Accounting Standards : Need, Benefits, Limitations and Applicability

Accounting is a process of recording an organisation’s financial exchanges in order to retain data that can be referred to in the ,future to make important decisions. But it is very necessary that the records are maintained in a proper format and all the firms follow some specific rules to maintain the records for ease and to create uniformity in the format of records all over the country.

What are Indian Accounting Standards?

The Institute of Chartered Accountants of India (ICAI) lays down the standards to be followed in India, which is known as the Indian Accounting Standard, and these standards were laid under the oversight of the Accounting Standards Board. These standards ensure uniformity, transparency, consistency, and comparability across firms.

Need for Accounting Standards

Accounting Standards are needed due to the following reasons:

• These standards ensure uniformity in financial statements across the firms so that the investors can understand them easily and clearly, and can take appropriate decisions about the investment.
• If the same accounting standards are followed throughout the world, anyone can explore career opportunities in accounting in any part of the world.
• Accounting standards guide businesses on how to create and maintain their account reports, which establish a common accounting language across the globe.
• It lets everyone have a single framework for recording all the business transactions.

Benefits of Accounting Standards

The benefits of Accounting Standards are as follows:

1. Reduces Confusion: If certain standards are followed during the creation of financial reports, then it can reduce confusion due to multiple people creating the reports in their own way.

2. Comparability: Accounting Standards ensure that the reports of any organisation can be compared with that of others across the globe.

3. Uniformity: Each transaction can be easily identified with the use of Accounting standards, as a particular type of transaction will follow certain rules and standards to record it in the reports and statements.

4. Reliability: Financial Statements and Reports that follow accounting standards allow stakeholders to take important decisions regarding investment easily, as the company’s financial reports are a major source to make decisions for them. Accounting standards ensure that the financial reports and statements of an organisation are fair and transparent.

Limitations of Accounting Standards

Accounting Standards have various limitations too. These are:

1. Lack of Flexibility: In accounting, there are many alternatives for valuations. It becomes very difficult to use different valuation methods to create reports, as a particular method can only be followed at a particular time instead of multiple methods, which may make the valuations lengthy and difficult.

2. Difficulty for Management: As stated, there may be many methods for a particular valuation, so it becomes difficult for management to choose one particular method, as each method has its own benefits and limitations.

3. Restricted Scope: Accounting Standards cannot override the statute and needs to be framed within the boundaries of the law that is prevalent at that time.

Applicability of Accounting Standards

For accounting standards to be applicable to various organisations, all enterprises are classified into three categories that are Level I, Level II and Level III. Certain accounting standards may not be applicable to a particular level. Let us see the list of accounting standards, and to which level they are applicable.

List of Accounting standards issued by ICAI

Accounting Standard	Description	Applicable To Level
AS1	Disclosure of Accounting Policies	All
AS2	Valuation of Inventories	All
AS3	Cash Flow Statements	1
AS4	Contingencies and Events Occurring After the Balance Sheet Date	All
AS5	Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies	All
AS6 (withdrawn FY 2016-17)	Depreciation Accounting	—–
AS7	Construction Contracts	All
AS8	Accounting for Research and Development	All
AS9	Revenue Recognition	All
AS10	Accounting for Fixed Assets	All
AS11	The Effects of Changes in Foreign Exchange Rates	All
AS12	Accounting for Government Grants	All
AS13	Accounting for Investments	All
AS14	Accounting for Amalgamations	All
AS15	Accounting for Retirement Benefits in the Financial Statements of Employers	All
AS16	Borrowing Costs	All
AS17	Segment Reporting	1
AS18	Related Party Disclosures	1
AS19	Leases	All
AS20	Earnings Per Share	All
AS21	Consolidated Financial Statements	See Note
AS22	Accounting for Taxes on Income	All
AS23	Accounting for Investments in Associates in Consolidated Financial Statements	See Note
AS24	Discontinuing Operations	1,2
AS25	Interim Financial Reporting	All
AS26	Intangible Assets	All
AS27	Financial Reporting of Interests in Joint Ventures	See Note
AS28	Impairment of Assets	All
AS29	Provisions, Contingent Liabilities and Contingent Assets	All

Note: AS 21, AS 23 and AS 27 for the preparation of consolidated financial statements are required to be complied with by a non-corporate entity if the non-corporate entity voluntarily prepares and presents the consolidated financial statements.