1.

CHAPTER 3

OVERVIEW OF ACCOUNTING
STANDARDS

UNIT 1: APPLICABILITY OF ACCOUNTING

STANDARDS

LEARNING OUTCOMES
 After studying this unit, you will be able to–
 Comprehend the status of Accounting Standards;
 Understand the applicability of Accounting Standards.

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 3.2 ACCOUNTING

Applicability of Applicability
AS for of AS for Non-
Status of AS
Corporate Corporate
Entities Entities

1.1 STATUS OF ACCOUNTING STANDARDS

It has already been mentioned in chapter 1 that the standards are developed by
the Accounting Standards Board (ASB) of the Institute of Chartered Accountants of
India and are issued under the authority of its Council which are approved by the
MCA (Ministry of Corporate Affairs). The standards cannot override laws and local
regulations. The Accounting Standards are nevertheless made mandatory from the
dates notified by the MCA and are generally applicable to all enterprises, subject
to certain exception as stated below. The implication of mandatory status of an
Accounting Standard depends on whether the statute governing the enterprise
concerned requires compliance with the Standard, e.g., the Ministry of Corporate
Affairs have notified Accounting Standards for companies incorporated under the
Companies Act, 1956 (or the Companies Act, 2013).
In assessing whether an accounting standard is applicable, one must find correct
answer to the following three questions.
(a) Does it apply to the enterprise concerned? If yes, the next question is:
(b) Does it apply to the financial statement concerned? If yes, the next question
is:
(c) Does it apply to the financial item concerned?

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 OVERVIEW OF ACCOUNTING STANDARDS 3.3

The preface to the statements of accounting standards answers the above

questions.
Enterprises to which the accounting standards apply?
Accounting Standards apply in respect of any enterprise (whether organised in
corporate, co-operative or other forms) engaged in commercial, industrial or
business activities, whether or not profit oriented and even if established for
charitable or religious purposes. Accounting Standards however, do not apply to
enterprises solely 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 were 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.
Implication of mandatory status
Where the statute governing the enterprise does not require compliance with the
accounting standards, e.g. a partnership firm, the mandatory status of an
accounting standard implies that, in discharging their attest functions, the
members of the Institute are required to examine whether the financial statements
are prepared in compliance with the applicable accounting standards. In the event
of any deviation from the accounting standards, they have the duty to make
adequate disclosures in their reports so that the users of financial statements may
be aware of such deviations. It should nevertheless be noted that responsibility for
the preparation of financial statements and for making adequate disclosure is that
of the management of the enterprise. The auditor’s responsibility is to form his
opinion and report on such financial statements.
Section 129 (1) of the Companies Act, 2013 requires companies to present their
financial statements in accordance with the accounting standards notified under
Section 133 of the Companies Act, 2013 (refer Note below). Also, the auditor is
required by section 143(3)(e) to report whether, in his opinion, the financial
statements of the company audited, comply with the accounting standards referred
to in section133 of the Companies Act, 2013. Where the financial statements of a
company do not comply with the accounting standards, the company should
disclose in its financial statements, the deviation from the accounting standards,

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 3.4 ACCOUNTING

the reasons for such deviation and the financial effects, if any, arising out of such
deviations as per Section 129(5) of the Companies Act, 2013. Provided also that the
financial statements should not be treated as not disclosing a true and fair view of
the state of affairs of the company, merely by reason of the fact that they do not
disclose—-

(a) in the case of an insurance company, any matters which are not required to
be disclosed by the Insurance Act, 1938, or the Insurance Regulatory and
Development Authority Act, 1999;
(b) in the case of a banking company, any matters which are not required to be
disclosed by the Banking Regulation Act, 1949;
(c) in the case of a company engaged in the generation or supply of electricity, any
matters which are not required to be disclosed by the Electricity Act, 2003;
(d) in the case of a company governed by any other law for the time being in
force, any matters which are not required to be disclosed by that law.
Note: As per the Companies Act, 2013, the Central Government may prescribe
standards of accounting or addendum thereto, as recommended by the Institute of
Chartered Accountants of India, in consultation with NFRA. Till date, the Central
Government has notified all the existing accounting standards  except AS 30, 31
and 32 on Financial Instruments.
Financial items to which the accounting standards apply
The Accounting Standards are intended to apply only to items, which are material.
An item is considered material, if its omission or misstatement is likely to affect
economic decision of the user. Materiality is not necessarily a function of size; it is
the information content i.e. the financial item which is important. A penalty of
` 50,000 paid for breach of law by a company can seem to be a relatively small
amount for a company incurring crores of rupees in a year, yet is a material item
because of the information it conveys. The materiality should therefore be judged
on case-to-case basis. If an item is material, it should be shown separately instead
of clubbing it with other items. For example it is not appropriate to club the
penalties paid with legal charges.


