This article has been written by Diksha Paliwal. The article comprehensively analyses Section 133 of the Companies Act, 2013 and the relevant rules and regulations formulated by the Central Government in relation to this Section. It begins with explaining crucial terms like financial reporting, accounting, etc., which hold significant importance for having a better understanding of this topic.
It has been published by Rachit Garg.
Table of Contents
Introduction
A company invests Rs. 50,000 in a renowned dairy business. A month later, it gained a profit of Rs. 95,000. Also, an amount worth Rs. 20,000 is spent on behalf of the company for regular checkups and medicines of the farm animals. Naturally, the company would want to keep track of all the economic activities or financial transactions that it has made. Keeping records of such transactions and other events, along with maintaining track of adequate information pertaining to all the necessary economic activities aids in decision-making. This is when accounting or other financial reporting methods come into the picture.
Not only this, the stakeholders of any business require a condensed overview of the performance of a company, especially its financial status. It is very crucial that such information must be presented in a uniform, standardised manner, making it easy for the end users to comprehend and analyse the financial data along with aiding in comparison with other entities. Therefore, formulation of a standardised financial reporting and accounting procedure is paramount.
Financial reporting plays a significant role in maintaining the overall growth and development of the economy of a country. Now, the question that pops up in our mind is, what does the term financial reporting mean, and how is it related to the scope of this article? The simple meaning of the term ‘financial reporting’ is, a certain standard or set of guidelines stating how financial information is to be recorded, exhibited, and disclosed by companies, businesses, and other entities. Moving to the term ‘accounting’, it is a procedure of financial reporting. The next relevant term for this article is ‘accounting standards’. It is a set of uniform guidelines by which the accounting is to be done.
The scope of this article, i.e., Section 133 of the Companies Act, 2013, which mainly talks about the power of the government to prescribe accounting standards. These standards are designed to maintain consistency, authenticity, reliability, and equivalence of financial statements across the country.
Some definitions necessary for the understanding of Section 133
Section 133 of the 2013 Act predominantly talks about the accounting standards that the government is supposed to prescribe in consultation with Institute of Chartered Accountants of India (hereinafter referred to as ICAI) and the National Financial Reporting Authority (hereinafter referred to as NFRA), as discussed in the later part of the article. To comprehend this section, it is pertinent to learn certain terms, which are defined as follows:
Financial reporting
In simple terms, financial reporting is a method of producing financial statements for a business, a company or any entity. It is a method of disclosing the financial status of the concerned entity to its stakeholders, investors, creditors, and other concerned regulatory agencies. Financial reporting is done with the aim of supplying financial data of the concerned entity that is being reported on. It thus makes it convenient for the prospective investors, creditors, and lenders in decision making relating to the allocation of resources to the entity.
To learn more about financial reporting, refer to the below-mentioned link- – https://resource.cdn.icai.org/67241bos54140cp1.pdf.
Accounting
According to the Black’s Law Dictionary, accounting is an act of incorporating, forming or settling of accounts. The ICAI defines accounting as a way or art of keeping records. The institute further states that the purpose of accounting is to meet the needs of rational and sound-decision makers. It is a process through which financial transactions of companies or businesses are recorded. It is a business language that communicates financial results of an entity to its stakeholders, investors, and other concerned parties.
The definition laid down by the American Institute of Certified Public Accountants is, “Accounting is the art of recording, classifying, and summarising in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character, and interpreting the result thereof.”
In order to maintain uniformity, reliability, consistency, and comparability in the accounting or in the financial statements, the Central Government prescribes certain standards known as ‘accounting standards’.
To know more about accounting, refer to the below-mentioned link- https://resource.cdn.icai.org/74599bos60479-fnd-cp1-u1.pdf.
Accounting standards
Generally speaking, accounting standards are basic policy documents that the government issues after consultation with the concerned authorities (as prescribed under the law). Section 2(2) of the 2013 Act defines ‘accounting standards’ as the standards of accounting formulated for companies or class of companies as enunciated under Section 133 of the 2013 Act. In India, the accounting standards are the written policy documents issued by the Central Government. The government issues these accounting standards after seeking advice from the concerned regulating authorities like the Ministry of Corporate Affairs (hereinafter referred to as MCA) and the NFRA.
While formulating or issuing such accounting standards, the government and other regulating authorities are obligated to keep in mind the below mentioned points relating to the financial transactions, namely;
- the recognition or acknowledgment of financial events;
- the measurement of financial transactions;
- transparency in presentation of financial statements and events in such a way or manner that it is easily intelligible to the reader; and
- disclosure in accordance with necessary provisions. These disclosures must be in a way that the stakeholders, the general public, and the potential investors are able to comprehend and get an insight on the financial statements. This is so, so that it facilitates an informed decision by the concerned persons.
