Post on 03-Apr-2018
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1. Harmony In Indian Accounting Standards
Recent global and domestic developments in the economic environment in India have led tomore measures being taken to standardize accounting standards. Further, cross-border raisingof huge amount of capital has also generated considerable interest in the generally acceptedaccounting principles in advanced countries such as USA. Initiatives taken by International
Organisation Securities Commission (IOSCO) towards propagating International AccountingStandards (IASs)/ International Financial Reporting Standards (IFRSs), issued by theInternational Accounting Standards Board (IASB), as the uniform language of business toprotect the interests of international investors have brought into focus the IASs/ IFRSs. TheInstitute of Chartered Accountants of India, being a premier accounting body in the country, tookupon itself the leadership role by establishing Accounting Standards Board, more than twentyfive years ago, to fall in line with the international and national expectations. Today, accountingstandards in India have come a long way.Rationale of Accounting Standards
Accounting Standards are formulated with a view to harmonise different accounting
policies and practices in use in a country. The objective of Accounting Standards is,
therefore, to reduce the accounting alternatives in the preparation of financialstatements within the bounds of rationality, thereby ensuring comparability of
financial statements of different enterprises with a view to provide meaningful
information to various users of financial statements to enable them to make
informed economic decisions. The Companies Act, 1956, as well as many other
statutes in India require that the financial statements of an enterprise should give a
true and fair view of its financial position and working results. This requirement is
implicit even in the absence of a specific statutory provision to this effect. The
Accounting Standards are issued with a view to describe the accounting principles
and the methods of applying these principles in the preparation and presentation of
financial statements so that they give a true and fair view. The AccountingStandards not only prescribe appropriate accounting treatment of complex business
transactions but also foster greater transparency and market discipline. Accounting
Standards also helps the regulatory agencies in benchmarking the accounting
accuracy.
International Harmonisation of Accounting Standards
Recognising the need for international harmonisation of accounting standards, in
1973, the International Accounting Standards Committee (IASC) was established. It
may be mentioned here that the IASC has been reconstituted as the International
Accounting Standards Board (IASB). The objectives of IASC included promotion ofthe International Accounting Standards for worldwide acceptance and observance
so that the accounting standards in different countries are harmonised. In recent
years, need for international harmonisation of Accounting Standards followed in
different countries has grown considerably as the cross-border transfers of capital
are becoming increasingly common.
Accounting Standards-setting in India
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The Institute of Chartered Accountants of India (ICAI) being a member body of the
IASC, constituted the Accounting Standards Board (ASB) on 21st April, 1977, with a
view to harmonise the diverse accounting policies and practices in use in India.
After the avowed adoption of liberalisation and globalisation as the corner stones of
Indian economic policies in early 90s, and the growing concern about the need of
effective corporate governance of late, the Accounting Standards have increasinglyassumed importance. While formulating accounting standards, the ASB takes into
consideration the applicable laws,customs, usages and business environment
prevailing in the country. The ASB also gives due consideration to International
Financial Reporting Standards (IFRSs)/ International Accounting Standards (IASs)
issued by IASB and tries to integrate them, to the extent possible, in the light of
conditions and practices prevailing in India.
Composition of the Accounting Standards Board
The composition of the ASB is broad-based with a view to ensuring participation of
all interest groups in the standard-setting process. These interest-groups includeindustry, representatives of various departments of government and regulatory
authorities, financial institutions and academic and professional bodies. Industry is
represented on the ASB by their apex level associations, viz., Associated Chambers
of Commerce & Industry (ASSOCHAM), Confederation of Indian Industries (CII) and
Federation of Indian Chambers of Commerce and Industry (FICCI). As regards
government departments and regulatory authorities, Reserve Bank of India, Ministry
of Company Affairs, Comptroller & Auditor General of India, Controller General of
Accounts and Central Board of Excise and Customs are represented on the ASB.
Besides these interest-groups, representatives of academic and professional
institutions such as Universities, Indian Institutes of Management, Institute of Cost
and Works Accountants of India and Institute of Company Secretaries of India are
also represented on the ASB. Apart from these interest groups, certain elected
members of the Central Council of ICAI are also on the ASB.