It may be noted that AS 6 ‘Depreciation Accounting’ and AS 8 ‘Research and Development’
have been withdrawn consequent to issuance of AS 10 Revised ‘Property, Plant, and
equipment’ and AS 26 ‘Intangible Assets’ respectively.

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 OVERVIEW OF ACCOUNTING STANDARDS 3.5

Accounting Standards and Income tax Act, 1961

Accounting standards intend to reduce diversity in application of accounting
principles. They improve comparability of financial statements and promote
transparency and fairness in their presentation. Deductions and exemptions
allowed in computation of taxable income on the other hand, is a matter of fiscal
policy of the government.
Thus, an expense required to be charged against revenue by an accounting
standard does not imply that the same is always deductible for income tax
purposes. For example, depreciation on assets taken on finance lease is charged in
the books of lessee as per AS 19 but depreciation for tax purpose is allowed to
lessor, being legal owner of the asset, rather than to lessee. Likewise, recognition
of revenue in the financial statements cannot be avoided simply because it is
exempted under section 10 of the Income Tax Act, 1961.
Income Computation and Disclosure Standards
Section 145(2) empowers the Central Government to notify in the Official Gazette
from time to time, income computation and disclosure standards to be followed by
any class of assessees or in respect of any class of income. Accordingly, the Central
Government has, in exercise of the powers conferred under section 145(2), notified
ten income computation and disclosure standards (ICDSs) to be followed by all
assessees (other than an individual or a Hindu undivided family who is not required
to get his accounts of the previous year audited in accordance with the provisions
of section 44AB) following the mercantile system of accounting, for the purposes
of computation of income chargeable to income-tax under the head “Profit and
gains of business or profession” or “ Income from other sources”, from A.Y. 2017-
18. The ten notified ICDSs are:
ICDS I : Accounting Policies
ICDS II : Valuation of Inventories
ICDS III : Construction Contracts
ICDS IV : Revenue Recognition
ICDS V : Tangible Fixed Assets
ICDS VI : The Effects of Changes in Foreign Exchange Rates
ICDS VII : Government Grants
ICDS VIII : Securities

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 3.6 ACCOUNTING

ICDS IX : Borrowing Costs

ICDS X : Provisions, Contingent Liabilities and Contingent Assets

1.2 APPLICABILITY OF ACCOUNTING STANDARDS

For the purpose of compliance of the accounting Standards, the ICAI had earlier
issued an announcement on ‘Criteria for Classification of Entities and Applicability
of Accounting Standards’. As per the announcement, entities were classified into
three levels. Level II entities and Level III entities as per the said Announcement
were considered to be Small and Medium Entities (SMEs).
However, when the accounting standards were notified by the Central Government
in consultation with the National Advisory Committee on Accounting Standards,
the Central Government also issued the‘Criteria for Classification of Entities and
Applicability of Accounting Standards’for the companies.
According to the‘Criteria for Classification of Entities and Applicability of
Accounting Standards’as issued by the Government, there are two levels, namely,
Small and Medium-sized Companies (SMCs) as defined in the Companies
(Accounting Standards) Rules, 2006 and companies other than SMCs. Non-SMCs
are required to comply with all the Accounting Standards in their entirety, while
certain exemptions/ relaxations have been given to SMCs.
Consequent to certain differences in the criteria for classification of the levels of
entities as issued by the ICAI and as notified by the Central Government for
companies, the Accounting Standard Board of the ICAI decided to revise its “Criteria
for Classification of Entities and Applicability of Accounting Standards ” and make


The Companies Act, 1956 is being replaced by the Companies Act 2013 in a phased manner.
Now, as per Section 133 of the Companies Act, 2013, the Central Government may prescribe
the standards of accounting or any addendum thereto, as recommended by the Institute of
Chartered Accountants of India, constituted under section 3 of the Chartered Accountants
Act, 1949, in consultation with and after examination of the recommendations made by the
National Financial Reporting Authority (NFRA). Section 132 of the Companies Act, 2013 deals
with constitution of NFRA.
However, the Ministry of Corporate Affairs has, vide clarification dated 13th September, 2013,
announced that the existing Accounting Standards notified under the Companies Act, 1956
shall continue to apply till the Standards of Accounting or any addendum thereto are
prescribed by Central Government in consultation and recommendation of the National
Financial Reporting Authority.