The objective is to facilitate the circulation of valuable financial data to the potential investors, stakeholders, and other interested parties who are concerned with the company’s economic performance. Setting up such standards eliminates the chances of depending upon other alternatives of accounting in preparation of financial statements within the ambit of reasonableness. This also facilitates easy comparison of financial statements of various enterprises.
J.K. Industries Limited and anr. v. Union of India and ors. (2007)
In the case of J.K. Industries, it was held that accounting standards are basically issued policy statements and documents formulated by the ICAI. These standards establish rules relating to recognition, measurement, presentation, and disclosure of financial statements, which in turn ensures that enterprises follow a standard set of accounting policies. These are true, fair and transparent. Based on a number of accounting principles, they aim to arrive at the true accounting income.
The institute aims to shift the old traditional method of matching to the fair value principle. This ensures the determination of true income. This sole purpose of formulating accounting standards is shifting from traditional accounting methods to fair valuation. With the advent of globalisation, the standard accounting principles seek to reconcile the accounts of Indian companies with that of their foreign partners associated with their ventures. The purpose is to bridge the gap between the Indian Accounting Standards (Ind AS) and the International Financial System (IFS). Formulation of methods like deferred tax accounting, segment reporting, etc. are some of the methods brought by the institute and the government for bridging this gap.
Benefits of setting up of accounting standards
The issuance of such a written policy document, covering the aspects of recognition, measurement, presentation and disclosure of accounting transactions in the financial statements, has certain benefits that play a very crucial role in standardising diverse policies of accounting. These standards up to a great extent eliminate the possibility of non-comparability of financial statements and prescribe a standard set of accounting policies. This improves the reliability of the financial statements.
In crucial areas, often the concerned law does not require disclosing certain necessary information. Setting up of accounting standards may call for disclosure beyond what is prescribed in the law. This requirement for additional disclosure helps the readers to understand the accounting treatments done in the financial statements.
Also, setting up such standards helps in comparing the financial statements of companies situated across various parts of the country and the world. Accounting standards increase the credibility and alleviates comparability, along with minimising the scope of creative accounting.
Section 133 : an overview
According to Section 133 of the Companies Act, 2013, the central government has been given the power to prescribe accounting standards. This government is empowered to prescribe standards of accounting based on the recommendations, advice, or suggestions given by the ICAI, and the same is done after consulting with the NFRA. The suggestions given by NFRC are examined, along with the recommendations made by ICAI, and thereafter the government prescribes accounting standards.
The government prescribes such accounting standards by giving due consideration to the economic and legal environment of the country, along with an aim to converge with the International Financial Reporting Standards (hereinafter referred to as IFRS). The copyright for the same is held by the foundation of IFRS.
A proviso clause was added to the section by the Second Order dated 29th March 2016 which states that until the NFRA is constituted under Section 132 of the Companies Act, 2013 the government may prescribe the standards as recommended by the ICAI which is formed under Section 3 of the Chartered Accountants Act, 1949 . The same shall be done after consultation and examination of the advice and suggestions given by the National Advisory Committee on Accounting Standards constituted under Section 210A of the Companies Act, 1956 .
Rules relating to the Section 133 of the 2013 Act
Apart from Section 133 of the Companies Act, 2013 the central government has also formulated certain rules for governing and regulating the accounting standards in India. Mostly, these are in accordance with the international standards of accounting. Let’s have an overview of the rules applicable on the accounting standards in India.
Companies (Accounts) Rule, 2014
The 2014 Rules were formulated by the central government in pursuance to the powers conferred on them by Sections 128(1) and (3), 129(3), 133, 134, 135(4), 136(1), 137, 138 read with Section 469 of the 2013 Act. Also, in replacement of the Companies (Central Government’s) General Rules and Forms, 1956 and any other rules in existence formulated under the Companies Act, 1956 for this subject matter.
Rule relating to accounting standards
Rule 7 of the 2014 Rules lays down the provision relating to “transitional provisions relating to accounting standards”.
Rule 7(1) states that unless new rules, regulations, and guidelines are formulated in relation to accounting standards as per Section 133 of the 2013 Act, the prevailing standards shall be as laid down under the Companies Act, 1956.
