 Namaste. In our last module we had discussed corporate governance, today we are going to discuss about very important concept of accounting principles, accounting standards, IAS gap and so on. Now you have learned already learned what are the financial statements, now we are going to look into the assumptions which go into preparation of these statements. So this will be discussed in the current session, accounting principles, concepts, standards, IAS and gap. First the accounting principles, now we know that accounting seeks to disseminate information, the record transactions, prepare statements and they are provided to the users. It is very much necessary that such communication is based on certain uniform and scientifically laid down principles, so that it is understood by everybody in the same sense. Now accounting principle means those rules of conduct or procedures which are adopted by accountants universally for both recording as well as for disseminating. Now these are the important accounting concepts, now these are the basic assumptions or conditions upon which the accounting is based. The first one is business entity concept, now many times for a proprietary concern the owner and the business look together for the outsider they appear as one thing. But in accounting we always keep in mind that owner is separate from the entity and the accounts are being prepared for a particular entity. Next is dual aspect, we know that for every transaction there are two effects, sometimes those are called as debit or credit. Because of two effects the balance sheet always tally, we have already seen the balance sheet equation that equities plus liabilities is equal to assets. The next one is known as cost concept, now assets are normally to be recorded at historical cost that is at the acquisition cost. We ignore market value unless there is some specific condition for taking it into account, otherwise both the asset valuation as well as recording of expenses happen on actual cost going concern. This is a very important assumption that it is anticipated that business will continue for long foreseeable future and is not likely to be liquidated in a short period, the accounting is always done with the assumption of continuity of the business concern. Next one is accounting period concept, we all know that the business is a continuous process, it keeps on happening transactions keep on coming. But as far as the accounting is concerned the whole of business life is divided into certain periods which are known as accounting periods. Normally there is a one year accounting period, within one year you can have a quarter or a month, but we cannot have some system where accounts are not closed at any point of time. Normally in India the, are you aware of the accounting period in India? Normally it is from 1st April to 31st March, so at the end of every 31st March profit and loss and balance sheet and cash flow and all other statements are prepared, books are considered to be closed and then the new books are opened from 1st April or from the first day of the next financial year that is as per accounting period concept. Next one is money measurement concept, now all transactions which are expressed in money terms alone are recorded, there could be some other transactions like good will or like good contacts or relations which or emotions which cannot be measured in money and such things cannot be recorded in accounting. Next is realization concept, now revenue is recognized only when a particular agreement is reached, so only in case of realization of a transaction the transaction is recorded. Constant value concept, so there is an assumption of constant value of currency for example rupee, we do not assume that the value of rupee though is changing vis-a-vis the foreign currency, we do not record the changes in the value of currency, the value of currency also changes because of inflation but those are not the business transactions, we record the transaction only when some transactions happens with third party otherwise the value of currency is considered to be constant. Next is accrual concept, this is one very important concept because transactions may happen but payment may not come, so receipt of cash or payment of cash could be delayed or it could be advance but the transaction date is a date when the agreement or a particular contract is reached, this is called as a accrual concept, so transactions are recorded as and when they accrue or as and when they occur not as and when the cash is received or paid. The next one is consistency, now the accounting policies or assumptions are the base for making the entries or for preparation of statements. Now once you decide to use a particular assumption or use a particular accounting concept that should not be changed from period to period because accounting statement should be comparable from different period, now in order to achieve the comparability it is necessary that the accounting principles and policies are followed from one period to another in a consistent manner. If for some special reason the change in the accounting policy is necessary it needs to be separately disclosed and the effect of such changes also required to be disclosed. Now here the accounting conventions are given in short, one of the convention we have already seen that is known as consistency that method or a principle once adopted should be followed for a longer period of time, disclosure, all relevant information and fact concerning the financial position must be made available to the users, it should be communicated, it should be disclosed properly, materiality. Many times some transactions are too small, they are insignificant. It is necessary that significant information is shared, it is recorded that is why materiality of transaction is also taken into account, objectivity. Now whenever a particular choice is to be made or whenever a particular assumption is to be chosen, unbiased and objective view is to be taken. Next is stable monetary unit, we have already seen it like the way we have Indian rupee or whatever currency we are recording it is considered to be of a stable value. The last one is very important conservatism or prudence, we have discussed it earlier also that if there are two choices either you can use valuation method A or B, use that method which shows lower value because accountants avoid any overstatement of income or overstatement of asset, we go for a more conservative approach or a prudent approach where the value recorded is as low as possible and not on higher side. As per AS 1, AS 1 refers to accounting standard 1, there are 3 assumptions which are considered as fundamental accounting assumptions which is going concern, consistency and accrual. Now it is always assumed that any accounting statements which are prepared are on the basis of these 3 assumptions that is why they are called as fundamental accounting assumption. If this any of this assumption is not true, it is required to be disclosed but there is no need to disclose these 3 because it is assumed that they are always followed. Now a very small exercise, now consider the following data pertaining to L limited, the cost of land purchased on 1st April 2020 is 125 lakhs and registration charges are 15 lakhs. Now there are 3 possible market values as on 31st March 2021 that is the year ending on March 31st 2021, rupees 150 lakhs is a value possibility A or B 120 lakhs or C 130 lakhs. Now what company did was while finalizing the annual accounts, it has considered the value of land as 125 lakhs. Now is it correct what will be the value in your opinion in each of the scenario A, B and C and which of the accounting assumption is violated by company L, just think over. Now if you take scenario A where the market value is 150, how much is a cost of land will we consider 125 or we will add registration charges also? We are not going for cost of purchase, we call it cost of acquisition which includes cost of purchase plus any incidental