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 OVERVIEW OF ACCOUNTING STANDARDS 3.7

the same applicable only to non-corporate entities. Though the classification

criteria and applicability of accounting standards has been largely aligned with the
criteria prescribed for corporate entities, it was decided to continue with the three
levels of entities for non-corporate entities vis-à-vis two levels prescribed for
corporate entities as per the government notification.
“Criteria for Classification of Entities and Applicability of Accounting Standards” for
corporate entities and non-corporate entities have been explained in the coming
paragraphs.
1.2.1 Criteria for classification of non-corporate entities as decided by
the Institute of Chartered Accountants of India
Level I Entities
Non-corporate entities which fall in any one or more of the following categories,
at the end of the relevant accounting period, are classified as Level I entities:
(i) Entities whose equity or debt securities are listed or are in the process of
listing on any stock exchange, whether in India or outside India.
(ii) Banks (including co-operative banks), financial institutions or entities carrying
on insurance business.
(iii) All commercial, industrial and business reporting entities, whose turnover
(excluding other income) exceeds rupees fifty crore in the immediately
preceding accounting year.
(iv) All commercial, industrial and business reporting entities having borrowings
(including public deposits) in excess of rupees ten crore at any time during
the immediately preceding accounting year.
(v) Holding and subsidiary entities of any one of the above.
Level II Entities (SMEs)
Non-corporate entities which are not Level I entities but fall in any one or more of
the following categories are classified as Level II entities:
(i) All commercial, industrial and business reporting entities, whose turnover
(excluding other income) exceeds rupees one crore but does not exceed


This change is made as per the announcement ‘Revision in the criteria for classifying Level
II non-corporate entities’. This revision is applicable with effect from the accounting year
commencing on or after April 01, 2012.

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 3.8 ACCOUNTING

rupees fifty crore in the immediately preceding accounting year.

(ii) All commercial, industrial and business reporting entities having borrowings
(including public deposits) in excess of rupees one crore but not in excess o f
rupees ten crore at any time during the immediately preceding accounting
year.
(iii) Holding and subsidiary entities of any one of the above.
Level III Entities (SMEs)
Non-corporate entities which are not covered under Level I and Level II are
considered as Level III entities.
Additional requirements
(1) An SME which does not disclose certain information pursuant to the
exemptions or relaxations given to it should disclose (by way of a note to its
financial statements) the fact that it is an SME and has complied with the
Accounting Standards insofar as they are applicable to entities falling in Level
II or Level III, as the case may be.
(2) Where an entity, being covered in Level II or Level III, had qualified for any
exemption or relaxation previously but no longer qualifies for the relevant
exemption or relaxation in the current accounting period, the relevant
standards or requirements become applicable from the current period and
the figures for the corresponding period of the previous accounting period
need not be revised merely by reason of its having ceased to be covered in
Level II or Level III, as the case may be. The fact that the entity was covered
in Level II or Level III, as the case may be, in the previous period and it had
availed of the exemptions or relaxations available to that Level of entities
should be disclosed in the notes to the financial statements.
(3) Where an entity has been covered in Level I and subsequently, ceases to be
so covered, the entity will not qualify for exemption/relaxation available to
Level II entities, until the entity ceases to be covered in Level I for two
consecutive years. Similar is the case in respect of an entity, which has been
covered in Level I or Level II and subsequently, gets covered under Level III.
(4) If an entity covered in Level II or Level III opts not to avail of the exemptions
or relaxations available to that Level of entities in respect of any but not all
of the Accounting Standards, it should disclose the Standard(s) in respect of
which it has availed the exemption or relaxation.

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 OVERVIEW OF ACCOUNTING STANDARDS 3.9

(5) If an entity covered in Level II or Level III desires to disclose the information
not required to be disclosed pursuant to the exemptions or relaxations
available to that Level of entities, it should disclose that information in
compliance with the relevant Accounting Standard.
(6) An entity covered in Level II or Level III may opt for availing certain
exemptions or relaxations from compliance with the requirements prescribed
in an Accounting Standard: Provided that such a partial exemption or
relaxation and disclosure should not be permitted to mislead any person or
public.
(7) In respect of Accounting Standard (AS) 15, Employee Benefits, exemptions/
relaxations are available to Level II and Level III entities, under two sub-
classifications, viz., (i) entities whose average number of persons employed
during the year is 50 or more, and (ii) entities whose average number of
persons employed during the year is less than 50. The requirements stated in
paragraphs (1) to (6) above, mutatis mutandis, apply to these sub-
classifications.

Example
M/s Omega & Co. (a partnership firm), had a turnover of ` 1.25 crores (excluding other
income) and borrowings of ` 0.95 crores in the previous year. It wants to avail the
exemptions available in application of Accounting Standards to non-corporate entities
for the year ended 31.3.20X1. Advise the management of M/s Omega & Co in respect
of the exemptions of provisions of ASs, as per the directive issued by the ICAI.
Solution
The question deals with the issue of Applicability of Accounting Standards to a non -
corporate entity. For availment of the exemptions, first of all, it has to be seen that
M/s Omega & Co. falls in which level of the non-corporate entities. Its classification
will be done on the basis of the classification of non-corporate entities as prescribed
by the ICAI. According to the ICAI, non-corporate entities can be classified under 3
levels viz Level I, Level II (SMEs) and Level III (SMEs).
An entity whose turnover (excluding other income) exceeds rupees fifty crore in the
immediately preceding accounting year, will fall under the category of Level I entities.
Non-corporate entities which are not Level I entities but fall in any one or more of
the following categories are classified as Level II entities:

