limited Liability Partnership Act are not Non-Corporate entities. All business or professional Entities, other than Companies incorporated under Companies Act are considered as Non-corporate entities.  The non-corporate entities may assume the following forms:

• Sole proprietorship firms, Hindu Undivided Family
• Registered or Unregistered Partnership Firms
• Association of Persons (Body of Individuals, or Resident Welfare Associations)
• Society registered under any law for the time being in force
• Registered or Unregistered Trust (private or public) covered by any law for the time being in force
• Any form of organisation that is engaged fully or partially in any Business or Professional activities unless their activities are fully charitable in nature.

The extent of applicability of AS to non-corporate entities is addressed in this note. 

Audit of Financial Statements

For non-corporate entities, if audit of financial statements is required under a statute, the attest-functionary shall conduct the audit and issue the Auditors’ Report in accordance with the Standards on Auditing issued by the ICAI. For the purpose of tax audit, the auditor issues a report taking into consideration the “Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961” issued by the ICAI. 

It is a commonly accepted code that compliance with Accounting Standards would lead to presenting a true and fair view of the financial position.  Entities that are governed by Companies Act, carry a statutory obligation to comply with AS.  However, there is a general view, that non-corporate entities do not have such an obligation, and the Standards issued by ICAI are only recommendatory. 

This aforesaid view suffers from a fallacy, in the context of tax-audit. In case of tax audit under section 44AB of the Income-tax Act, 1961, the attest functionary is required to conduct audit of financial statements (even of non-corporates) to give a true and fair view thereon and report the same in Form 3CB. Along with the Report in Form 3CB, the confirmation as to the true and correct view of particulars annexed in Form 3CD, is also required to be given.

As for Companies other than those covered by Ind AS Standards, and for SMCs, the formats in which financial statements are prepared are prescribed in Schedule III to Companies Act.  ICAI has issued detailed guidance on this topic.

As for entities that are non-corporates, the formats in which financial statements are prepared have now been evolved by ICAI, and these are explained in the Technical Guide on Financial Statements of Non-Corporate Entities (June 2022)

Growth in size and scale of economic activities of Non-corporates

Extent or size of economic and financial activities of the Non-Corporate entities have grown over the period of time. In recent times, Indian government has initiated many steps to create or upgrade infrastructure for public services such as roads, bridges, tunnels, airports, hospitals, water distribution facilities, energy supply, and telecommunication networks.

While there is push for higher private participation through ‘Public-Private-Partnership’ model, it has also led to substantial increase in the number of Non-Corporate entities in the private sector as well as in government sector and increase in size of financial activities of these Non-Corporate entities.

In view of this, a graded scale of relaxations and exemptions has been introduced by ICAI for non-corporates on lines similar to though not identical with non-Ind AS SME Companies.

Differentiating Small Companies from SMCs

It is essential to bear in mind the distinction between Small Companies as defined under Companies Act and SMCs defined in MCA notification for purposes of relaxations and exemptions under Accounting Standards.

Clause 85 of Definition Section 2 of Companies Act, 2013, (as per amendment effective from 1st April 2021) provides that a Small Company means — companies other than public companies: having a (i) paid-up share capital of which does not exceed Rupees two crores, and (ii) turnover of which as per its last profit and loss account does not exceed Rupees Twenty Crores rupees or a such higher amount as may be prescribed which shall not be more than twenty crore rupees: Provided that nothing in this clause shall apply to— (A) a holding company or a subsidiary company; (B) a company registered under section 8; or (C) a company or body corporate governed by any special Act;

A small company is bestowed with certain special dispensations in respect of provisions of Companies Act.  Nevertheless, such special dispensations do not cover relaxations or exemptions in the applicability of AS. Stated differently, in order that exemptions or relaxations of MCA notified AS, that are effective from 1^st April 2021, do not automatically flow to small companies.  

Meaning – SMCs under Companies Act:

• Small and Medium Sized Companies are unlisted companies that meet all the following five conditions, viz.,
• The equity or debt securities of the company are not listed or in the process of listing on any stock exchange, whether in India or outside India.
• The company is not a bank or financial institution or insurance company.
• The Company’s turnover (excluding other income) does not exceed Rs. 250 crores in the immediately preceding accounting year
• The Company does not have borrowings (including public deposits) exceeding Rs. 50 crores at any time during the immediately preceding accounting year, and
• The company is not a holding company or subsidiary of a non-SMC company.
• This exemption must be read harmoniously with a proviso incorporated in Clause 5 of the said notification.  This clause 5 provides further that, an existing company, which was previously not a Small and Medium Sized Company (SMC) and subsequently becomes an SMC shall not be qualified for exemption or relaxation in respect of AS available to an SMC until the company remains an SMC for two consecutive accounting periods.

Meaning – Non-corporates for AS:  Also called MSMEs

Non-corporate entities are classified into four levels, viz., (i) Level I, Level II Level III and Level IV entities. Non-corporates falling under Level I are comparable to SMCs described in the preceding paragraph.

Level I enterprises are those that meet any or more of the following conditions, at any time during the accounting period, viz.,

1. The enterprises whose equity or debt securities are listed, or in the process of listing their such securities (as evidenced by the Board of Directors’ Resolution in this regard) whether in India or outside India
2. Banks, including cooperative banks, Financial Institutions, enterprises carrying on Insurance Business, 
3. All commercial, industrial and business reporting enterprises whose turnover (excluding other income) for the immediately preceding accounting period on the basis of audited financial statements exceeds Rs.250 crores.
4. All commercial, industrial and business reporting enterprises having borrowings (including public deposits) in excess of Rs. 50 crores at any time during the immediately preceding accounting year
5. Holding and subsidiary enterprises of any one of the above, at any time during the accounting period.

