Indian Audit and Accounts Department

Courseware on Financial Audit of Autonomous Bodies

Session: 3 Introduction to Accounting Standards and AS 1 and AS 4

Introduction to Accounting
Standards and
Accounting Standard 1
and Accounting
Standard 4
Session Overview
In the previous sessions we had a look at
the legal mandate for audit of autonomous
bodies and authorities and objective and
scope of audit of such institutions. We are
also aware that objective of audit of an
autonomous institution is to examine the
utilization of financial assistance provided
to that institution by the Government as
per sanction and to ensure that the
financial statements prepared by the
institution present a true and fair view of
the accounts.
In order to ensure that the financial
statements prepared by autonomous
bodies/authorities present a true and fair
view of the accounts, the preparers of
financial statements are guided by the
generally accepted accounting standards.
Auditors also ensure during the audit of
financial statements that generally
accepted accounting standards have been
followed and applied by the entity while
preparing or presenting their financial
statements. Accounting is the process of
collecting and recording economic data
relating to an enterprise, processing this
data to produce useful information to those
who need it. Every profession develops a
body of knowledge consisting of
principles, which are considered as
standard to be attained. Accounting is no
exception. In India, the Institute of
Chartered Accountants of India has
developed Accounting Standards; based on
the generally accepted accounting
standards to be used in preparation of
financial statements.

During this session, we will learn:

the importance of the accounting

standards in preparation of financial
statements; and
application of AS 1 relating to
Disclosure of Accounting Policies,
and
application of AS 4 relating to Events
Occurring After the Balance Sheet
Date for preparation of financial
statements.

Learning Objective
At the end of the session, the learner will
be able to state the importance of
accounting standards in the preparation of
financial statements and application of AS
1 relating to Disclosure of Accounting
Policies and AS 4 relating to Events
Occurring After the Balance Sheet Date in
the preparation of Financial Statements.

Importance of Accounting
Standards in the preparation
of financial statements
Financial statements are prepared on the
basis of certain fundamental assumptions.
One is the concept of going concern and
another is the concept of accrual basis of
accounting. Besides, the numerous
financial transactions of an enterprise are
classified into various heads depending on
their impact. Expenditure incurred on
operations of the current year are charged
to profit and loss account of that year,
while as expenditure not relating to that
period is taken to balance sheet. Similarly
any income generated from current years
operation are credited to profit and loss
account of that year, while as any income
not relating to current year is carried
forward in balance sheet. These are
fundamental assumptions on the basis of

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Courseware on Financial Audit of Autonomous Bodies
Session: 3 Introduction to Accounting Standards and AS 1 and AS 4
which financial statements are prepared.
On the basis of these and other
assumptions certain standards have
evolved and have been grouped into
generally accepted accounting standards.
The users of the financial statements need
an assurance that the entities preparing
their financial statements follow the
accepted standards while presenting their
financial information in the financial
statements.

Formation of Accounting
Standard Board
Recognizing the need to harmonize the
diverse accounting policies and practices
in use, the Institute of Chartered
Accountants of India constituted an
Accounting Standards Board (ASB) in
April 1977.
Scope and functions of the ASB
The main function of the ASB is to
formulate standards so that the Council of
the ICAI may establish such standards, to
be followed by all the entities while
preparing and presenting their financial
statements. The Accounting Standards,
prescribed by the ICAI follow the
standards set by the International
Accounting Standards Committee.
Accounting Standards have to be in
conformity with the provisions of the
applicable laws, customs, usage and
business environment in the country. If
due to subsequent amendments in the law,
a particular Accounting Standard is found
to be not in conformity with such law, the
provisions of such law will prevail and the
financial statements should be prepared in
conformity with such law.
The Accounting Standards cannot and do
not override the local regulations, which
govern the preparation and presentation of

financial statements in our country. Where

a certain Accounting Standard is not
followed while presenting information in a
financial statement, a disclosure to that
effect has to be made in the form of
appropriate notes explaining the treatment
of particular item. The Accounting
Standards are intended to apply only to
items that are material.
ICAI has issued 29 Accounting Standards
till date. These are give in annexure A to
this note.