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(i) All commercial, industrial and business reporting entities, whose turnover
(excluding other income) exceeds rupees one crore but does not exceed rupees
fifty crore in the immediately preceding accounting year.
(ii) All commercial, industrial and business reporting entities having borrowings
(including public deposits) in excess of rupees one crore but not in excess of
rupees ten crore at any time during the immediately preceding accounting year.
(iii) Holding and subsidiary entities of any one of the above.
As the turnover of M/s Omega & Co. is more than ` 1 crore, it falls under 1st criteria
of Level II non-corporate entities as defined above. Even if its borrowings of ` 0.95
crores is less than ` 1 crores, it will be classified as Level II Entity. In this case, AS 3,
AS 17, AS 21 (Revised), AS 23, AS 27 will not be applicable to M/s Omega & Co.
Relaxations from certain requirements in respect of AS 15, AS 19, AS 20, AS 25, AS
28 and AS 29 (Revised) are also available to M/s Omega & Co.

1.2.2 Criteria for classification of Companies under the Companies

(Accounting Standards) Rules, 2006
Small and Medium-Sized Company (SMC) as defined in Clause 2(f) of the
Companies (Accounting Standards) Rules, 2006:
“Small and Medium Sized Company” (SMC) means, a company-
(i) whose equity or debt securities are not listed or are not in the process of
listing on any stock exchange, whether in India or outside India;
(ii) which is not a bank, financial institution or an insurance company;
(iii) whose turnover (excluding other income) does not exceed rupees fifty crore
in the immediately preceding accounting year;
(iv) which does not have borrowings (including public deposits) in excess of
rupees ten crore at any time during the immediately preceding accounting
year; and
(v) which is not a holding or subsidiary company of a company which is not a
small and medium-sized company.
Explanation: For the purposes of clause 2(f), a company should qualify as a Small
and Medium Sized Company, if the conditions mentioned therein are satisfied as
at the end of the relevant accounting period.

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 OVERVIEW OF ACCOUNTING STANDARDS 3.11

Non-SMCs
Companies not falling within the definition of SMC are considered as Non-SMCs.
Instructions
 General Instructions
1. SMCs should follow the following instructions while complying with Accounting
Standards under these Rules:
1.1 The SMC which does not disclose certain information pursuant to the exemptions
or relaxations given to it should disclose (by way of a note to its financial
statements) the fact that it is an SMC and has complied with the Accounting
Standards insofar as they are applicable to an SMC on the following lines:
“The Company is a Small and Medium Sized Company (SMC) as defined in the
General Instructions in respect of Accounting Standards notified under the
Companies Act Accordingly, the Company has complied with the Accounting
Standards as applicable to a Small and Medium Sized Company.”
1.2 Where a company, being an SMC, has qualified for any exemption or relaxation
previously but no longer qualifies for the relevant exemption or relaxation in the
current accounting period, the relevant standards or requirements become
applicable from the current period and the figures for the corresponding period
of the previous accounting period need not be revised merely by reason of its
having ceased to be an SMC. The fact that the company was an SMC in the
previous period and it had availed of the exemptions or relaxations available to
SMCs should be disclosed in the notes to the financial statements.
1.3 If an SMC opts not to avail of the exemptions or relaxations available to an SMC
in respect of any but not all of the Accounting Standards, it should disclose the
standard(s) in respect of which it has availed the exemption or relaxation.
1.4 If an SMC desires to disclose the information not required to be disclosed pursuant
to the exemptions or relaxations available to the SMCs, it should disclose that
information in compliance with the relevant accounting standard.
1.5 The SMC may opt for availing certain exemptions or relaxations from compliance
with the requirements prescribed in an Accounting Standard:
Provided that such a partial exemption or relaxation and disclosure should not be
permitted to mislead any person or public.

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B Other Instructions
Rule 5 of the Companies (Accounting Standards) Rules, 2006, provides as below:
An existing company, which was previously not a Small and Medium Sized
Company (SMC) and subsequently becomes an SMC, should not be qualified for
exemption or relaxation in respect of Accounting Standards available to an SMC
until the company remains an SMC for two consecutive accounting periods.”
1.2.3 Applicability of Accounting Standards to Companies
1.2.3.1 Accounting Standards applicable to all companies in their entirety for
accounting periods commencing on or after 7th December, 2006

AS 1 Disclosures of Accounting Policies

AS 2 (Revised) Valuation of Inventories
AS 4 (Revised) Contingencies and Events Occurring After the Balance Sheet
Date
AS 5 Net Profit or Loss for the Period, Prior Period Items and
Changes in Accounting Policies
AS 7 Construction Contracts
AS 9 Revenue Recognition
AS 10 (Revised) Property, Plant and Equipment 
AS 11 (Revised) The Effects of Changes in Foreign Exchange Rates
AS 12 Accounting for Government Grants
AS 13 (Revised) Accounting for Investments
AS 14 (Revised) Accounting for Amalgamations
AS 16 Borrowing Costs
AS 18 Related Party Disclosures