Rule 7(2) states that until the constitution of the NFRA (under Section 132 of the 2013 Act), the Central Government can lay down accounting standards as recommended by the ICAI. Also, consultation must be done with the National Advisory Committee on Accounting Standards (made under Section 210A of 1956 Act), and after examining the formulated guidelines for the standards of accounting.
Other provisions
Rule 3 of the 2014 Rules states that the books of accounts along with other relevant paper books must be kept in electronic records. Also, these must be available in India for easy access, when and where required. Also, it is important that the originality (format in which these were noted) of the concerned books of accounts and other books must be maintained.
Rule 4 provides provision pertaining to the conditions relating to maintenance and inspection of financial information by the directors. It states that the books of accounts of the companies which are kept and maintained outside the country are supposed to be sent to the registered office at the scheduled intervals. These records shall be kept open for inspection by the directors. By an amendment made in 2015 (Companies (Accounts) Second Amendment Rules, 2015) a few forms were amended and added which contained the formatting and other information relating to keeping of financial statements.
Further, Rule 5 provides for the format of statement which has certain salient features of financial statements of subsidiaries. As per the rule, the financial statements must be in a manner specified under Form AOC-1. Whereas, Rule 6 provides for the manner in which consolidation of accounts shall be done. The same shall be done in accordance with Schedule III of the 2013 Act and the accounting standards. In the provision of the rule it is provided that since the companies covered under Section 129(3) are not required to formulate financial statements under the standards of accounting, compliance with Schedule III of the 2013 Act is sufficient. Further, an amendment in the Rule 6 was done by which a proviso was added to the Rule, which categorically states regarding the non applicability of this provision in certain situations. (amendment in proviso to the Rule 6)
Further, Rule 8 lays down provisions with respect to what details and information are to be included in the board’s report. Details like conservation of energy, technology absorption, Foreign exchange earnings and Outgo, and other details specifically mentioned in the rule are supposed to be a part of the Board’s report. The particulars that a board report shall include are enunciated under Form AOC-2.
Further as per Rule 9 the disclosure of the Corporate Social Responsibility Policy (CSR Policy) in the Board’s report and on the website of the company (if any) is mandatory.
Rules 10 and 11 of the 2014 Rule provides for further essential information regarding the financial statements’ performance and certain fees relating to it. As per this rule the concerned contents shall be as specified in Form AOC-3.
Rule 12 provides for the filing of financial statements with the registrar, which shall be in the manner specified in Form AOC-4. It also provides for the fees that are to be paid in relation to this.
Rule 13 provides for the mandatory appointment of an internal auditor by the companies. It provides a detailed description of which companies are required to appoint an internal auditor.
To read the latest version of the amended rules (as amended on June 2022) of the above 2014 Rules, refer to this link- https://www.aubsp.com/companies-accounts-rules-2014/
Companies (Indian Accounting Standard) Rules, 2015
The Central Government has made these 2015 Rules in regards to the power conferred to it by virtue of Section 133 of the 2013 Act and 210A(1) of the 1956 Act. These rules have been formulated by the Central Government in consultation with the National Advisory Committee on Accounting Standards.
The enforcement date of the rule as mentioned in Rule 1 is 01.04.2015. The second rule of the 2014 Rules lays down the definitions of certain important terms like ‘accounting standards, entity, act, annexure, etc., for clearing the ambiguity in interpreting the language and meaning of the rules.
Applicability of accounting standards
Rule 3 of the 2015 Rules lays down provisions pertaining to the applicability of the Indian Accounting Standards.
- Clause 1 states that the standards of accounting as mentioned in the Annexures to this rule shall be termed as ‘Indian Accounting Standards’. Further, it states that it shall be applicable to the companies specified in Rule 4.
- Clause 2 states that the companies other than the ones mentioned in these rules shall have the accounting standards as specified in the Annexures to the Companies (Accounting Standards) Rules, 2006.
- Clause 3 states that the concerned companies as specified or listed in these rules in the Annexure shall mandatorily stick to these accounting standards only.
- Clause 4 clarifies that the companies which will not follow these accounting standards as specified in the annexures, shall specifically comply with standards of 2006 Accounting Standard Rules.
Obligation to comply with the Indian Accounting Standards
The mandatory obligation for the compliance of the Indian Accounting Standards (Ind AS) by the concerned authorities is dealt with under Rule 4 of the 2015 Rules.