Accounting Standard (AS 1)

Disclosure of Accounting Policies
This Accounting Standards deals with the
disclosure of significant accounting
policies followed in preparing and
presenting the financial statements.
The view presented in the financial
statements of an enterprise of its financial
state of affairs and of the profit and loss
can be significantly affected by the
accounting policies followed in
preparation of the financial statements.
The accounting policies followed vary
from enterprise to enterprise. Disclosure
of significant accounting policies followed
is necessary if the view presented is to be
properly appreciated by the users of the
financial statements.
The disclosure of some of the accounting
policies followed in the preparation and
presentation of the financial statements is
required by law in some cases.
The purpose of this standard is to promote
better understanding of financial
statements by establishing the disclosure
of significant accounting policies and the
manner in which accounting policies are
disclosed in the financial statements. Such
disclosure would also facilitate a more

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Courseware on Financial Audit of Autonomous Bodies
Session: 3 Introduction to Accounting Standards and AS 1 and AS 4
meaningful comparison between financial
statements of different enterprises.
Fundamental Accounting Assumptions
Certain fundamental accounting
assumptions underline the preparation and
presentation of financial statements. They
are usually not specifically stated because
their acceptance and use are assumed.
Disclosure is necessary if they are not
followed.
The following have been generally
accepted accounting assumptions:
a.

Going concern

The enterprise is normally viewed as a

going concern, that is, as continuing in
operation for the foreseeable future. It is
assumed that the enterprise has neither the
intention nor the necessity of liquidation or
of curtailing materially the scale of its
operation.
b.

Consistency

which are applicable in all circumstances.

The differing circumstances under which
enterprises operate in a situation of diverse
and complex economic activity make
alternative accounting principles and
methods of applying those principles
acceptable. The choice of appropriate
accounting principles and the method of
applying those principles in the specific
circumstances of each enterprise calls for
considerable judgment in the management
of the enterprise.
The various statements of the Institute of
Chartered Accountants of India combined
with the efforts of government and other
regulatory agencies and progressive
managements have reduced in recent years
the number of acceptable alternatives
particularly in the case of corporate
entities. While continuing efforts in this
direction in future are likely to reduce the
number still further, the availability of
alternatives accounting policies and
methods of applying those principles is not
likely to be eliminated altogether in view
of the differing circumstances faced by the
enterprises.

It is assumed that accounting policies are

consistent from one period to another.

Areas in which differing accounting

Policies are encountered

c.

The following are the examples of the

areas in which different accounting
policies may be adapted by different
enterprises. The list is not intended to be
exhaustive:
Methods of depreciation, depletion
and amortization;
Treatment of expenditure during
construction;
Conversion or translation of
foreign currency items;
Valuation of inventories;
Treatment of goodwill;
Valuation of investments;
Treatment of retirement benefits;

Accrual

Revenues and costs are accrued, that is,

recognized as they are earned or incurred
(and not as money is received or paid) and
recorded in financial statements of the
period to which they relate.

Nature of Accounting Policies

The accounting policies refer to the
accounting principles and the methods of
applying those principles adopted by the
enterprise in the preparation and
presentation of financial statements. There
is no single list of accounting policies,

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Courseware on Financial Audit of Autonomous Bodies
Session: 3 Introduction to Accounting Standards and AS 1 and AS 4

Recognition of profit on long-term

contracts;
Valuation of fixed assets;
Treatment of contingent liabilities.
Considerations in the selection of
Accounting Policies
The primary consideration in the selection
of accounting policies by an enterprise is
that the financial statements prepared and
presented on the basis of such accounting
policies should represent a true and fair
view of the state of affairs of an enterprise,
as at the balance sheet date and of the
profit and loss for the period ended on that
date. For this purpose, the major
considerations governing the selection and
application of accounting policies are:
1.