Revised AS 10 is on ‘Property, Plant and Equipment’ which is applicable for corporate entities
and will come into effect prospectively in respect of accounting periods commencing on or
after April 1, 2016 while for non-corporate entities the same has been withdrawn and will
come into effect prospectively in respect of accounting periods commencing on or after April
1, 2017 onwards.
AS 6 has been withdrawn by the MCA on 30.3.2016 for corporate entities and will come into
effect prospectively in respect of accounting periods commencing on or after April 1, 2016
while for non-corporate entities the same has been withdrawn and will come into effect
prospectively in respect of accounting periods commencing on or after April 1, 2017 onwards.
Provisions with respect to Depreciation have been incorporated in revised AS 10.

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AS 22 Accounting for Taxes on Income

AS 24 Discontinuing Operations
AS 26 Intangible Assets
1.2.3.2 Exemptions or Relaxations for SMCs as defined in the Notification
(A) Accounting Standards not applicable to SMCs in their entirety:
AS 3 Cash Flow Statements
AS 17 Segment Reporting
Note:
Under Section 129 of the Companies Act, 2013, the financial statement, with respect
to One Person Company, small company and dormant company, may not include
the cash flow statement. As per the Amendment, under Chapter I, clause (40) of
section 2, an exemption has been provided vide Notification dated 13th June, 2017
under Section 462 of the Companies Act 2013 to a startup private company besides
one person company, small company and dormant company. As per the
amendment, a startup private company is not required to include the cash flow
statement in the financial statements.
Thus the financial statements, with respect to one person company, small company,
dormant company and private company (if such a private company is a start-up),
may not include the cash flow statement.
(B) Accounting Standards not applicable to SMCs since the relevant Regulations
require compliance with them only by certain Non-SMCs :
(i) AS 21 (Revised), Consolidated Financial Statements
(ii) AS 23, Accounting for Investments in Associates in Consolidated
Financial Statements
(iii) AS 27, Financial Reporting of Interests in Joint Ventures (to the extent
of requirements relating to Consolidated Financial Statements)
(C) Accounting Standards in respect of which relaxations from certain
requirements have been given to SMCs:


AS 21, AS 23 and AS 27 (relating to consolidated financial statements) are required to be
complied with by a company if the company, pursuant to the requirements of a
statute/regulator or voluntarily, prepares and presents consolidated financial statements.

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(i) Accounting Standard (AS) 15, Employee Benefits

(a) paragraphs 11 to 16 of the standard to the extent they deal with
recognition and measurement of short-term accumulating
compensated absences which are non-vesting (i.e., short-term
accumulating compensated absences in respect of which
employees are not entitled to cash payment for unused
entitlement on leaving);
(b) paragraphs 46 and 139 of the Standard which deal with
discounting of amounts that fall due more than 12 months after
the balance sheet date;
(c) recognition and measurement principles laid down in paragraphs
50 to 116 and presentation and disclosure requirements laid down
in paragraphs 117 to 123 of the Standard in respect of accounting
for defined benefit plans. However, such companies should
actuarially determine and provide for the accrued liability in
respect of defined benefit plans by using the Projected Unit Credit
Method and the discount rate used should be determined by
reference to market yields at the balance sheet date on
government bonds as per paragraph 78 of the Standard. Such
companies should disclose actuarial assumptions as per
paragraph 120(l) of the Standard; and
(d) recognition and measurement principles laid down in paragraphs
129 to 131 of the Standard in respect of accounting for other long
term employee benefits. However, such companies should
actuarially determine and provide for the accrued liability in
respect of other long-term employee benefits by using the
Projected Unit Credit Method and the discount rate used should
be determined by reference to market yields at the balance sheet
date on government bonds as per paragraph 78 of the Standard.
(ii) AS 19, Leases
Paragraphs 22 (c),(e) and (f); 25 (a), (b) and (e); 37 (a) and (f); and 46 (b)
and (d) relating to disclosures are not applicable to SMCs.
(iii) AS 20, Earnings Per Share
Disclosure of diluted earnings per share (both including and excluding
extraordinary items) is exempted for SMCs.