- Clause 1 of the Rule 4 provides for certain manners and guidelines which the companies and their auditors are supposed to follow while preparing the financial statements and the books of accounts as per the Indian Accounting Standards. Following are the manners and guidelines set as per the clause 1:
- Any company may follow the Ind AS for preparing of the financial statements for the accounting period starting on or from 1.04.2015 with the comparatives for the term ending on 31.03.2015, or thereafter;
- A list is provided of the companies that shall follow the Indian Accounting Standards for the accounting period starting on or from 1.04.2016 with the comparatives for the term ending on 31.03.2016, or thereafter;
- A list is provided of the companies that shall follow the Indian Accounting Standards for the accounting period starting on or from 1.04.2017 with the comparatives for the term ending on 31.03.2017, or thereafter;
The Indian accounting standards as amended from the year to year basis in regards to the 2015 Rules can be accessed by clicking on the below mentioned link. https://www.icai.org/post.html?post_id=12125.
Companies (Accounting Standards) Rules, 2021
The concerned authority of the Central Government, i.e., the Ministry of Corporate Affairs released the notification of these 2021 Rules on 23.06.2021. These rules shall come into force with respect to the commencement of the accounting period commencing on or after 1.04.2021.
Rule 1 and 2 of the 2021 Rules talk about the commencement date, title and important definitions for the rules, respectively.
Accounting Standards
Rule 3 of the 2021 Rules lays down that the Central Government categorically mentions Accounting Standards 1 – 5, 7, and 9 – 27 as recommended by the ICAI. These standards are specified in the annexure to these rules. These standards will come into force in respect of the standards of accounting starting on or after 1.04.2021.
Obligation to comply with the Indian Accounting Standards
These standards shall be applicable to every company except the ones as notified under the 2015 rules, i.e., the Companies (Indian Accounting Standards) Rules, 2015. The auditors of the company shall mandatorily comply with these accounting standards.
Qualification for exemption or relaxation to the small and medium sized companies
Rule 5 talks about the qualification for exemption or relaxation to the small and medium sized companies. The exemption as granted under this rule is not available to those small and medium sized companies which previously did not fall in the category of small and medium sized companies. However, the ones who have been a small and medium sized company consecutively for two accounting periods.
A comprehensive compilation of the Indian Accounting standards as per these rules can be accessed through the below mentioned link. https://www.mca.gov.in/content/mca/global/en/acts-rules/ebooks/accounting-standards.html.
Conclusion
In conclusion, accounting standards are applicable to any entity or enterprise (be it in organised sector, cooperative, corporate or any other forms). It is applicable to the entities engaged in any commercial, business, or industrial activity, irrespective of the fact that they are profit oriented or not or they are a religious or charitable trust. Communication of the financial statements of any company or entity holds significant importance. In the absence of there being non uniformity in the accounting standards chances are that there may arise a problem in the evaluation of the financial statements. Also, the financial statements may due to the lack of uniformity and proper set of guidelines turn out to be misleading, tendentious, and may disrupt the originality of the statements.
The Central Government keeping in view the dire need of having a standard accounting system and to increase the reliability, adequacy, consistency, and comparability of these standards have formulated certain manners and rules in pursuance of which the Indian Accounting Standards formulated. The same is done in regards to the power conferred by virtue of Section 133 of the Companies Act, 2013, as discussed in detail in the article.
Frequently asked questions (FAQs)
What is the meaning of ‘Generally Accepted Accounting Principles’ (GAAP) ?
GAAP connotes a common set of accounting principles, standards, and procedures that are widely accepted methods of reporting of the financial activities of any entity or business. Every business or entity is required to follow these principles while financial reporting. It is a combination of authoritative standards which are set by concerned policy boards and widely accepted methods of recording and reporting accounting information. While talking about the international level these principles are called ‘International Financial Reporting Standards’. In India, these generally accepted principles are called Indian Accounting Standards.
Which are the important accounting events that the accounting standards deal with?
The accounting standards as issued by the Ministry of Corporate Affairs in consultation with ICAI and after the examination of the recommendations made by the NFRA deal with four major accounting events, namely;
- recognition,
- measurement,
- presentation, and
- disclosure of financial statements
What are some significant objectives that the government wishes to achieve by formulating standard accounting principles (Indian Accounting Standards) ?
- Elimination of the issue of non-comparability of financial statements and thus, increasing reliability.
- Providing a standard set of accounting policies, requirements for disclosure, and valuation norms.
- Reduction of use of alternative methods for accounting.
- Also, to facilitate proper, adequate, and reliable circulation of valuable financial data to the potential investors, stakeholders, and other interested parties, who are concerned with companies’ economic performance
What are some limitations of setting standards of accounting?