Level II, III and IV enterprises are those commercial, industrial and business reporting entities, that are not Level I enterprises, and whose turn-over and borrowings fall within the threshold indicated below:

Classification	Turnover (exclude other income) as per audited P&L for immediately preceding period	Borrowing including public deposits : threshold
Level II	Exceeds Rs.50 crores, but does not exceed Rs.250 crores	In excess of Rupees 10 crores but in excess of Rs. 50 crores at any time during the immediately preceding accounting period
Level III	Exceeds Rs.10 crores, but does not exceed Rs.50 crores	In excess of Rupees 2 crores but in excess of Rs. 10 crores at any time during the immediately preceding accounting period
Level IV	Are those that fall outside the ambit of Level I, II or III entities

Accounting Standards presently operative

The Accounting Standards Notified by MCA (with exemptions as explained below) are applicable to SMCs.  These are numbered from 1 to 29, but since AS 6 and AS 8 stand withdrawn, effectively there are only 27 Standards as listed below.

Sl. No.	Standard Number	Title of the Standard
1	1	Disclosure of Accounting Policies
2	2	Valuation of Inventories
3	3	Cash Flow Statements
4	4	Contingencies, and Events Occurring after the Balance Sheet Date
5	5	Net Profit Or Loss for the Period, Prior Period Items, and changes in accounting policies
6	7	Construction Contracts
7	9	Revenue Recognition
8	10	Property, Plant and Equipment
9	11	The Effects of changes in foreign exchange rates
10	12	Accounting for Government Grants
11	13	Accounting for Investments
12	14	Amalgamations
13	15	Employee Benefits
14	16	Borrowing Costs
15	17	Segment Reporting
16	18	Related Party Disclosures
17	19	Leases
18	20	Earnings Per Share
19	21	Consolidated Financial Statements
20	22	Accounting for Taxes on Income
21	23	Accounting for Investments in Associates in Consolidated Financial Statements
22	24	Discontinuing Operations
23	25	Interim Financial Reporting
24	26	Intangible Assets
25	27	Financial Reporting of Interests in Joint Ventures
26	28	Impairment of Assets
27	29	Provisions, Contingent Liabilities and Contingent Assets

Exemptions and Relaxations for SMC companies

SMCs are exempted from complying with Accounting Standard 3 ‘Cash flow statement’ and Accounting Standard 17 ‘Segment reporting’. However, exemption from AS 3 is relevant only for companies who have paid-up capital up to Rs 50 lakh and turnover of up to Rs 2 crore. Beyond these limits, preparation of a cash flow statement is mandatory under section 2(40) of the Companies Act 2013.

Exemption from detailed disclosures which are required by the Accounting Standard 15 – ‘employee benefits’. Also, there is a simplification in terms of the valuation of the liability. This will reduce the cost incurred by the companies for the actuarial valuation of the liability.

The accounting standard requires detailed disclosures with regards to operating lease as well as a finance lease. The new rules exempt SMC companies from such disclosures.

Disclosure of diluted earnings per share is not required. 

Applicability (exemptions and relaxations) for non-corporate entities

For Level I:  All Standards are fully applicable. 

For Level II, III and IV – disclosure and recognition exemptions applicable are explained in Standard

Title of the Standard	Level II	Level III	Level IV
Disclosure of Accounting Policies	Applicable	Applicable	Applicable
Valuation of Inventories	Applicable	Applicable	Applicable
Cash Flow Statements	Not Applicable	Not Applicable	Not Applicable
Contingencies, and Events Occurring after the Balance Sheet Date	Applicable	Applicable	Applicable
Net Profit Or Loss for the Period, Prior Period Items, and changes in accounting policies	Applicable	Applicable	Applicable
Construction Contracts	Applicable	Applicable	Applicable
Revenue Recognition	Applicable	Applicable	Applicable
Property, Plant and Equipment	Applicable	Some Disclosure exemptions	Some Disclosure exemptions
The Effects of changes in foreign exchange rates	Applicable	Some Disclosure exemptions	Some Disclosure exemptions
Accounting for Government Grants	Applicable	Applicable	Applicable
Accounting for Investments	Applicable	Applicable	Some Disclosure exemptions
Amalgamations	Applicable	Applicable	Not Applicable
Employee Benefits	Some Disclosure & Recognition exemptions	Some Disclosure & Recognition exemptions	Some Disclosure & Recognition exemptions
Borrowing Costs	Applicable	Applicable	Applicable
Segment Reporting	Not applicable	Not applicable	Not applicable
Related Party Disclosures	Applicable	Not applicable	Not applicable
Leases	Some Disclosure exemptions	Some Disclosure exemptions	Some Disclosure exemptions
Earnings Per Share	Not applicable	Not applicable	Not applicable
Consolidated Financial Statements	Not applicable	Not applicable	Not applicable
Accounting for Taxes on Income	Applicable	Applicable	Applicable only for current tax provisions
Accounting for Investments in Associates in Consolidated Financial Statements	Not applicable	Not applicable	Not applicable
Discontinuing Operations	Applicable	Not applicable	Not applicable
Interim Financial Reporting	Not applicable	Not applicable	Not applicable
Intangible Assets	Applicable	Applicable	Some disclosure exemptions
Financial Reporting of Interests in Joint Ventures	Not applicable	Not applicable	Not applicable
Impairment of Assets	Some Disclosure exemptions	Some Disclosure exemptions	Not applicable
Provisions, Contingent Liabilities and Contingent Assets	Some Disclosure exemptions	Some Disclosure exemptions	Some Disclosure exemptions

Each of these Standards is analysed and presented elsewhere.  These contents may be read in conjunction with the above exemptions and relaxations. 

Click here to read the text on “Framework for the preparation and presentation of financial statements “

*********