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(iv) AS 28, Impairment of Assets

SMCs are allowed to measure the‘value in use’on the basis of
reasonable estimate thereof instead of computing the value in use by
present value technique. Consequently, if an SMC chooses to measure
the‘value in use’by not using the present value technique, the
relevant provisions of AS 28, such as discount rate etc., would not be
applicable to such an SMC. Further, such an SMC need not disclose the
information required by paragraph 121(g) of the Standard.
(v) AS 29 (Revised), Provisions, Contingent Liabilities and Contingent
Assets
Paragraphs 66 and 67 relating to disclosures are not applicable to SMCs.
(D) AS 25, Interim Financial Reporting, does not require a company to present
interim financial report. It is applicable only if a company is required or elects
to prepare and present an interim financial report. Only certain Non-SMCs
are required by the concerned regulators to present interim financial results,
e.g, quarterly financial results required by the SEBI. Therefore, the recognition
and measurement requirements contained in this Standard are applicable to
those Non-SMCs for preparation of interim financial results.
1.2.4 Applicability of Accounting Standards to Non-corporate Entities
1.2.4.1 Accounting Standards applicable to all Non-corporate Entities in their
entirety (Level I, Level II and Level III)

AS 1 Disclosures of Accounting Policies

AS 2 (Revised) Valuation of Inventories
AS 4 (Revised) Contingencies and Events Occurring After the Balance
Sheet Date
AS 5 Net Profit or Loss for the Period, Prior Period Items and
Changes in Accounting Policies
AS 7 Construction Contracts
AS 9 Revenue Recognition

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AS 10 (Revised) Property, Plant and Equipment 

AS 11 The Effects of Changes in Foreign Exchange Rates
AS 12 Accounting for Government Grants
AS 13 (Revised) Accounting for Investments
AS 14 (Revised) Accounting for Amalgamations
AS 16 Borrowing Costs
AS 22 Accounting for Taxes on Income
AS 26 Intangible Assets

1.2.4.2 Exemptions or Relaxations for Non-corporate Entities falling in Level

II and Level III (SMEs)
(A) Accounting Standards not applicable to Non-corporate Entities falling in
Level II in their entirety:

AS 3 Cash Flow Statements

AS 17 Segment Reporting

(B) Accounting Standards not applicable to Non-corporate Entities falling in

Level III in their entirety:

AS 3 Cash Flow Statements

AS 17 Segment Reporting
AS 18 Related Party Disclosures
AS 24 Discontinuing Operations


Revised AS 10 is on ‘Property, Plant and Equipment’ which is applicable for corporate entities and will
come into effect prospectively in respect of accounting periods commencing on or after April 1, 2016
while for non-corporate entities the same has been withdrawn and will come into effect prospectively
in respect of accounting periods commencing on or after April 1, 2017 onwards.
AS 6 has been withdrawn by the MCA on 30.3.2016 for corporate entities and will come into effect
prospectively in respect of accounting periods commencing on or after April 1, 2016 while for non-
corporate entities the same has been withdrawn and will come into effect prospectively in respect of
accounting periods commencing on or after April 1, 2017 onwards.

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(C) Accounting Standards not applicable to all Non-corporate Entities since

the relevant Regulators require compliance with them only by certain
Level I entities:

(i) AS 21 (Revised), Consolidated Financial Statements

(ii) AS 23, Accounting for Investments in Associates in Consolidated
Financial Statements
(iii) AS 27, Financial Reporting of Interests in Joint Ventures (to the extent
of requirements relating to Consolidated Financial Statements)
(D) Accounting Standards in respect of which relaxations from certain
requirements have been given to Non-corporate Entities falling in Level
II and Level III (SMEs):
(i) Accounting Standard (AS) 15, Employee Benefits
(1) Level II and Level III Non-corporate entities whose average
number of persons employed during the year is 50 or more are
exempted from the applicability of the following paragraphs:
(a) paragraphs 11 to 16 of the standard to the extent they deal
with recognition and measurement of short-term
accumulating compensated absences which are non-vesting
(i.e., short-term accumulating compensated absences in
respect of which employees are not entitled to cash
payment for unused entitlement on leaving);
(b) paragraphs 46 and 139 of the Standard which deal with
discounting of amounts that fall due more than 12 months
after the balance sheet date;
(c) recognition and measurement principles laid down in
paragraphs 50 to 116 and presentation and disclosure
requirements laid down in paragraphs 117 to 123 of the
Standard in respect of accounting for defined benefit plans.
However, such entities should actuarially determine and
provide for the accrued liability in respect of defined benefit
plans by using the Projected Unit Credit Method and the
discount rate used should be determined by reference to
market yields at the balance sheet date on government
bonds as per paragraph 78 of the Standard. Such entities

