APPLICABILITY OF ACCOUNTING STANDARDS

For the purpose of applicability of Accounting Standards (AS), enterprises are divided into three categories, viz; Level I, Level II, and Level III.

CRITERIA FOR CLASSIFICATION OF ENTERPRISES

Level I Enterprises

           
Enterprises which falls in any one or more of the following categories, at any point of time during the accounting period, are classified as Level I enterprises:

1. Enterprises whose equity or debt securities are listed whether in India or outside India.

2. Enterprises that are in the process of listing their equity or debt securities as evidenced by the board of director’s resolution in this regard.

3. Banks including co-operative banks.

4. Financial Institutions.

5. Enterprises carrying on Insurance business.

6. All commercial, industrial and business reporting enterprises, whose turnover for the immediately preceding accounting period on the basis of audited financial statements exceeds Rs. 50 crores. Turnover does not include “other income”.

7. All commercial, industrial and business reporting enterprises having borrowings, including public deposits, in excess of Rs. 10 crores at any time during the accounting period.

8. Holding and subsidiary enterprises of any one of the above at any time during the accounting period.

Level II Enterprises

Enterprises which are not Level I enterprises but fall in any one or more of the following categories are classified as Level II enterprises: 

1. All commercial, industrial and business reporting enterprises, whose turnover for the immediately preceding accounting period on the basis of audited financial statements exceeds Rs. 40 Lakhs but does not exceed Rs. 50 crores. Turnover does not include “other income”.

2. All commercial, industrial and business reporting enterprises having borrowings, including public deposits, in excess of Rs. 1 crores but not in excess of Rs. 10 crores at any time during the accounting period.

3. Holding and subsidiary enterprises of any one of the above at any time during the accounting period.

Level III Enterprises

Enterprises which are not covered under Level I and Level II are considered under Level III enterprises.


Level II and Level III enterprises are considered as SME’s. 


Level I enterprises are required to comply fully with all the accounting standards. In general no relaxations are given to Level II and Level III enterprises in respect of recognition and measurement principles. Relaxations are provided with regard to disclosure requirements. Accordingly, Level II and Level III enterprises are fully exempt from certain accounting standards which mainly lay down disclosure requirements.


In respect of certain other accounting standards, which lay down recognition, measurement and disclosure requirements, relaxations from certain disclosure requirements are given. 

AS	DESCRIPTION	LEVEL I	LEVEL II	LEVEL III
1	Disclosure of Accounting Policies	Applicable	Applicable	Applicable
2	Valuation of Inventories	Applicable	Applicable	Applicable
3	Cash Flow Statements	Applicable	Not Applicable	Not Applicable
4	Contingencies and Events Occurring after Balance Sheet Date	Applicable	Applicable	Applicable
5	Net Profit or Loss for the Period, Prior Period Items and changes in Accounting Policies	Applicable	Applicable	Applicable
6	Depreciation Accounting	Applicable	Applicable	Applicable
7	Construction Contracts	Applicable	Applicable	Applicable
8	Accounting for Research and Development [Note : This standard has been withdrawn]	NA	NA	NA
9	Revenue Recognition	Applicable	Applicable	Applicable
10	Accounting for Fixed Assets	Applicable	Applicable	Applicable
11	The Effects of Changes in Foreign Exchange Rates	Applicable	Applicable	Applicable
12	Accounting for Government Grants	Applicable	Applicable	Applicable
13	Accounting for Investments	Applicable	Applicable	Applicable
14	Accounting for Amalgamations	Applicable	Applicable	Applicable
15	Accounting for Retirement Benefits in the Financial Statements of Employers	Applicable	Applicable	Applicable
16	Borrowing Costs	Applicable	Applicable	Applicable
17	Segment Reporting	Applicable	Applicable with modifications	Applicable with modifications
18	Related Party Disclosures	Applicable	Applicable with modifications	Applicable with modifications
19	Leases	Applicable	Applicable with some modifications and Exemption from Disclosure Requirements	Applicable with some modifications and Exemption from Disclosure Requirements
20	Earnings Per Share	Applicable	Applicable with some modifications and Exemption from Disclosure Requirements [No need to disclose Diluted Earning Per Share and information required by Para 48]	Applicable with some modifications and Exemption from Disclosure Requirements [No need to disclose Diluted Earning Per Share and information required by Para 48]
21	Consolidated Financial Statements	Applicable	Not Applicable	Not Applicable
22	Accounting for Taxes on Income	Applicable except for non-corporate enterprises	Applicable except for non-corporate enterprises	Applicable except for non-corporate enterprises
23	Accounting for Investments in Associates in Consolidated Financial Statements	Applicable	Not Applicable	Not Applicable
24	Discontinuing Operations	Applicable	Not Applicable	Not Applicable
25	Interim Financial Reporting	Applicable [See Note]	Not Applicable	Not Applicable
26	Intangible Assets	Applicable	Applicable	Applicable
27	Financial Reporting of Interest in Joint Ventures	Applicable	Not Applicable to the extent of requirements relating to consolidated financial statements	Not Applicable to the extent of requirements relating to consolidated financial statements
28	Impairment of Assets	Applicable	Applicable	Applicable
29	Provisions, Contingent Liabilities and Contingent Assets	Applicable	Applicable, Disclosure requirements are not applicable	Applicable, Disclosure requirements are not applicable
30	Financial Instruments: Recognition and Measurement [Note: Mandatory from on or after 01/04/2011]	Applicable	Not Applicable	Not Applicable
31	Financial Instruments: Presentations [Note: Mandatory from on or after 01/04/2011]	Applicable	Not Applicable	Not Applicable
32	Financial Instruments: Disclosures [Note: Mandatory from on or after 01/04/2011]	Applicable	Not Applicable	Not Applicable

NOTES:

1. AS 25, Interim Financial Reporting, does not require any enterprise to present interim financial report. It is applicable only if an enterprise is required or elects to prepare and present an interim financial report. However, the recognition and measurement requirements contained in this Standard are applicable to interim financial reports; e.g. quarterly financial results required by the SEBI.

