The Hindu Business Line : AS on local bodies

With the issue of the trilogy of Accounting Standards on Financial Instruments — AS 30, 31 and 32 — the Institute of Chartered Accountants of India (ICAI) has come almost the distance to benchmark themselves with the International Financial Reporting Standards (IFRS) — the latest language for the global accountant.

Standards on share-based payments, investment property and agriculture would complete the issue of global standards. There would be minor differences and some standards which we may not desire — like the one on hyper-inflationary economies — but all the hard work would have been completed by then.

The ICAI has focused on local bodies now with the issue of two draft accounting standards ASLB 3 ‘Revenue from exchange transactions’ and ASLB 4 ‘Borrowing costs’.

The need for these could not have been more timely since the 73rd and 74th Constitutional Amendment Acts envisage a key role for Panchayati Raj institutions and urban local bodies in respect of various functions such as education, health, rural housing and drinking water and the financial accounting practices they follow now would do with a dose of transparency.

ASLB 3 and 4

ASLB 3 dictates that revenue should be recognised at the fair value of the revenue received or receivable. The amount of revenue arising on transaction is usually determined by agreement between the entity and the purchaser or the user of the asset or service.

It is measured at the fair value of the consideration received or receivable taking into account the amount of any trade discounts allowed by the entity.

Accounting Standard for Local Bodies (ASLB) 3, ‘Revenue from Exchange Transactions’, lays down the accounting treatment of revenue arising from exchange transactions and events in addition to specifying revenue recognition norms.

The local bodies will be able to use this standard for revenue arising from the rendering of services, sale of goods, and other income like royalty, dividend and interest.

An exchange transaction is one in which an entity transfers goods or services, or use of assets, and receives some value (primarily in the form of cash, goods, services or has liabilities extinguished) from the other party in exchange.

The non-exchange transactions are transactions that are not exchange transactions like revenue from taxes, duties, fines, grants and donations and revenue from lease agreements among others. There is also a diktat that when the outcome of a transaction involving the rendering of services cannot be estimated reliably, only to the extent of expenses recognised are recoverable.

A separate Accounting Standard for Local Bodies (ASLB), ‘Revenue from Non-Exchange Transactions’, is being formulated by the ICAI. ASLB 4, ‘Borrowing Costs’, prescribes capitalisation of borrowing costs that are specifically incurred for acquisition, construction or production of a qualifying asset.

The Standard is simple to apply in practice as it does not require capitalisation of borrowing costs of general borrowings used for the purposes of obtaining a qualifying asset. As per this standard, any borrowing cost, such as interest or commitment charges related to raising of funds, will be added to the cost of asset.

ASLB 1 and 2

Currently, there are no accounting standards for local bodies in India. The ICAI had already issued the Preface to the Accounting Standards for Local Bodies in 2007. Further, ASLB 1 — Presentation of Financial Statements, and ASLB 2 — Accounting Policies, Changes in Accounting Estimates and Errors — will be issued shortly.

The accounting standards for local bodies will help harmonise the financial reporting practices followed by various local bodies that have adopted accrual basis of accounting. These standards are important, keeping in view the recent accounting reforms to bring more transparency and accountability in managing public funds.

The ICAI has focused on two critical areas while formulating these standards and has used the latest jargon called fair value to measure transactions. Local bodies could expect some more prescriptive and disclosure standards in the years to come.

(The author is a Hyderabad-based chartered accountant. blfeedback@thehindu.co.in)

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