The Hindu Business Line : After 25 years, ICAI revises accounting norms `Preface'

IN a significant move, the Institute of Chartered Accountants of India (ICAI) has revised the `Preface' to the statements of accounting standards that are issued by the institute.

The first and only version of the Preface was issued in 1979. The ICAI has so far issued 29 accounting standards.

The Preface is a pre-requisite for using any accounting standard.

All the accounting standards issued by the institute are required to be read in the context of the `Preface' to the statements of accounting standards. The ICAI has now specifically stated in the revised Preface that all accounting standards issued by the institute are "principle-based." According to a senior ICAI official, this would imply that the accounting standards in the country are not to be considered "rule-based."

"Rule-based accounting standards are prone to misuse. This has been amply demonstrated in the events (corporate wrong doings such as Enron) that shook the US in recent years. A principle-based approach that we are adopting is much better," the official said.

An example of rule based vis-à-vis principle-based approach could be illustrated in the case of consolidation of financial statements. In a rule-based approach (like US GAAP), an entity with say 50.1 per cent stake in another entity would alone be required to present consolidated financial statements. On the other hand, if one were to adopt a principle-based approach of "control" the consolidation would be a must even if the holding is say 49.5 per cent and control is exercised through other routes.

Further, the revised Preface has specifically mentioned that even the `plain' portions of an accounting standard are mandatory on the enterprise adopting the accounting standard. "Every accounting standard has two parts - the `bold' or `italics' part and the `plain' part. In India, there is a notion that only the `bold' portion is mandatory and not the `plain' part below such `italicised' or `bold' paragraphs. We are now making it clear that even the `plain' part which elaborates on the principles enunciated in the `bold' part is mandatory," the official said.

Besides clearly setting out the composition of the Accounting Standards Board (ASB), the revised Preface has also incorporated the position in respect of applicability of accounting standards to co-operative societies and enterprises established for charitable and religious purposes.

So far, the instruction on applicability of accounting standards to co-operative societies and enterprises established for charitable and religious purposes were separately done by the ICAI council from time to time.

"There is no change in the position of applicability of standards to co-operative societies. We have only incorporated the existing position in the Preface," the ICAI official said.

The revised Preface also specifically recognises the issuance of the accounting standard interpretations as one of the functions of the ASB.

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