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Accounting Standards

Before introduction of standards every company was followed its own accounting policies and there was no standard accounting practices to follow and it’s become difficult to compare the financial statements of various companies. Hence, ICAI introduced accounting standards to standardize diverse accounting practices with a view to eliminate, to the extent possible, incomparability of information contained in the financial statements of various enterprises. The accounting standards have got legal recognition under the Companies Act, 1956, which require accounting standards to be followed by all companies. Apart from the Companies Act, 1956, various regulatory bodies, e.g., the Securities and Exchange Board of India (SEBI), the Reserve Bank of India (RBI) and the Insurance Regulatory and Development Authority (IRDA) also require compliance with the accounting standards issued by the Institute. Till now there are 29 accounting standards are issued by ICAI.



For the purpose of applicability of Accounting Standards, enterprises are classified into three categories, viz., Level I, Level II and Level III.

Level II and Level III enterprises are considered as SMEs.

Level I enterprises are required to comply fully with all the accounting standards.

Level II and Level III enterprises in respect of recognition and measurement principles should be followed. Relaxations are provided with regard to disclosure requirements.


Accounting Standards not applicable to Level II enterprises in their entirety:

(i) AS 3, Cash Flow Statements

(ii) AS 17, Segment Reporting

(iii) AS 18, Related Party Disclosures

(iv) AS 19, Leases (partly)

(v)  AS 20, Earnings per Share (partly)

(vi) AS 21, Consolidated Financial Statements


(vii) AS 23, Accounting for Investments in Associates in Consolidated Financial Statements

(viii) AS 24, Discontinuing Operations.

 (ix)  AS 25 is not mandatory

 (ix)  AS 27, Financial Reporting of Interests in Joint Ventures

  (x) AS 29, Provisions, Contingent Liabilities and Contingent Assets (partly)

All the above standards not applicable to Level III enterprises also and apart from above AS 22, Accounting for Taxes on Income also not applicable to Level III enterprises.

Accounting standards are easy to understand if we read the standards along with the help of one or two company’s annual reports and how they followed the standards and how they disclosed in their financial statements. Accounting standards would become easy to understand and read, for the students if the following points are considered for every Accounting standard. Consider these points for every standard then it’s become easy.

The points are as follows:


1 Objective of the Standard

2. Scope of the Standard

3. Definitions of the terms used in the Standard

4. Recognition and measurement principles (wherever applicable)

5. Presentation and disclosure requirements.




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