The Hindu Business Line : The bold face of the new preface to Accounting Standards

ALONG with a change of guard in the Institute of Chartered Accountants of India (ICAI), there is a sea change of face. The pronouncements that emanate from the accounting body are getting repackaged and the ICAI is redefining its own standard setting role. That there is much activity in the green room is only too visible when one finds the preface to accounting standards revised after a quarter century.

As for books, where preface is a preliminary statement or essay introducing the book, explaining its scope, intention, or background, so too with each Accounting Standard (AS) of the ICAI, the preface sets the context. The old preface spoke of how the Accounting Standards Board (ASB) of the ICAI came into being on April 21, 1977, and delineated the "scope and functions" of the ASB. Composition of the ASB was not specified in the preface.

Till February 4, 2004, ASB had 10 from among the elected members of the Central Council, nominees of the Central Government drawn from the Department of Company Affairs and the Central Board of Direct Taxes, plus a host of co-opted members and special invitees such as from the Office of the Comptroller and Auditor General of India, the Federation of Indian Chambers of Commerce & Industry, the Associated Chambers of Commerce & Industry, the Institute of Company Secretaries of India, the Institute of Cost and Works Accountants of India, the Reserve Bank of India, the Confederation of Indian Industry, Industrial Development Bank of India, the Securities and Exchange Board of India, Indian Institute of Management, Lucknow, the Central Board of Excise and Customs, and University Grants Commission.

The 2004 version has hard-coded the make-up into the preface, with an explicit statement that "the composition of the ASB is fairly broad-based and ensures participation of all interest-groups in the standard-setting process." There is an addition - a representative of the Controller General of Accounts - that appears relevant because the ICAI is pushing for the introduction of accrual accounting in defence and railways. There could also be "representative(s) of any other body, as considered appropriate by the ICAI." As a result, there is every likelihood of the Board swelling in size as it identifies newer bodies to represent.

Earlier, there was a section in the preface that was titled `scope and functions' of ASB' though it spoke only of `functions'. Now, there is no scope but `objectives'. Accordingly, the ASB has to: conceive of and suggest areas in which AS need to be developed; formulate AS with a view to assisting the Council of the ICAI in evolving and establishing AS in India; examine how far the relevant International Accounting Standard/ International Financial Reporting Standard can be adapted while formulating the AS and to adapt the same; review, at regular intervals, the AS from the point of view of acceptance or changed conditions, and, if necessary, revise the same; provide, from time to time, interpretations and guidance on AS; and carry out such other functions relating to AS. All this promises that ASB has no fire-and-forget job but a lot of handholding to do.

As if to rein in leeway in applying AS, the new preface states that the ASB has to examine the various current alternative practices in vogue and "endeavour to eliminate or reduce alternatives within the bounds of rationality," instead of the earlier phrase "identify such alternatives, which should be preferred." A portent of options getting limited.

Paragraph 3.3 lays the net, by defining the statements on which the AS would have its sweep: "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 organised in corporate, co-operative1 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." The last sentence is ominously worded to ensure that almost everything comes under the ambit of AS.

Draft of any proposed AS would be circulated to all those bodies represented in the ASB and also to Standing Conference of Public Enterprises (SCOPE) and the Indian Banks' Association (IBA) for comments. Exposure drafts should go to the "stock exchanges and other interest groups, as appropriate."

"In the years to come, it is to be expected that Accounting Standards will undergo revision and a greater degree of sophistication may then be appropriate," was what the old preface had to say. The new one, after establishing the equality between bold and the non-bold print of the AS, makes a bold mention of two types of revision - viz. substantive and limited. For a substantive revision of an AS, the procedure is the same as for a new AS. For limited revision, the procedure "will substantially be the same as that to be followed for formulation of an Accounting Standard, ensuring that sufficient opportunity is given to various interest groups and general public to react to the proposal for limited revision." This would act as a deterrent against unlimited number of `limited revisions'.

A major course-correction happens in paragraph 4.5: "In formulation of Accounting Standards, the emphasis would be on laying down accounting principles and not detailed rules for application and implementation thereof." Visibly, the ICAI is switching horses.

The stick, however, comes in the last section of the preface: "Compliance with the AS." There is no `recommendatory' sop; everything is `mandatory.' What does `mandatory' imply? Two things: One, while discharging their attest functions, it will be the duty of the CAs to examine whether the AS is complied with in the presentation of financial statements covered by their audit; two, in the event of any deviation from the AS, it will be their duty to make adequate disclosures in their audit reports so that the users of financial statements may be aware of such deviation.

To conclude, there is no wishful thinking as in the old preface that "the adoption of AS... will, over the years, has an important effect, with consequential improvement in the quality of presentation of financial statements." Now, there is no mincing of words: "Financial Statements cannot be described as complying with the Accounting Standards unless they comply with all the requirements of each applicable Standard."