Prudence

In view of the uncertainty attached to

future events, profits are not anticipated
but considered only when realized though
not necessarily in cash. Provision is made
for all known liabilities and losses even
though the amount cannot be determined
with accuracy and represents only a best
estimate in the light of available
information.
2.

Substance over form

The accounting policies and presentations

in financial statements of transactions and
events should be governed by their
substance and not merely by legal form.
3.

To ensure proper understanding of the

financial statements, it is necessary that all
significant accounting policies adopted in
the preparation and presentation of
financial statements should be disclosed.
Such disclosure should form part of the
financial statements.
Examples of matters in respect of which
disclosure of accounting policies adopted
will be required are listed in these notes.
Any change in an accounting policy, which
has a material effect, should be disclosed.
The amount by which any item in the
financial statement is affected by such
change should also be disclosed to the
extent ascertainable, wholly or in part. If a
change is made in the accounting policies
which has no material effect on the
financial statements for the current period
but which is reasonably expected to have a
material effect in later periods, the fact of
such change should be appropriately
disclosed in the period in which the change
is adopted. Disclosure of accounting
policies or of change therein cannot
remedy a wrong or inappropriate treatment
of an item in the accounts.

Accounting Standard
The following is the text of the Accounting
Standard 1- Disclosure of Accounting
Policies:

All significant accounting

policies adopted in preparation
and presentation of financial
statements should be disclosed.

The disclosure of significant

accounting policies as such
should form part of the financial
statement and the significant
accounting policies should
normally be disclosed in one
place.

Materiality

Financial statements should disclose all

material items, i.e., items the knowledge of
which might influence the decision of the
user of the financial statements

Disclosure of Accounting Policies

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Courseware on Financial Audit of Autonomous Bodies
Session: 3 Introduction to Accounting Standards and AS 1 and AS 4

Any change in the accounting

policies which has a material,
affect in the current period or
which is reasonably expected to
have a material affect in later
periods should be disclosed. In
the case of a change in
accounting policies, which has a
material affect in the current
period, the amount by which any
item in the financial statement is
affected by such change should
also be disclosed to the extent
ascertainable. Where such
amount is not ascertainable,
wholly or in part, the fact should
be disclosed.
If the fundamental accounting
assumptions, viz., going concern,
consistency and accrual are
followed in financial statements,
specific disclosure is not
required. If a fundamental
accounting assumption is not
followed, the fact should be
disclosed.

(a) Liabilities of life assurance and

general insurance enterprises
arising from policies issued;
(b) Obligations under retirement
benefit plans; and
(c) Commitments arising from longterm lease contracts.
Definitions
The following terms are used in this
Statement with the meanings specified:
A contingency is a condition or situation,
the ultimate outcome of which, gain or
loss, will be known or determined only on
the occurrence or non-occurrence of one or
more uncertain future events.
Events after the balance sheet date are
those significant events, both favourable
and unfavourable, that occur between the
balance sheet date and the date on which
the financial statements are approved by
the Board of Directors in the case of a
company, and by the corresponding
approving authority in the case of any
other entity.
Two types of events can be identified:

Accounting Standard (AS) 4 Contingencies and Events

Occurring After the Balance Sheet
Date
This Statement deals with treatment in
financial statements of
(a)
(b)

Contingencies; and
Events occurring after the
balance sheet date.

The following subjects, which may result

in contingencies, are excluded from the
scope of this Statement in view of special
considerations applicable to them:

(a) those which provide further

evidence of conditions that existed
at the balance sheet date; and
(b) those, which are indicative of
conditions that arose subsequent to
the balance sheet, date.
Explanation
Contingencies
The term contingencies used in this
statement is restricted to conditions or
situations at the balance sheet date, the
financial effect of which is to be
determined by future events which my or
may not occur.

