Companies Act Section 2(2) Accounting Standards

Understanding Accounting Standards in the Companies Act, 2013

Accounting Standards Section 2(2)

"Accounting standards" are the standards of accounting or any addendum to such standards as prescribed by the Central Government in consultation with the National Financial Reporting Authority (NFRA).

Key Features:

1. Authority: 

The Central Government is responsible for prescribing accounting standards.

The NFRA, an independent regulator, is consulted to ensure that the standards are robust and in line with international practices.

2. Purpose:

To ensure consistency, transparency, and comparability in the financial statements of companies.

To provide a common framework for preparing and presenting financial statements, ensuring they reflect a true and fair view of the company's financial position and performance.

3. Applicability:

The accounting standards apply to all companies to which the Companies Act, 2013 applies.

These standards must be followed by companies while preparing their financial statements.

Components of Accounting Standards:

Accounting standards typically cover various aspects of financial accounting and reporting. They include:

1. Recognition:

Criteria for recognizing financial transactions and events in the financial statements.

2. Measurement:

Guidelines on how to measure assets, liabilities, income, and expenses.

Methods for determining the value at which items should be recognized in the financial statements.

3. Presentation:

Format and structure for presenting financial information in financial statements.

Requirements for presenting specific items on the face of the financial statements.

4. Disclosure:

Detailed requirements for disclosing information in the financial statements and accompanying notes.

Ensures that all relevant information is available to users of financial statements for making informed decisions.

Examples of Accounting Standards:

Examples of specific accounting standards that companies might follow include:

1. AS 1: Disclosure of Accounting Policies:

Requires companies to disclose significant accounting policies used in preparing and presenting financial statements.

2. AS 2: Valuation of Inventories:

Provides guidelines for valuing inventories and recognizing them as expenses when sold.

3. AS 3: Cash Flow Statements:

Prescribes the format and content of cash flow statements, classifying cash flows into operating, investing, and financing activities.

4. AS 10: Property, Plant, and Equipment:

Sets out principles for recognizing, measuring, and disclosing property, plant, and equipment.

Importance of Accounting Standards:

1. Consistency:

Ensures that financial statements are prepared consistently across different companies and over different periods.

2. Transparency:

Enhances the transparency of financial reporting, making it easier for stakeholders to understand and compare financial statements.

3. Reliability:

Increases the reliability of financial statements, providing stakeholders with confidence in the reported financial information.

4. Comparability:

Facilitates comparison of financial statements between different companies and industries, aiding investors and other stakeholders in making informed decisions.

5. Regulatory Compliance:

Helps companies comply with statutory requirements, reducing the risk of legal and regulatory issues.