one time expenses like registration fee. So 125 plus 15 the cost of land to the company is 140, in scenario A the market value is 150. So what should we consider as a cost as a value in the balance sheet? We take lower of the 2, 140 or 150. So in scenario A the valuation will be made at 140 lakhs. Now company has made it at 125, so they have violated a principle called as cost principle or cost concept because the cost of acquisition of land is 140 they have wrongly calculated it as 125, got it? Now in scenario B, in scenario B the cost remains same which is 140 the market value has gone down it is only 120. So what should we consider it as should they value at 140 or they should value at 120? This is not stock if it is a stock or inventory we take cost or market value whichever is less that is 140 or 120 we would have taken 120, but this is a land so it is a long term asset. So we will not go by the market value we will still value it at 140, in case of B or in case of C any of the cases we will value it at 140 and the concept which the company has violated is cost concept they have not violated conservatism concept, are you waiting? If they happen to value it at 150 they would violate conservatism concept because land is a fixed asset it should always be recorded at cost when we say cost at the acquisition cost are you getting? Now go to let us go to accounting standards. Now accounting policies and principles are used for a very long period of time perhaps for hundreds of years and different countries and different areas have different accounting standard policies although most of the policies are common there are different conventions in different areas. Now to standardize these policies accounting standards were introduced. So these are written policy documents which are issued by some expert accounting body or by regulatory body or by government and they give certain guidelines about recognition, treatment, measurement, presentation, disclosure and so on and they are standardized that is why they are called standard and they should be uniformly followed within that territory maybe that country or that region or so on. Now accounting standards provide framework and standard policies so that if you compare the financial statements of different entities they are very much comparable. Now accounting standards seek to ensure that financial statements of an enterprise give a true and fair view of its financial position and working results. Now accounting standards not only prescribe appropriate treatment but they foster greater transparency and market discipline. In general accounting standards promote uniformity, rationalization, comparability and transparency. Sometimes these accounting standards are also called as financial reporting standards they have the same meaning. Now different countries have different accounting standards as far as India is concerned what standards we use we will discuss about it. I think you all would have heard about Institute of Chartered Accountants of India or ICAI. This is a apex accounting body in India which constituted ASB or Accounting Standard Board in 1977 in order to harmonize various accounting policies and principles. While harmonizing or while coming out with the standards they do give consideration to law, customs, usage and business environment in the country. Now ASB gives due consideration to international standards also. There are two sets of international standards one is International Financial Reporting Standard or IFRS as they are known as or the other one are International Accounting Standards or IAS. Now an effort has been made right from 1977 to harmonize Indian standards with the global standards. Now we will come to INDS. Now the earlier set of standards which were being used in India were called as AS. So we had a series of standards like AS1, AS2, AS3, AS4 and so on. Now in accordance with the policy of convergence here by convergence we mean the convergence of global standards. Different countries have different standards and effort has been made all over the globe to harmonize to bring these standards together. Now because of this policy Ministry of Corporate Affairs has issued a press release on 21st February 2011 and they have notified a new series of standards which are called as INDS that is a new series of Indian accounting standards. Now several requirements of INDS are considerably dissimilar from policies and practices followed by Indian companies because many of the Indian companies for years were following EAS that is the old state of standards. Now international standard which is IFRS has been examined and effort has been made to bring down the differences and as far as possible harmonize the same. Now this is the new set of standards which have been notified. So INDS AS101 is first time adoption of Indian accounting standards, INDS AS2 is about share based payment, INDS 3 is business combination then insurance contracts, non-current assets health or sale, exploration of mineral type of items. So then AS107 is financial instruments and 108 is operating segments. So these are special standards from 107 to 108 and then again a series starts from INDS 1 which is the presentation of accounting standard then we have got INDS 2, 7, 8, 10, 11, 12. I am not reading out all the standards but all these are available for downloading. I will request you to download these standards. If you are interested you can go to them in detail and if you do not want to go in so much of details you at least try to understand various terminologies. So that whenever a reference is made to a standard you should be able to at least refer to it and read about it. So this is the list of all the standards. Now it is not within the purview of the course to really go through every standard it is not necessary. We have already seen how financial statements are prepared they are already prepared based on various standards. Now let us look at what are the international standards. Now there is a body known as IASC international accounting standards committee which was formed in 1973. Now most of the countries started adopting those standards except Canada, Japan and US. Now to give proper direction and interpretation standard interpretation committee was made in 97. Now a new board known as IASB was created in 2001 to prescribe the norms for treatment of various items on preparation and presentation of financial standards. Now IASAB has adopted 41 standards of IASC. Now as I told you the American standards or US standards are not in harmony. In US there is a body called as FASB financial accounting standard board FASB and IASB are in the process of eliminating the differences and bring those standards nearer. Now IASB purchases or publishes its standards in a series of pronouncements which are called as IFRS international financial reporting standard. It has also adopted the body of standards issued by board of international accounting standard IASC and these pronouncements are called as international accounting standards or IAS. Now I have given here a list of IAS, again I would request you to download these IAS if you have interest and then go through them in detail. So for example IAS1 is about preparation of financial statements, IAS2 is on inventory, IAS7 is on cash flow statements, IAS8 is on accounting policy changes in the financial estimates and errors. If you observe carefully the news in different countries there are different gaps and they together are called as GAAP. Now GAP is a backbone of accounting information system without which system cannot even stand correctly. Now GAPs and accounting standards as considered as a theory base for all the accounting. So are you getting me? So here we have discussed today various information about various types of standards. In future these standards are applicable in all the statements which we made. We are not going into too much details of it but I will request you to download them and go through it as per your own interest. Namaste the Neval.