The Accounting Standards-setting Process
The accounting standard setting, by its very nature, involves reaching an optimal
balance of the requirements of financial information for various interest-groups
having a stake in financial reporting. With a view to reach consensus, to the extent
possible, as to the requirements of the relevant interest-groups and thereby
bringing about general acceptance of the Accounting Standards among such
groups, considerable research, consultations and discussions with the
representatives of the relevant interest-groups at different stages of standard
formulation becomes necessary. The standard-setting procedure of the ASB, as
briefly outlined below, is designed in such a way so as to ensure such consultation
and discussions:
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Identification of the broad areas by the ASB for formulating the Accounting
Standards.
Constitution of the study groups by the ASB for preparing the preliminary drafts of
the proposed Accounting Standards.
Consideration of the preliminary draft prepared by the study group by the ASB and
revision, if any, of the draft on the basis of deliberations at the ASB.
Circulation of the draft, so revised, among the Council members of the ICAI and 12
specified outside bodies such as Standing Conference of Public Enterprises (SCOPE),
Indian Banks Association, Confederation of Indian Industry (CII), Securities and
Exchange Board of India (SEBI), Comptroller and Auditor General of India (C& AG),
and Department of Company Affairs, for comments.
Meeting with the representatives of specified outside bodies to ascertain their
views on the draft of the proposed Accounting Standard.
Finalisation of the Exposure Draft of the proposed Accounting Standard on the
basis of comments received and discussion with the representatives of specified
outside bodies.
Issuance of the Exposure Draft inviting public comments.
Consideration of the comments received on the Exposure Draft and finalisation of
the draft
Accounting Standard by the ASB for submission to the Council of the ICAI for its
consideration and approval for issuance.
Consideration of the draft Accounting Standard by the Council of the Institute, and
if found necessary, modification of the draft in consultation with the ASB.
The Accounting Standard, so finalised, is issued under the authority of the Council.
Present status of Accounting Standards in India in harmonisation with the
International
Accounting Standards
As indicated earlier, Accounting Standards are formulated on the basis of theInternational Financial Reporting Standards (IFRSs)/ International Accounting
Standards (IASs) issued by the IASB. Of the 41 IASs issued so far, 29 are at present
in force, the remaining standards have been withdrawn. Apart from this, 8 IFRSs
have also been issued by the IASB. Corresponding to the IASs/IFRSs, so far, 30
Indian Accounting Standards on the following subjects have been issued:
AS 1 Disclosure of Accounting Policies
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AS 2 Valuation of Inventories
AS 3 Cash Flow Statements
AS 4 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 6 Depreciation Accounting
AS 7 Construction Contracts
AS 8 Accounting for Research and Development (Withdrawn pursuant to
AS 26 becoming mandatory)
AS 9 Revenue Recognition
AS 10 Accounting for Fixed Assets
AS 11 The Effects of Changes in Foreign Exchange Rates
AS 12 Accounting for Government Grants
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 in Consolidated Financial
Statements
AS 24 Discontinuing Operations
AS 25 Interim Financial Reporting
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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
AS 30 Financial Instruments: Recognition and Measurement
AS 31 Financial Instruments: Presentation
Compliance with Accounting Standards
Accounting Standards issued by the ICAI have legal recognition through the
Companies Act,1956, whereby every company is required to comply with theAccounting Standards and the statutory auditors of every company are required to
report whether the Accounting Standards have been complied with or not. Also, the
Insurance Regulatory and Development Authority (IRDA) (Preparation of Financial
Statements and Auditors Report of Insurance Companies) Regulations, 2000
requires insurance companies to follow the Accounting Standards issued by the
ICAI. The Securities and Exchange Board of India (SEBI) and the Reserve Bank of
India also require compliance with the Accounting Standards issued by the ICAI from
time to time. Section 211 of the Companies Act, 1956, deals with the form and
contents of balance sheet and profit and loss account. The Companies
(Amendment) Act, 1999 has inserted new sub-sections 3A, 3B and 3C to Section211, with a view to ensure that the financial statements are prepared in accordance
with the Accounting Standards. The new sub-sections as inserted are reproduced