INDIAN ECONOMY : CONVERGING WITH THE WORLD ECONOMY

Indian economy is in the process of converging with the world economy. We will be going to witness a lot of changes in our legal as well as regulatory and accounting framework. The initial steps required to reach that milestone have already been taken.

“Principles that have gain international acceptance have been adopted. The best practices in the world have been studied and incorporated.”

Mr. Pranab Mukherjee H’ble Finance Minister

Source : Discussion Paper on Direct Tax Code, 2009

The first step in this process is the implementation of Goods & Service Tax (GST) in place of various indirect taxes, such as, excise act, service tax, vat, octrio, etc. The GST will be implemented by the beginning of April, 2010, i.e, 01/04/2010. GST is a single rated tax and more than 140 countries are currently using it. Since it is a single rated tax system, therefore it will eliminate the problem of double taxation.

The second is the adoption & converging to International Financial Reporting Standards (IFRS). More than 100 countries are using IFRS. As we all know that accounting is a language and the language which we follow in India, i.e, Accounting Standards (AS) is having certain differences in comparison to the IFRS.

This creates the situation in which the two sets of accounts, one based on the IFRS and the other one based on the Indian GAAP (i.e. AS) becomes unrivaled. As the globalization in India is taking place at a very fast pace, so if it has to invest abroad or attract inbound investment it must follow global standards.

To remove this hindrance the ICAI has taken the initiative, and issued the directive that the India will be converging to IFRS by financial year 2011-12, i.e. 01/04/2011. For the purpose of comparative figures, the transitional period will be 2010-11 (i.e. Date of Transition 01/04/2010), which means for the period 2010-11, the two sets of accounts should be maintained, one as per Indian AS and the other one as per the IFRS, i.e. parallel accounting will take place. The reporting date will be 31/03/2012.

2010-2011 - Transition Period, required for comparative figures

Date of transition 01/04/2010

2011-2012 - Reporting Period

Date of Convergence 01/04/2011

Date of Reporting 31/03/2012

Initially it will be mandatory only for the public listed companies or the companies in which the stake of public is involved. Later on it will be extend to other companies also.

The Indian GAAP is based on the historical cost based model and the IFRS follows the fair value approach. This is the basic difference between the two. After adoption of the IFRS the financial statements will reflect the true picture of the organization, instead of the historical cost which may be not relevant today.

But the fair value concept will further give rise to certain problems. As it is very subjective matter to decide the fair value of an event. The fair value for one person may be different and for other it may be different. So the main challenge will be to determine that fair value.

It will also involve the recognition of assets which are not classified as per Indian GAAP, such as, Carbon Credits, Derivatives etc. and there are many other issues also which will arise due to the difference between the two standards during the first time adoption of IFRS.

And the last step in this process is the implementation of the new Direct Tax Code, 2009.The draft Direct Tax Code along with a Discussion Paper is presented in the Parliament by the Honorable Finance Minister Mr. Pranab Mukherjee on 12th day of August, 2009.

This Code will be effective from 01/04/2011.

The thrust of the Code is to improve the efficiency and equity of our tax system by eliminating the distortions of the tax structure, introducing moderate level of taxation and expanding the tax base.

The strategy to broadening the tax base mainly involves three elements:

1. For many decades, escalating ranges of exemptions which are eroding the tax base. Removal of these exemptions will have following consequences-

(a) A higher tax to GDP ratio

(b) High GDP growth rate

2. Removal of ambiguity in the provisions.

3. Checking of erosion of tax base through tax evasion.

This Direct Tax Code, 2009 is the consolidation of Income Tax, Wealth Tax, Dividend Distribution Tax & Fringe Benefit Tax. It will further provide the simple language as to convey, with clarity, the intent, scope & amplitude of the provisions of the law.

As the economy is expending at a very fast pace, tax base is also increasing, and the bulk of them includes the small payers for whom the compliance cost should be low. Simple language will voluntarily lead to the compliance.

Provisos & explanations have been eliminated which was incomprehensible to the non-experts. There has been extensive use of formulas & tables to simplify the issues.

It further reduces the ambiguity involved in the provisions, which previously gives rise to the different interpretations, thereby reducing the scope of litigation. The powers have been delegated to the Central Government/CBDT to avoid the protracted litigation.

It further provides the flexibility, i.e. the Code is capable to adjust itself to accommodate the change in the economy. The general & essential features are incorporated in the Statute and the matters requiring detailed discussion have been dealt in the Rules/Schedules.

This Code will further provide the stability to the entire tax structure. In current scenario, the tax rates are determined by the Finance Act of the relevant year, therefore there is a certain degree of instability & uncertainty in the prevailing rates of taxes. But in the new Direct Tax Code, all rates form part of the First to Fourth Schedule of the Code itself, thereby obviating the need for an annual Finance Bill. The changes in the rates, if any, will be done through the amendments in the Code through the proper Amendment Bills.