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Courseware on Financial Audit of Autonomous Bodies
Session: 3 Introduction to Accounting Standards and AS 1 and AS 4
Estimates are required for determining the
amounts to be stated in the financial
statements for many on going and
recurring activities of an enterprise. One
must, however, distinguish between an
event and one, which is uncertain. The
fact that an estimate is involved does not,
of itself, create the type of uncertainty,
which characterizes an uncertainty. For
example, the fact that estimates of useful
life of an asset are used to determine
depreciation does not make depreciation a
contingency; the eventual expiry of the
useful life of the asset is not uncertain.
Accounting treatment of contingent
losses
The accounting treatment of a contingent
loss is determined by the expressed
outcome of the contingency. If it is likely
that a contingency will result in a loss to
the enterprise, then it is prudent to provide
for that loss in the financial statement.
The estimation of the amount of
contingent loss to be provided in the
financial statement may be based on the
information available.
If there is conflicting or insufficient
evidence for estimating the amount of
contingency loss, then disclosure is made
of the existence of the contingency.
A potential loss to an enterprise may be
reduced or avoided because a contingent
liability is matched by related counter
claim or claims against a third party. In
such cases, the amount of provision is
determined after taking into account the
probable recovery under the claim if no
significant uncertainty as to its
measurability or collectablility exists.
Suitable disclosure regarding the nature
and gross amount of the contingent
liability is also made.

The existence and amount of guarantees,

obligations arising from discounted bills of
exchange and similar obligations
undertaken by an enterprise are generally
disclosed in financial statements by way of
note, even though the possibility that a loss
to the enterprise will occur is remote.
Provisions for contingencies are not made
in respect of general or unspecified
business risks since they do not relate to
conditions or situations existing at the
balance sheet date.
Accounting treatment of contingent
gains
Contingent gains are not recognized in
financial statements since their recognition
may result in the recognition of revenue,
which may never be realized. However,
when the realization of a gain is virtually
certain, then such gain is not a contingency
and accounting for the gain is appropriate.
Determination of the Amounts at which
Contingencies are included in Financial
Statements
The amount at which a contingency is
stated in the financial statements is based
on the information, which is available at
the date on which the financial statements
are approved. Events occurring after the
balance sheet date that indicate that an
asset may have been impaired, or that a
liability may have existed, at the balance
sheet date are, therefore, taken into
account in identifying contingencies and in
determining the amounts at which such
contingencies are included in financial
statements.
In some cases, each contingency can be
separately identified, and the special
circumstances of each situation considered
in the determination of the amount of the
contingency. A substantial legal claim

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Courseware on Financial Audit of Autonomous Bodies
Session: 3 Introduction to Accounting Standards and AS 1 and AS 4
against the enterprise may represent such a
contingency. Among the factors taken into
account by management in evaluating such
a contingency are the progress of the claim
at the date on which the financial
statements are approved, the opinions,
wherever necessary, of legal experts or
other advisers, the experience of the
enterprise in similar cases and the
experience of other enterprises in similar
situations.

Adjustments to assets and liabilities are

required for events occurring after the
balance sheet date that provide additional
information materially affecting the
determination of the amounts relating to
conditions existing at the balance sheet
date. For example, an adjustment may be
made for a loss on a trade receivable
account, which is confirmed by the
insolvency of a customer, which occurs
after the balance sheet date.

If the uncertainties, which created a

contingency in respect of an individual
transaction, are common to a large number
of similar transactions, then the amount of
the contingency need not be individually
determined, but may be based on the group
of similar transactions. An example of
such contingencies may be the estimated
uncollectable portion of accounts
receivable. Another example of such
contingencies may be the warranties for
products sold. These costs are usually
incurred frequently and experience
provides a means by which the amount of
the liability or loss can be estimated with
reasonable precision although the
particular transactions that may result in a
liability or a loss are not identified.
Provision for these costs results in their
recognition in the same accounting period
in which the related transactions took
place.

Adjustments to assets and liabilities are

not appropriate for events occurring after
the balance sheet date, if such events do
not relate to conditions existing at the
balance sheet date. An example is the
decline in market value of investments
between the balance sheet date and the
date on which the financial statements are
approved. Ordinary fluctuations in market
values do not normally relate to the
condition of the investments at the balance
sheet date, but reflect circumstances,
which have occurred in the following
period.