below:
Section 211 (3A): Every profit and loss account and balance sheet of the company
shall comply with the accounting standards Section 211 (3B): Where the profit
and loss account and the balance sheet of the company do not comply with the
accounting standards, such companies shall disclose in its profit and loss account
and balance sheet, the following, namely:-
a) the deviation from the accounting standards;
b) the reasons for such deviation; and
c) the financial effect, if any, arising due to such deviation
Section 211 (3C): For the purposes of this section, the expression accounting
standards
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means the standards of accounting recommended by the Institute of Chartered
Accountants of
India, constituted under the Chartered Accountants Act, 1949 (38 of 1949), as may
be
prescribed by the Central Government in consultation with the National Advisory
Committee on
Accounting Standards established under sub- section (1) of section 210A:
Providedthat the standards of accounting specified by the Institute of Chartered
Accountants of India shall be deemed to be the Accounting Standards until the
accounting standards are prescribed by the Central Government under this sub-
section.It may also be mentioned that the National Advisory Committee on
Accounting Standards NACAS) has been constituted under section 210A as referred
to under section 211 (3C) to advise the Central Government on formulation andlaying down of the accounting standards for adoption by companies or class of
companies. It is of significance to note that on the recommendation of NACAS, the
Ministry of Company Affairs, has issued a Notification dated 7th December, 2006,
whereby it has prescribed Accounting Standards 1 to 7 and 9 to 29, as
recommended by the Institute of Chartered Accountants of India, which are
included in the said
Notification. As per the Notification, the Accounting Standards shall come into effect
in respect of accounting periods commencing on or after the publication of these
Accounting Standards, i.e., 7th December, 2006. Specific relaxations are given to
particular kinds of companies, termed as Small and Medium Sized Companies,depending upon their size and nature. The above legal provisions have cast a duty
upon the management to prepare the financial statements in accordance with the
accounting standards. The corresponding provision to report on the compliance of
accounting standards has been inserted under section 227 of the Companies Act,
1956, thereby casting a duty upon the auditor of the company to report on such
compliance. A new clause (d) under sub-section 3 of Section 227 of the Companies
Act, 1956 is read as under:
whether, in his opinion, the profit and loss account and balance sheet comply with
the
accounting standards referred to in sub-section (3C) of section 211
As far as the reporting of compliance with the Accounting Standards by the
management is
concerned, clause (i) under the new sub-section 2AA of Section 217 of the
Companies Act, 1956, (inserted by the Companies Amendment Act, 2000)
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prescribes that the Boards report should include a Directors Responsibility
Statement indicating therein that in the preparation of the annual accounts, the
applicable accounting standards had been followed along with proper explanation
relating to material departures.
Accounting is the art of recording transactions in the best manner possible, so asto enable the reader to arrive at judgments/come to conclusions, and in this regard
it is utmost necessary that there are set guidelines. These guidelines are generally
called accounting policies. The intricacies of accounting policies permitted
Companies to alter their accounting principles for their benefit. This made it
impossible to make comparisons. In order to avoid the above and to have a
harmonised accounting principle, Standards needed to be set by recognised
accounting bodies. This paved the way for Accounting Standards to come into
existence. Accounting Standards in India are issued By the Institute of Chartered
Accountanst of India (ICAI). At present there are 30 Accounting Standards issued by
ICAI.
Objective of Accounting Standards
Objective of Accounting Standards is to standarize the diverse accounting policies
and practices with a view to eliminate to the extent possible the non-comparability
of financial statements and the reliability to the financial statements.
The institute of Chatered Accountants of India, recognizing the need to harmonize
the diversre accounting policies and practices, constituted at Accounting Standard
Board (ASB) on 21st April, 1977.
Compliance with Accounting Standards issued by ICAI
Sub Section(3A) to section 211 of Companies Act, 1956 requires that every
Profit/Loss Account and Balance Sheet shall comply with the Accounting Standards.