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 3.18 ACCOUNTING

should disclose actuarial assumptions as per paragraph

120(l) of the Standard; and
(d) recognition and measurement principles laid down in
paragraphs 129 to 131 of the Standard in respect of
accounting for other long-term employee benefits.
However, such entities should actuarially determine and
provide for the accrued liability in respect of other long-
term employee benefits by using the Projected Unit Credit
Method and the discount rate used should be determined
by reference to market yields at the balance sheet date on
government bonds as per paragraph 78 of the Standard.
(2) Level II and Level III Non-corporate entities whose average
number of persons employed during the year is less than 50 are
exempted from the applicability of the following paragraphs:
(a) paragraphs 11 to 16 of the standard to the extent they deal
with recognition and measurement of short-term
accumulating compensated absences which are non-vesting
(i.e., short-term accumulating compensated absences in
respect of which employees are not entitled to cash
payment for unused entitlement on leaving);
(b) paragraphs 46 and 139 of the Standard which deal with
discounting of amounts that fall due more than 12 months
after the balance sheet date;
(c) recognition and measurement principles laid down in
paragraphs 50 to 116 and presentation and disclosure
requirements laid down in paragraphs 117 to 123 of the
Standard in respect of accounting for defined benefit plans.
However, such entities may calculate and account for the
accrued liability under the defined benefit plans by
reference to some other rational method, e.g., a method
based on the assumption that such benefits are payable to
all employees at the end of the accounting year; and

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 OVERVIEW OF ACCOUNTING STANDARDS 3.19

(d) recognition and measurement principles laid down in

paragraphs 129 to 131 of the Standard in respect of
accounting for other long-term employee benefits. Such
entities may calculate and account for the accrued liability
under the other long-term employee benefits by reference
to some other rational method, e.g., a method based on the
assumption that such benefits are payable to all employees
at the end of the accounting year.
(ii) AS 19, Leases
Paragraphs 22 (c),(e) and (f); 25 (a), (b) and (e); 37 (a) and (f); and 46 (b)
and (d) relating to disclosures are not applicable to non-corporate
entities falling in Level II. Paragraphs 22 (c),(e) and (f); 25 (a), (b) and (e);
37 (a), (f) and (g); and 46 (b), (d) and (e) relating to disclosures are not
applicable to Level III entities.
(iii) AS 20, Earnings Per Share
Diluted earnings per share (both including and excluding extraordinary
items) is not required to be disclosed by non-corporate entities falling
in Level II and Level III and information required by paragraph 48(ii) of
AS 20 is not required to be disclosed by Level III entities if this standard
is applicable to these entities.
(iv) AS 28, Impairment of Assets
Non-corporate entities falling in Level II and Level III are allowed to measure
the ‘value in use’ on the basis of reasonable estimate thereof instead of
computing the value in use by present value technique. Consequently, if a
non-corporate entity falling in Level II or Level III chooses to measure the
‘value in use’ by not using the present value technique, the relevant
provisions of AS 28, such as discount rate etc., would not be applicable to
such an entity. Further, such an entity need not disclose the information
required by paragraph 121(g) of the Standard.
(v) AS 29 (Revised), Provisions, Contingent Liabilities and Contingent Assets
Paragraphs 66 and 67 relating to disclosures are not applicable to non-
corporate entities falling in Level II and Level III.

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 3.20 ACCOUNTING

(E) AS 25, Interim Financial Reporting, does not require a non-corporate entity to
present interim financial report. It is applicable only if a non-corporate entity is
required or elects to prepare and present an interim financial report. Only certain
Level I non-corporate entities are required by the concerned regulators to
present interim financial results e.g., quarterly financial results required by the
SEBI. Therefore, the recognition and measurement requirements contained in
this Standard are applicable to those Level I non-corporate entities for
preparation of interim financial results.
Note: The Accounting standards (AS) covered in the syllabus of this paper at
Intermediate Leve (AS 1; AS 2 (Revised); AS 3; AS 10 (Revised); AS 11(Revised);
AS 12; AS 13 (Revised); and AS 16) have been discussed in detail in the
succeeding unit of this chapter.

SUMMARY
 According to the‘Criteria for Classification of Entities and Applicability of
Accounting Standards’as issued by the Government, there are two levels,
namely, Small and Medium-sized Companies (SMCs) as defined in the
Companies (Accounting Standards) Rules, 2006 and companies other than SMCs.
Non-SMCs are required to comply with all the Accounting Standards in their
entirety, while certain exemptions/ relaxations have been given to SMCs.
 Criteria for classification of entities for applicability of accounting standards
for corporate and non-corporate entities have been prescribed as per the
Govt. notification.

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 OVERVIEW OF ACCOUNTING STANDARDS 3.21

TEST YOUR KNOWLEDGE

MCQ
1. Non-corporate entities which are not Level I entities whose turnover
(excluding other income) exceeds rupees ___________ but does not exceed
rupees fifty crore in the immediately preceding accounting year are classified
as Level II entities.
(a) Five crores.
(b) Two crores.

(c) One crore.

2. The following Accounting Standard is not applicable to Non-corporate
Entities falling in Level II in its entirety
(a) AS 10.