- It becomes difficult to choose between different prevalent and reliable accounting methods, as every method may have its own uniqueness and reliability. Thus, often there arises difficulty in choosing between different alternative accounting treatments.
- It is pertinent to note that accounting standards can never override the statute. Hence, setting up of accounting standards must be done within the ambit of the prevailing law.
Is there any list provided by the Central government relating to the Indian Accounting Standards?
The Central Government in consultation with the concerned authority and ICAI establishes certain standards which are to be followed by every company or any entity while preparing the financial statements. Also, these are usually in consonance with the generally accepted accounting principles.
List of Accounting Standards
| No. of Accounting Standard (AS) | Title of Accounting Standard |
| AS-1 | Disclosure of accounting policies |
| AS-2 | Valuation of inventories |
| AS-3 | Cash flow statements |
| AS-4 | Contingencies and events occurring after balance sheet date |
| AS-5 | Net profit or loss for the period, prior period items and changes in accounting policies |
| AS-7 | Construction contracts accounting |
| AS-9 | Revenue Recognition |
| AS-10 | Property, Plant and Equipment |
| AS-11 | The effects of changes in foreign exchange rates |
| AS-12 | Government grants accounting |
| AS-13 | Accounting for investments |
| AS-14 | Accounting for amalgamations |
| AS-15 | Employee benefits |
| AS-16 | Borrowing costs |
| AS-17 | Segment reporting |
| AS-18 | Related party disclosures |
| AS-19 | Leases |
| AS-20 | Earnings per share |
| AS-21 | Consolidated financial statements |
| AS-22 | Accounting for taxes on income |
| AS-23 | Accounting for investments in associates consolidated financial statements |
| AS-24 | Discontinuing operations |
| AS-25 | Interim financial reporting |
| AS-26 | Intangible assets |
| AS-27 | Financial reporting of interests in joint ventures |
| AS-28 | Impairment of assets |
| AS-29 | Provisions, contingent liabilities and contingent assets |
List of Indian Accounting Standards
| No. of Indian Accounting Standard | Title of Indian Accounting Standard |
| Ind AS 101 | First time adoption of Ind AS |
| Ind AS 102 | Share based payment |
| Ind AS 103 | Business combination |
| Ind AS 104 | Insurance contracts |
| Ind AS 105 | Non-current assets held for sale and discontinued operations |
| Ind AS 106 | Exploration for and evaluation of mineral resources |
| 1Ind AS 07 | Financial instruments: disclosures |
| Ind AS 108 | Operating segments |
| Ind AS 109 | Financial instruments |
| Ind AS 110 | Consolidated financial statements |
| Ind AS 111 | Joint arrangements |
| Ind AS 112 | Disclosure of interests in other entities |
| Ind AS 113 | Fair value measurement |
| Ind AS 114 | Regulatory deferral accounts |
| Ind AS 115 | Revenue from contracts with customers (applicable from April 2018) |
| Ind AS 116 | Leases (Applicable from April 2019) |
| Ind AS 1 | Presentation of financial statements |
| Ind AS 2 | Inventories |
| Ind AS 7 | Statement of cash flows |
| Ind AS 8 | Accounting policies, changes in accounting estimates and errors |
| Ind AS 10 | Events occurring after reporting period |
| Ind AS 11 | Construction contracts (omitted by the Companies (Indian Accounting Standards) Amendment Rules, 2018) |
| Ind AS 12 | Income taxes |
| Ind AS 16 | Property, plant and equipment |
| Ind AS 19 | Employee benefits |
| Ind AS 20 | Accounting for Government grants and disclosure of government assistance |
| Ind AS 21 | The effects of change in foreign exchange rates |
| Ind AS 23 | Borrowing costs |
| Ind AS 24 | Related party disclosures |
| Ind AS 27 | Separate financial statements |
References
- https://www.scconline.com/blog/post/2021/06/25/companies-accounting-standards-rules-2021/
- https://caclub.in/list-of-accounting-standards-of-icai-as/
- https://josephscollege.ac.in/lms/Uploads/pdf/material/IndAS.pdf
- https://www.icai.org/post.html?post_id=17757
- https://corporatelawreporter.com/companies_act/section-133-of-companies-act-2013-central-government-to-prescribe-accounting-standards/
- https://www.mca.gov.in/content/mca/global/en/acts-rules/ebooks/accounting-standards.html#:~:text=The%20Indian%20Accounting%20Standards%20
- https://wirc-icai.org/wirc-reference-manual/part5/important-definitions-under-companies-act-2013.html
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