'Accounting Standards' means the standard of accounting recomended by the ICAI
and prescribed by the Central Government in consultation with the National
Advisory Committee on Accounting Standards(NACAs) constituted under section
210(1) of companies Act, 1956.
Accounting Standards Issued by the Institute of Chatered Accountants of
India are as below:
Disclosure of accounting policies:
Valuation Of Inventories:
Cash Flow Statements
Contingencies and events Occurring after the Balance sheet Date
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Net Profit or loss For the period, Prior period items and Changes in accounting
Policies.
Depreciation accounting.
Construction Contracts.
Revenue Recognition.
Accounting For Fixed Assets.
The Effect of Changes In Foreign Exchange Rates.
Accounting For Government Grants.
Accounting For Investments.
Accounting For Amalgamation.
Employee Benefits.
Borrowing Cost.
Segment Reporting.
Related Party Disclosures.
Accounting For Leases.
Earning Per Share.
Consolidated Financial Statement.
Accounting For Taxes on Income.
Accounting for Investment in associates in Consolidated Financial Statement.
Discontinuing Operation.
Interim Financial Reporting.
Intangible assets.
Financial Reporting on Interest in joint Ventures.
Impairment Of assets.
Provisions, Contingent, liabilities and Contingent assets.
Financial instrument.
Financial Instrument: presentation.
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Financial Instruments, Disclosures and Limited revision to accounting
standards.
Disclosure of Accounting Policies: Accounting Policies refer to specific
accounting principles and the method of applying those principles adopted by the
enterprises in preparation and presentation of the financial statements.
Valuation of Inventories: The objective of this standard is to formulate the
method of computation of cost of inventories / stock, determine the value of closing
stock / inventory at which the inventory is to be shown in balance sheet till it is not
sold and recognized as revenue.
Cash Flow Statements: Cash flow statement is additional information to user of
financial statement. This statement exhibits the flow of incoming and outgoing
cash. This statement assesses the ability of the enterprise to generate cash and to
utilize the cash. This statement is one of the tools for assessing the liquidity and
solvency of the enterprise.
Contigencies and Events occuring after the balance sheet date: In preparing
financial statement of a particular enterprise, accounting is done by following
accrual basis of accounting and prudent accounting policies to calculate the profit
or loss for the year and to recognize assets and liabilities in balance sheet. While
following the prudent accounting policies, the provision is made for all known
liabilities and losses even for those liabilities / events, which are probable.
Professional judgement is required to classify the likehood of the future events
occuring and, therefore, the question of contingencies and their accounting arises.
Objective of this standard is to prescribe the accounting of contigencies and the
events, which take place after the balance sheet date but before approval of
balance sheet by Board of Directors. The Accounting Standard deals with
Contingencies and Events occuring after the balance sheet date.
Net Profit or Loss for the Period, Prior Period Items and change in
Accounting Policies : The objective of this accounting standard is to prescribe the
criteria for certain items in the profit and loss account so that comparability of the
financial statement can be enhanced. Profit and loss account being a period
statement covers the items of the income and expenditure of the particular period.
This accounting standard also deals with change in accounting policy, accounting
estimates and extraordinary items.
Depreciation Accounting : It is a measure of wearing out, consumption or other
loss of value of a depreciable asset arising from use, passage of time. Depreciation
is nothing but distribution of total cost of asset over its useful life.
Construction Contracts : Accounting for long term construction contracts
involves question as to when revenue should be recognized and how to measure
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the revenue in the books of contractor. As the period of construction contract is
long, work of construction starts in one year and is completed in another year or
after 4-5 years or so. Therefore question arises how the profit or loss of construction
contract by contractor should be determined. There may be following two ways to
determine profit or loss: On year-to-year basis based on percentage of completion
or On cpmpletion of the contract.
