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Thursday, Feb 19, 2004

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A sudden spurt of action

Mohan R. Lavi

Mohan R. Lavi on what the changes to the Accounting Standards Preface imply

IT IS COMMON in Western movies to encounter a long period of inaction after which there is suddenly a lot of action. On the cricket field, it is passť for commentators to state after a period of dull play that "something is going to give". Something similar has happened to the accounting profession after Enron.

There has been such a lot of action that it appears difficult to keep pace with the announcements and changes that are coming at such a rapid pace these days. The latest is the move of the Institute of Chartered Accountants of India (ICAI) to alter its Preface to the Accounting Standards which have stood the test of time for 25 years.

Coming as it does from the premier accounting body in the country, the intent behind this move could be to close the gaps in the interpretation of Accounting Standards by professionals and the auditees. Accounting Standards in India, after a sedate start, have over the past few years, gathered momentum to an extent that we now have 29 such tomes for consumption. More are slated to come.

The Preface seeks to clarify all that we needed to know about the composition of the Accounting Standards Board (ASB) and such other matters that the paparazzi have been ignorant about. The Preface makes a statement that the composition of the ASB is fairly broad-based and ensures participation of all interest groups in the standard-setting process.

A representative of the Controller General of Accounts has also found a berth on the ASB.

The ASB no longer has scope and functions but objectives which, inter alia, include conceive and suggest areas in which the standards need to be developed, formulate AS, examine how the relevant International Accounting Standards (IAS) can be adapted to India and review the standards from time to time. It is also the objective of the ASB to endeavour, eliminate or reduce alternatives within the bounds of rationality.

As far as applicability is concerned, the Preface makes no bones about the fact that the standards are applicable to the general purpose financial statements and other financial reporting, which are subject to the attest function of the members of the ICAI. As far as entities go, they are applicable to any enterprise (whether organised in corporate, cooperative or other forms) engaged in commercial, industrial or business activities irrespective of whether it is profit oriented or established for charitable or religious purposes.

The only ones who have been let scot-free are enterprises carrying on activities which are not commercial, industrial or business in nature, such as an activity of collecting donations and giving them to flood-affected people. To drive home the message loud and clear, the Preface states that even if a miniscule part of the activity of an enterprise is of commercial, industrial or business nature, the entire AS is applicable.

Reading the Preface as a layman would, special purpose financial statements (for example, a standalone balance-sheet prepared for US GAAP restatement) need not follow the standards. The ICAI has recently relaxed applicability of the standards to small and medium enterprises (SMEs).

It would have been in the fitness of things to have drawn a reference to this in the Preface so that one would not have to guess whether this Preface supersedes the relaxed guideline or vice-versa. Similarly, it took the efforts of the N. D. Gupta Committee to bring about some commonality between the standards being followed by banks and those followed by other entities. An insertion about this in the Preface would have been in order.

In case the ICAI was of the opinion that the clarifications given have lost their relevance due to this Preface, it should have mentioned so in the Preface. History is witness to legion examples where people have collected donations for flood-affected people and instead of distributing it where it should have been done, have put the proceeds into their own bank accounts. It needs no saying that one cannot devise uniform standards for each and every person in the country, but the example given could have been more descriptive of what the ICAI is planning to achieve.

The practice of circulating a draft of the proposed AS to all concerned has been retained. Expecting a lot of changes in the years to come, the Preface contemplates two types of revisions to the standards — substantive and limited. Substantive is when the AS is turned topsy-turvy and limited is when it is contemplated that mere tinkering in the AS is to be done. To dispose of the notion that only the bold portions of the standards are mandatory whilst the rest can go to the Recycle Bin, the Preface says that irrespective of the decoration that is provided to a portion of an AS, it is applicable in toto.

Another substantial change that has been made in the Preface is that it has clarified that the standards are now to be principle-based rather than rule-based.

This basically means that you need to follow the AS as a principle and a way of life instead of saying that in case my turnover is Rs 49.99 crore I need not follow a particular AS since I am still a rupee short of the benchmark.

The ICAI has also exited from the materiality concept as far as their applicability to AS is concerned. In short, the ICAI is exhorting members to use the standards as a Bible and to ensure that any slight deviations also find a place in the audit report.

The ICAI, in this laudable move, has shown who is the boss as far as Accounting Standards are concerned. However, much more needs to be done.

The ICAI should do some out-of-the-box action and do away with entities such as the National Advisory Board on Accounting Standards which are but mantelpieces in a showcase.

The ASB in the UK is busy issuing Financial Reporting Exposure Drafts (FREDs) to comply with the diktat to comply with the International Accounting Standards by 2005.

The day is not far off when India too would have to move towards common global accounting standards.

At that point in time, many of the existing standards would have to be revisited. By issuing this Preface, the ICAI has made the right step at the right time.

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