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Objective of Accounting Standards (AS):
Accounting standards have been introduced with the objective to standardize accounting practices as this will help in comparing the financial statements of different entities falling in the same industry to which such accounting standards are applicable.
Applicability of Accounting Standards:
For the purpose of applicability, entities are grouped as follows:
Classification of Entities in detail:
Corporate Entities: For the purpose of applicability of AS, companies are categorized as follows:
Small and Medium Companies (SMCs): SMCs are companies that satisfy the following conditions:
a) Equity and debt securities of the company are not listed or are not in the process of listing of any stock exchange, whether in India or outside India
b) Company is not a bank or financial institution or insurance company
c) Company’s turnover (excluding other income) does not exceed Rs. 50 crores in the immediately preceding accounting year
d) Company does not have borrowing (including public deposits) exceeding Rs. 10 crores at any time during the immediately preceding accounting year and
e) Company is not a holding company or subsidiary of a non-SMC.
Certain relaxations are provided with respect to the following AS:
AS 17- Segment Reporting
AS 15- Employee Benefits
AS 19- Leases
AS 20- Earnings Per Share (EPS)
AS 29- Provisions, contingent liabilities, and contingent assets
AS 3- Cash Flow Statements, shall not apply to SMCs if it is a Person Company (OPC), dormant company, and Small company.
Non-SMCs: All the accounting standards are applicable to Non-SMCs.
Non-Corporate Entities: Non-corporate entities are entities other than companies (as defined in the Companies Act, 2013). It includes
1. Cooperative society and charitable entity if they carry on any commercial, industrial or business activities (even if a very small portion), in such cases AS will apply to its entire activity (whether charitable or otherwise)
2. Partnership firms and sole proprietary concerns
3. Societies registered under Societies Registration Act, Hindu Undivided Family (HUF), and Association of Person (AOP).
Non-corporate entities are not under any obligatory requirement to follow accounting standards, but if such entities are required to get its financial statements attested, it will be the duty of a member of the institute (CA in practice) to examine whether AS has been complied with. So indirectly, non-corporate entities are also required to follow accounting standards on the basis of the level in which it falls.
Levels of non-corporate entities are discussed below:
Accounting Standards applicable
•Entities whose equity or debt instruments are listed or are in process of listing on any stock exchange (in or outside India)
•Banks (including co-operative banks), financial institutions or entities carrying on Insurance business
•All commercial, industrial or business reporting entities having:
Ø Borrowings > 10 crores (at any time during immediately preceding accounting year)
Ø Turnover > 50 crores (during preceding accounting year)
• Holding or subsidiary entities of any of the above.
All the accounting standards are applicable to Level I entities. However, AS 21, 23, and 27 will apply based on the regulatory requirements.
• Other than Level I entities if they fall under the following limit.
• All commercial, industrial, or business reporting entities having:
Ø Borrowings > 1 crore (at any time during immediately preceding accounting year)
Ø Turnover > 10 crores (during preceding accounting year)
• Holding or subsidiary entities of any of the above.
Fully applicable AS
All accounting standards are applicable to Level II entities except AS 3, 17, 18, 21, 23, 24, 25, 27 and those discussed below
AS applicable but certain relaxations regarding disclosure requirement
AS 19 – Leases
AS 20– Earning Per Share
AS 29 – Provisions, contingent liabilities, and contingent assets
• All non-corporate entities other than Level I and Level II.
Same exemptions as mentioned in level II above.
The requirement to follow AS:
Corporate entities are required to follow accounting standards while preparing their financial statements as per Section 129 of the Companies Act, 2013 and as discussed above, non-corporate entities are also required to comply with Accounting standards if they want to get their accounts attested from the member of the institute (CA in practice). Entities shall comply with AS 25 only if the entity is required (or it voluntarily opts) to prepare and present an interim financial report.
In case of conflict between Act and Accounting standards:
In case there is any conflict between provisions of any applicable Act and Accounting Standard (AS), the provisions of the Act shall prevail to that extent.
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