Revenue Recognition : The standard explains as to when the revenue should be
recognized in profit and loss account and also states the circumstances in which
revenue recognition can be postponed. Revenue means gross inflow of cash,
receivable or other consideration arising in the course of ordinary activities of an
enterprise such as:- The sale of goods, Rendering of Services, and Use of
enterprises resources by other yeilding interest, dividend and royalties. In other
words, revenue is a charge made to customers / clients for goods supplied and
services rendered.
Accounting for Fixed Assets : It is an asset, which is:- Held with intention ofbeing used for the purpose of producing or providing goods and services. Not held
for sale in the normal course of business. Expected to be used for more than one
accounting period.
The Effects of changes in Foreign Exchange Rates : Effect of Changes in
Foreign Exchange Rate shall be applicable in Respect of Accounting Period
commencing on or after 01-04-2004 and is mandatory in nature. This accounting
Standard applicable to accounting for transaction in Foreign currencies in
translating in the Financial Statement Of foreign operation Integral as well as non-
integral and also accounting for For forward exchange.Effect of Changes in Foreign
Exchange Rate, an enterprises should disclose following aspects:
Amount Exchange Difference included in Net profit or Loss;
Amount accumulated in foreign exchange translation reserve;
Reconciliation of opening and closing balance of Foreign Exchange translation
reserve;
Accounting for Government Grants : Governement Grants are assistance by the
Govt. in the form of cash or kind to an enterprise in return for past or future
compliance with certain conditions. Government assistance, which cannot be valued
reasonably, is excluded from Govt. grants,. Those transactions with Governement,
which cannot be distinguished from the normal trading transactions of the
enterprise, are not considered as Government grants.
Accounting for Investments : It is the assets held for earning income by way of
dividend, interest and rentals, for capital appreciation or for other benefits.
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Accounting for Amalgamation : This accounting standard deals with accounting
to be made in books of Transferee company in case of amalgamtion. This
accounting standard is not applicable to cases of acquisition of shares when one
company acquires / purcahses the share of another company and the acquired
company is not dissolved and its seperate entity continues to exist. The standard is
applicable when acquired company is dissolved and seperate entity ceased existand purchasing company continues with the business of acquired company
Employee Benefits : Accounting Standard has been revised by ICAI and is
applicable in respect of accounting periods commencing on or after 1st April 2006.
the scope of the accounting standard has been enlarged, to include accounting for
short-term employee benefits and termination benefits.
Borrowing Costs : Enterprises are borrowing the funds to acquire, build and install
the fixed assets and other assets, these assets take time to make them useable or
saleable, therefore the enterprises incur the interest (cost on borrowing) to acquire
and build these assets. The objective of the Accounting Standard is to prescribe thetreatment of borrowing cost (interest + other cost) in accounting, whether the cost
of borrowing should be included in the cost of assets or not.
Segment Reporting : An enterprise needs in multiple products/services and
operates in different geographical areas. Multiple products / services and their
operations in different geographical areas are exposed to different risks and
returns. Information about multiple products / services and their operation in
different geographical areas are called segment information. Such information is
used to assess the risk and return of multiple products/services and their operation
in different geographical areas. Disclosure of such information is called segment
reporting.
Related Paty Disclosure : Sometimes business transactions between related
parties lose the feature and character of the arms length transactions. Related
party relationship affects the volume and decision of business of one enterprise for
the benefit of the other enterprise. Hence disclosure of related party transaction is
essential for proper understanding of financial performance and financial position of
enterprise.
Accounting for leases : Lease is an arrangement by which the lesser gives the
right to use an asset for given period of time to the lessee on rent. It involves two
parties, a lessor and a lessee and an asset which is to be leased. The lessor whoowns the asset agrees to allow the lessee to use it for a specified period of time in
return of periodic rent payments.
Earning Per Share :Earning per share (EPS)is a financial ratio that gives the
information regarding earning available to each equiy share. It is very important
financial ratio for assessing the state of market price of share. This accounting
standard gives computational methodology for the determination and presentation
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of earning per share, which will improve the comparison of EPS. The statement is
applicable to the enterprise whose equity shares or potential equity shares are
listed in stock exchange.