Explanation
Events Occurring after the Balance
Sheet Date
Events, which occur between the
balance sheet date and the date on
which the financial statements are
approved, may indicate the need for
adjustments to assets and liabilities as at
the balance sheet date or may require
disclosure.

Events occurring after the balance sheet

date which do not affect the figures stated
in the financial statements would not
normally require disclosure in the financial
statements although they may be of such
significance that they may require a
disclosure in the report of the approving
authority to enable users of financial
statements to make proper evaluations and
decisions.
There are events, which, although they
take place after the balance sheet date, are
sometimes reflected, in the financial
statements because of statutory
requirements or because of their special
nature. Such items include the amount of
dividend proposed or declared by the
enterprise after the balance sheet date in
respect of the period covered by the
financial statements.

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Courseware on Financial Audit of Autonomous Bodies
Session: 3 Introduction to Accounting Standards and AS 1 and AS 4
Events occurring after the balance sheet
date may indicate that the enterprise ceases
to be a going concern. A deterioration in
operating results and financial position, or
unusual changes affecting the existence or
substratum of the enterprise after the
balance sheet date (e.g., destruction of a
major production plant by a fire after the
balance sheet date) may indicate a need to
consider whether it is proper to use the
fundamental accounting assumption of
going concern in the preparation of the
financial statements.
Disclosure

charge in the statement of profit

and loss if:
a. it is probable that future events
will confirm that, after taking into
account any related probable
recovery, an asset has been
impaired or a liability has been
incurred as at the balance sheet
date, and
b. a reasonable estimate of the
amount of the resulting loss can
be made.

The disclosure requirements herein

referred to apply only in respect of those
contingencies or events, which affect the
financial position to a material extent.
If a contingent loss is not provided for, its
nature and an estimate of its financial
effect are generally disclosed by way of
note unless the possibility of a loss is
remote (other than the circumstances
mentioned in paragraph 5.5). If a reliable
estimate of the financial effect cannot be
made, this fact is disclosed.

Events Occurring after the Balance

Sheet Date

When the events occurring after the

balance sheet date are disclosed in the
report of the approving authority, the
information given comprises the nature of
the events and an estimate of their
financial effects or a statement that such an
estimate cannot be made.
Accounting Standard
The following is the text of the Accounting
Standard 4-1- Contingencies and Events
Occurring After the Balance Sheet Date:
Contingencies

The amount of a contingent loss

should be provided for by a

The existence of a
contingent loss should be
disclosed in the financial
statements if either of the
conditions is not met, unless the
possibility of a loss is remote.
Contingent gains should not be
recognized in the financial
statements

Assets and liabilities should be

adjusted for events occurring
after the balance sheet date that
provide additional evidence to
assist the estimation of amounts
relating to conditions existing at
the balance sheet date or that
indicate that the fundamental
accounting assumption of going
concern (i.e., the continuance of
existence or substratum of the
enterprise) is not appropriate.
Dividends stated to be in respect
of the period covered by the
financial statements, which are
proposed or declared by the
enterprise after the balance sheet
date but before approval of the
financial statements, should be
adjusted.

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Courseware on Financial Audit of Autonomous Bodies
Session: 3 Introduction to Accounting Standards and AS 1 and AS 4

Disclosure should be made in the

report of the approving authority
of those events occurring after the
balance sheet date that represent
material changes and
commitments affecting the
financial position of the
enterprise

Disclosure

If disclosure of contingencies is
required by this Statement, the
following information should be
provided:

a. the nature of the contingency;

b. the uncertainties which may affect
the future outcome;
c. an estimate of the financial effect,
or a statement that such an
estimate cannot be made.

If disclosure of events
occurring after the balance sheet
date in the report of the approving
authority is required by
paragraph 15 of this Statement,
the following information should
be provided:

a. the nature of the event;

b. an estimate of the financial effect,
or a statement that such an
estimate cannot be made.

