Applicability of accounting Standard on Entities Carry Special Status

Applicability of accounting Standard on Special Entities

 

What Are Accounting Standards

Accounting standards are written documents, policy documents issued by expert accounting body or by the government or other regulatory bodies covering the aspect of recognition, measurement, treatment, presentation and disclosure of accounting transaction in the financial statement. Accounting standard in India are issued by ICAI.

Objective of Accounting Standards 

Objective of accounting standards is to standardize the diverse accounting policies and practices with a view to eliminate to the extent possible the non-comparability of financial statement and add the reliability to the financial statements.

Accounting Standard And

1.      The Auditors

a.       Auditors are duty bound while discharging their attest function to ensure the accounting standards issued and made mandatory by the ICAI are implemented.

b.      Section 227(3) of Companies Act,1956 requires that the auditors to report whether in his opinion the profit and loss account and balance sheet  comply with the Accounting standards referred in sec 211(3C) of Companies Act, 1956 i.e. accounting standard notified by MCA and till date As-1 to As 29 are notified by MCA .

2.      Board’s Report

a.       Sec 217 (2AA)(i) of Companies Act, 1956 states that Directors responsibility statement should include that in the preparation of the annual accounts the applicable accounting standards had been followed along with proper explanations relating to material departure. Or in simple words we can say that it’s a director’s responsibility that he must disclose in his responsibility statement about the compliance of accounting standard in financial statement of Company. 

Applicability of accounting Standard on Special Entities

1.      Co-Operative Societies

a.       The ICAI has explained that the AS issued by Institute shall apply in respect of financial statements of co-operative societies, which carry on commercial ,industrial or business activities, and are subject to the attest  function of the member of ICAI.

b.      The ICAI further clarified that even if a very small proportion of the activities of co-operative society is considered to be commercial, industrial or business in nature, then it cannot claim exemption from the application of AS and the AS would apply to all its activities.

Auditors Responsibility

It’s the responsibility of auditor to qualify their report in case the relevant accounting standards are not followed in the preparation and presentation of the financial statements of the Co-operative societies.

2.      Charitable Entities

a.       Accounting standards are applicable on commercial, industrial or business enterprise. Therefore, they do not apply to purely charitable entities.

b.      Provided that if a charitable entity is also engaged in business or commercial activity (howsoever insignificant indicates that even a very small amount of activity) then   accounting standards would apply to its entire activity, charitable and non charitable.

Auditors Responsibility

It’s the responsibility of auditor to qualify their report in case the relevant accounting standards are not followed in the preparation and presentation of the financial statements of the Charitable Entities.

3.      Partnership and Proprietorship

a.       Accounting standards are applicable to all commercial, industrial or business enterprises in spite of their status therefore accounting standards are also applicable to partnership firm or proprietorship.

Auditors Responsibility

It’s the responsibility of auditor to qualify their report in case the relevant accounting standards are not followed in the preparation and presentation of the financial statements of the individual and non-cooperative entity (wherever applicable).

Summary

The Preface to the statement of accounting standards clarifies that the AS are issued “for use in the presentation of General Purpose Financial statement issued to general public by such entity involved in commercial, industrial or business activities and subject to the attest function of its members”.

Accounting Standards are designed to apply to the general purpose financial statements and other financial reporting, which are subject to the attest function of the members of the ICAI. Accounting Standards apply in respect of any enterprise (whether organized in corporate, co-operative or other forms) engaged in commercial, industrial or business activities, irrespective of whether it is profit oriented or it is established for charitable or religious purposes. Accounting Standards will not, however, apply to enterprises only carrying on the activities which are not of commercial, industrial or business nature, (e.g., an activity of collecting donations and giving them to flood affected people). Exclusion of an enterprise from the applicability of the Accounting Standards would be permissible only if no part of the activity of such enterprise is commercial, industrial or business in nature. Even if a very small proportion of the activities of an enterprise is considered to be commercial, industrial or business in nature, the Accounting Standards would apply to all its activities including those which are not commercial, industrial or business in nature.

General Purpose financial Statements includes balance sheet, income statement (profit & loss statement), other statements and notes to accounts (explanatory notes), which form part thereof.

  Hence compliance with AS is required to be examined by an auditor in an audit of financial statements of individual and non-cooperative entity like sole proprietary concern, partnership firms, societies under societies registration act, trusts, HUF and AOP.