(b) AS17.
(c) AS 2.
3. All commercial, industrial and business reporting entities, whose turnover
(excluding other income) exceeds rupees fifty crore in the immediately
preceding accounting year, are classified as
(a) Level II entities.
(b) Level I entities.
(c) Level III entities.
Theory Questions
1. What are the issues, with which Accounting Standards deal?
2. List the criteria to be applied for rating a non-corporate entity as Level-I entity
and Level II entity for the purpose of compliance of Accounting Standards in
India.

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 3.22 ACCOUNTING

Practical Questions
Question 1
XYZ Ltd., with a turnover of ` 35 lakhs and borrowings of ` 10 lakhs during any time
in the previous year, wants to avail the exemptions available in adoption of
Accounting Standards applicable to companies for the year ended 31.3.20X1.
Advise the management on the exemptions that are available as per the Companies
(AS) Rules, 2006.
If XYZ is a partnership firm, is there any other exemption additionally available?
Question 2
A company was classified as Non-SMC in 20X1-20X2. In 20X2-20X3, it has been
classified as SMC. The management desires to avail the exemption or relaxations
available for SMCs in 20X2-20X3. However, the accountant of the company does
not agree with the same. Comment.

ANSWERS
MCQ
1. (c), 2. (b), 3. (b)
Answers to Theory Questions
1. Accounting Standards deal with the issues of (i) Recognition of events and
transactions in the financial statements, (ii) Measurement of these
transactions and events, (iii) Presentation of these transactions and events in
the financial statements in a manner that is meaningful and understandable
to the reader, and (iv) Disclosure requirements.

2. Refer para 1.2.1 for Criteria to be applied for rating a non-corporate entity as
Level-I entity and Level II entity for the purpose of compliance of Accounting
Standards in India.
Answers to Practical Questions
Answer 1

The question deals with the issue of Applicability of Accounting Standards for
corporate & non-corporate entities.

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 OVERVIEW OF ACCOUNTING STANDARDS 3.23

The companies can be classified under two categories viz SMCs and Non SMCs
under the Companies (AS) Rules, 2006.
As per the Companies (AS) Rules, 2006, criteria for above classification as SMCs, are:

“Small and Medium Sized Company” (SMC) means, a company-

 whose equity or debt securities are not listed or are not in the process of listing
on any stock exchange, whether in India or outside India;
 which is not a bank, financial institution or an insurance company;
 whose turnover (excluding other income) does not exceed rupees fifty crore in
the immediately preceding accounting year;
 which does not have borrowings (including public deposits) in excess of rupees
ten crore at any time during the immediately preceding accounting year; and
 which is not a holding or subsidiary company of a company which is not a small
and medium-sized company.
Since, XYZ Ltd.’s turnover of ` 35 lakhs doesnot exceed ` 50 crores and borrowings
of ` 10 lakhs are less than ` 10 crores, it is a small and medium sized company
(SMC).

The following relaxations and exemptions are available to XYZ Ltd as per the criteria
laid down for SMCs/Non SMCs:
1. AS 3 “Cash Flow Statements” is not mandatory.
2. AS 17 “Segment Reporting” is not mandatory.
3. SMCs are exempt from some paragraphs of AS 19 “Leases”.
4. SMCs are exempt from disclosures of diluted EPS (both including and
excluding extraordinary items).
5. SMCs are allowed to measure the ‘value in use’ on the basis of reasonable
estimate thereof instead of computing the value in use by present value
technique under AS 28 “Impairment of Assets”.
6. SMCs are exempt from certain disclosure requirements of AS 29 (Revised)
“Provisions, Contingent Liabilities and Contingent Assets”.

7. SMCs are exempt from certain requirements of AS 15 “Employee Benefits”.

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 3.24 ACCOUNTING

8. Accounting Standards 21, 23, 27 are not applicable to SMCs.

However, if XYZ is a partnership firm and not a corporate, then its classification will
be done on the basis of the classification of non-corporate entities as prescribed
by the ICAI. Accordingly, to ICAI, non-corporate entities can be classified under 3
levels viz Level I, Level II (SMEs) and Level III (SMEs).
Since, turnover of XYZ, a partnership firm is less than ` 1 crore & borrowings of
` 10 lakhs is less than ` 1 crore, therefore, it will be classified as Level III SME. In
this case, AS 3, AS 17, AS 18, AS 21 (Revised), AS 23, AS 24, AS 27 will not be
applicable to XYZ a partnership firm. Relaxations from certain requirements in
respect of AS 15, AS 19, AS 20, AS 25, AS 28 and AS 29 (Revised) are also available
to XYZ a partnership firm.
Answer 2
As per Rule 5 of the Companies (Accounting Standards) Rules, 2006, an existing
company, which was previously not an SMC and subsequently becomes an SMC,
should not be qualified for exemption or relaxation in respect of accounting
standards available to an SMC until the company remains an SMC for two
consecutive accounting periods. Therefore, the management of the company
cannot avail the exemptions available with the SMCs for the year ended 31 st March,
20X3.

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