Consolidated Financial Statements : The objective of this statement is to
present financial statements of a parent and its subsidiary (ies) as a singleeconomic entity. In other words the holding company and its subsidiary (ies) are
treated as one entity for the preparation of these consolidated financial statements.
Consolidated profit/loss account and consolidated balance sheet are prepared for
disclosing the total profit/loss of the group and total assets and liabilities of the
group. As per this accounting standard, the conslidated balance sheet if prepared
should be prepared in the manner prescribed by this statement.
Accounting for Taxes on Income : This accounting standard prescribes the
accounting treatment for taxes on income. Traditionally, amount of tax payable is
determined on the profit/loss computed as per income tax laws. According to this
accounting standard, tax on income is determined on the principle of accrualconcept. According to this concept, tax should be accounted in the period in which
corresponding revenue and expenses are accounted. In simple words tax shall be
accounted on accrual basis; not on liability to pay basis.
Accounting for Investments in Associates in consolidated financial
statements :The accounting standard was formulated with the objective to set out
the principles and procedures for recognizing the investment in associates in the
cosolidated financial statements of the investor, so that the effect of investment in
associates on the financial position of the group is indicated.
Discontinuing Operations :The objective of this standard is to establishprinciples for reporting information about discontinuing operations. This standard
covers "discontinuing operations" rather than "discontinued operation". The focus of
the disclosure of the Information is about the operations which the enterprise plans
to discontinue rather than dsclosing on the operations which are already
discontinued. However, the disclosure about discontinued operation is also covered
by this standard.
Interim Financial Reporting (IFR) : Interim financial reporting is the reporting for
periods of less than a year generally for a period of 3 months. As per clause 41 of
listing agreement the companies are required to publish the financial results on a
quarterly basis.
Intangible Assets : An Intangible Asset is an Identifiable non-monetary Asset
without physical substance held for use in the production or supplying of goods or
services for rentals to others or for administrative purpose
Financial Reporting of Interest in joint ventures : Joint Venture is defined as a
contractual arrangement whereby two or more parties carry on an economic
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activity under 'joint control'. Control is the power to govern the financial and
operating policies of an economic activity so as to obtain benefit from it. 'Joint
control' is the contractually agreed sharing of control over economic activity.
Impairment of Assets : The dictionary meanong of 'impairment of asset' is
weakening in value of asset. In other words when the value of asset decreases, itmay be called impairment of an asset. As per AS-28 asset is said to be impaired
when carrying amount of asset is more than its recoverable amount.
Provisions, Contingent Liabilities And Contingent Assets : Objective of this
standard is to prescribe the accounting for Provisions, Contingent Liabilitites,
Contingent Assets, Provision for restructuring cost.
Provision: It is a liability, which can be measured only by using a substantial degree
of estimation.
Liability: A liability is present obligation of the enterprise arising from past events
the settlement of which is expected to result in an outflow from the enterprise of
resources embodying economic benefits.
Financial Instrument: Recognition and Measurement, issued by The Council of
the Institute of Chartered Accountants of India, comes into effect in respect of
Accounting periods commencing on or after 1-4-2009 and will be recommendatory
in nature for An initial period of two years. This Accounting Standard will become
mandatory in respect of Accounting periods commencing on or after 1-4-2011 for all
commercial, industrial and business Entities except to a Small and Medium-sized
Entity. The objective of this Standard is to establish principles for recognizing and
measuring Financial assets, financial liabilities and some contracts to buy or sellnon-financial items. Requirements for presenting information about financial
instruments are in Accounting Standard.
Financial Instrument: presentation :The objective of this Standard is to
establish principles for presenting financial instruments as liabilities or equity and
for offsetting financial assets and financial liabilities. It applies to the classification
of financial instruments, from the perspective of the issuer, into financial assets,
financial liabilities and equity instruments; the classification of related interest,
dividends, losses and gains; and the circumstances in which financial assets andfinancial liabilities should be offset. The principles in this Standard complement the
principles for recognising and measuring financial assets and financial liabilities in
Accounting Standard Financial Instruments:
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Financial Instruments, Disclosures and Limited revision to accounting
standards:The objective of this Standard is to require entities to provide
disclosures in their financial statements that enable users to evaluate:
the significance of financial instruments for the entitys financial position and
performance; and
the nature and extent of risks arising from financial instruments to which the
entity is exposed during the period and at the reporting date, and how the
entity manages those risks.