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Courseware on Financial Audit of Autonomous Bodies
Session: 3 Introduction to Accounting Standards and AS 1 and AS 4

(C) LIST OF ACCOUNTING STANDARDS

(As on 1st July 2003)
Sl.
No

Date from which

Mandatory
Mandatory accounting
Periods commencing
on or after)
1
Disclosure of
1-4-1991- for companies governed For all enterprises
Accounting Policies
by the Companies Act, 1956, as
well as for enterprises other than
those specified in Note 1.1-41993- for all enterprises, including
those specified in Note1.
2
AS 2 (Revised) Valuation of Inventories
1-4-1999
For all enterprises
3
AS 3 (Revised) Cash flow Statements
1-4-2001
See Note 2
stands withdrawn with effect from the date AS 26, Intangible Assets, becomes mandatory for the
concerned enterprises
(See also Note 11 to this Table).
Accounting
Standard
(AS) No.
AS 1

AS 4 (Revised)

AS 5 (Revised)

AS 6 (Revised)

Title of the Accounting

Standard

Contingencies and Events

1-4-1995
Occurring After the Balance
Sheet Date
Net Profit or Loss for the Period, 1-4-1996
Prior Period Items and Changes in
Accounting Policies
Depreciation Accounting
1-4-1995

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* As
8

For all
enterprises
For all
enterprises
For all
enterprises

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Indian Audit and Accounts Department

Courseware on Financial Audit of Autonomous Bodies
Session: 3 Introduction to Accounting Standards and AS 1 and AS 4
7

AS 7

AS 8

AS 9

10

AS 10

11

AS 11
(Revised 1994)

12

AS 12

Accounting for Construction

Contracts
Accounting for Research
and Development
Revenue Recognition

As in case of AS 1 above
(See also Note 3)
As in case of AS 1 above

Accounting for Fixed

Assets
Accounting for the Effects of
Changes in Foreign Exchange
Rates

As in case of AS 1 above

Accounting for Government

Grants

1-4-1994

As in case of AS 1 above

1-4-1995
(See also Note 4)

For all
enterprises
For all
enterprises
For all
enterprises
For all
enterprises
For all
enterprises
(See also
Announce
ment IX
above)
For all enterprises

As 8 stands withdrawn with effect form the date AS 26, Intangible Assets, becomes mandatory for the
concerned enterprises
(See Note 11 to this Table).

13
14
15

AS 13
AS 14
AS 15

16
17
18
19

AS 16
AS 17
AS 18
AS 19

Accounting for Investments

Accounting for Amalgamations
Accounting for Retirement
Benefits in the financial
Statements of Employers
Borrowing Costs
Segment Reporting
Related Party Disclosures
Leases

1- 4 -1995
1- 4 -1995
1- 4 -1995

For all enterprises

For all enterprises
For all enterprises

1- 4 -2000
1- 4-2001
1- 4-2001
In respect of all assets leased

For all enterprises

See Note 2
See Note 2
For all enterprises

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Indian Audit and Accounts Department

Courseware on Financial Audit of Autonomous Bodies
Session: 3 Introduction to Accounting Standards and AS 1 and AS 4

20
21

AS 20
AS 21

22
23
24
25
26
27

AS 22
AS 23
AS 24
AS 25
AS 26
AS 27

28
29

AS 28
AS 29

Earnings Per Share

Consolidated
Financial Statements
Accounting for Taxes on Income
Discontinuing Operations
Interim Financial Reporting
Intangible Assets
Financial Reporting of Interests
in Joint Ventures
Impairment of Assets
Provisions, contingent Liabilities
and Contingent Assets

during accounting periods

commencing on or after 1-42001
1-4-2001( See also Note 5)
1-4-2001 (See also Note 6)

See Note 5
See Note 6

See Note 7
1-4-2002 (See also Note 8)
See Note 9
1-4-2002 (See also Note 10)_
See Note 11
1-4-2002 (See also Note 12)

See Note 7
See Note 8
See Note 9
See Note 10
See Note 11
See Note 12

See Note 13
1-4-2004

See Note 13

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12