The Institute of Chartered Accountants of India (ICAI) is a statutory body established
under the Chartered Accountants Act, 1949 (Act No. XXXVIII of 1949) for the
regulation of the profession of Chartered Accountants in India. During its 61 years of
existence, ICAI has achieved recognition as a premier accounting body not only in
the country but also globally, for its contribution in the fields of education,
professional development, maintenance of high accounting, auditing and ethicalstandards.ICAI now is the second largest accounting body in the whole world.
Indian Accounting Standards, abbreviated as Ind AS are a set of accounting
standards notified by the Ministry of Corporate Affairs which are converged with
International Financial Reporting Standards(IFRS). These accounting standards are
formulated bu Accounting Standards Board ofInstitute of Chartered Accountants of
India. Now India will have two sets of accounting standards viz. existing accounting
standards under Companies (Accounting Standard) Rules, 2006 and IFRS converged
Indian Accounting Standards(Ind AS). The Ind AS are named and numbered in the
same way as the corresponding IFRS. NACAS recommend these standards to the
Ministry of Corporate Affairs. The Ministry of Corporate Affairs has to spell out theaccounting standards applicable for companies in India. As on date the Ministry of
Corporate Affairs notified 35 Indian Accounting Standards(Ind AS). But it has not
notified the date of implementation of the same.
Convergence with IFRS
The inception of the idea of convergence of Indian GAAP with IFRS was made my
the Prime Minister of India Dr. Manmohan Singh by committing in G20 to align
Indian accounting standards with IFRS. Thereafter ICAI has decided to converge its
Accounting Standards with IFRS for accounting periods commencing on or after 1
April 2011 in a phased manner as envisaged the Roadmap to IFRS formulated bythe Ministry of Corporate Affairs. For smooth transition to IFRS, ICAI has taken up
the matter of convergence with the National Advisory Committee on Accounting
Standards and various regulators such as the RBI, SEBI and IRDA, CBDT. IASB, the
issuer of IFRS, is also supporting the ICAI in its endeavours towards convergence.
It has been decided that there shall be two sets of Accounting Standards under the
Companies Act. The new set of standards which have been converged with IFRS are
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now known as Indian Accounting Standards or Ind AS. The Ministry of Corporate
Affairs has notified the 35 Ind AS on 25 February 2011.[2] The text of the 35 Ind AS
are now available at the Ministry of Corporate Affairs portal.[3] At the same time The
Ministry of Corporate Affairs haven't specified the date of implementation of the
same. This reluctance of The Ministry of Corporate Affairs to notify the date even
when the proposed date is less than a month away is seen as rooted in the stronglobbying my the Corporates in India to defer the implementation. But the president
ofICAI. CA.G.Ramaswamy expects that it will be notified soon and there wont be
any deferment.[4]
[edit] List of Ind AS
1. Ind AS 101 First-time Adoption of Indian Accounting Standards
2. Ind AS 102 Share based Payment
3. Ind AS 103 Business Combinations
4. Ind AS 104 Insurance Contracts
5. Ind AS 105 Non current Assets Held for Sale and Discontinued Operations
6. Ind AS 106 Exploration for and Evaluation of Mineral Resources
7. Ind AS 107 Financial Instruments: Disclosures
8. Ind AS 108 Operating Segments
9. Ind AS 1 Presentation of Financial Statements
10.Ind AS 2 Inventories
11.Ind AS 7 Statement of Cash Flows
12.Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors
13.Ind AS 10 Events after the Reporting Period
14.Ind AS 11 Construction Contracts
15.Ind AS 12 Income Taxes
16.Ind AS 16 Property, Plant and Equipment
17.Ind AS 17 Leases
18.Ind AS 18 Revenue
19.Ind AS 19 Employee Benefits
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20.Ind AS 20 Accounting for Government Grants and Disclosure of Government
Assistance
21.Ind AS 21 The Effects of Changes in Foreign Exchange Rates
22.Ind AS 23 Borrowing Costs
23.Ind AS 24 Related Party Disclosures
24.Ind AS 27 Consolidated and Separate Financial Statements
25.Ind AS 28 Investments in Associates
26.Ind AS 29 Financial Reporting in Hyperinflationary Economies
27.Ind AS 31 Interests in Joint Ventures
28.Ind AS 32 Financial Instruments: Presentation
29.Ind AS 33 Earnings per Share
30.Ind AS 34 Interim Financial Reporting
31.Ind AS 36 Impairment of Assets
32.Ind AS 37 Provisions, Contingent Liabilities and Contingent Assets
33.Ind AS 38 Intangible Assets
34.Ind AS 39 Financial Instruments: Recognition and Measurement
35.Ind AS 40 Investment Property
News:
http://www.moneycontrol.com/news/the-firm/jamil-khatris-ifrs-diary-part-
10_526759.html
Through a press release, the Ministry of Corporate Affairs (MCA) notified the final
Ind AS on February 25, 2011. This is an important first step in operationalizing the
adoption of the Ind AS by Indian companies.
Key points:
The February 25 press release states that the Ind AS will be implemented
after various issues, including tax related issues are resolved with other
relevant government departments (for example, the Ministry of Finance).
Accordingly, the actual date of implementation of the Ind AS is proposed to
be notified by the MCA at a later date
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Per its announcement dated January 22, 2010, the MCA had issued a phased
approach for IFRS convergence by Indian companies based on net worth and
certain other specified criteria. The MCA now needs to notify whether the
previously specified timelines (which would require certain companies to
follow the Ind AS from April 1, 2011) would continue; or alternatively specify
the new timelines for adoption of Ind AS
The adoption of Ind AS will need an amendment of various sections of the
Companies Act. In addition to amendments to Schedule VI and Schedule XIV
of the Companies Act, various individual sections of the Companies Act may
also need to be changed. Similarly, amendments would need to be made to
specify how distributable profits will be determined by companies that follow
Ind AS
The government needs to notify how income taxes (including Minimum
Alternate Tax) will be computed by companies that follow Ind AS. While it
may seem intuitive to permit companies that follow Ind AS, to use profitscomputed per Ind AS as a starting point for computing their income tax
liability; this approach has its own limitations. Profits computed per Ind AS
are likely to include various types of unrealized gains/losses (for example,
unrealized gains/losses on derivatives) and other notional non-cash
accounting adjustments (for example, notional higher interest cost on
convertible instruments based on fair value principles). It may be difficult to
identify and list in the income tax laws all such items that may require a
treatment for tax purposes, which is different from the books of accounts.
Alternatively, requiring that taxable profits be computed per some other
bases (for example, old Indian GAAP) would require Ind AS companies to
make several adjustments to Ind AS book profits to compute taxable profits.
This is a sensitive issue, and I am aware that various government
departments are currently working through this issue. In this regard, the
experience of European countries may be relevant as Indian regulators seek
to address this issue. Several European countries opted to disregard the
IFRS-based profits and required companies to compute taxable income per
other frameworks, which were based more on historical cost conventions.
The previous chapter of my diary (Part 9) had a discussion on the carve outs that
had been proposed in the near final Ind AS submitted by the ICAI (mandatory
deviations from IFRS, voluntary deviations from IFRS and removal of options underIFRS). There are a few substantive differences between the final Ind AS and the
near final Ind AS previously issued by the ICAI. Consequently all carve outs
proposed in the near final Ind AS have been accepted in the final versions with
some modifications and additions which are outlined below:
The near final Ind AS specified that a company could choose to use the Indian
GAAP carrying values of fixed assets acquired before April 1, 2007, as the
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deemed cost for future accounting under Ind AS (i.e. a company could
choose not to make any adjustment in the opening Ind AS balance sheet for
such assets). The final Ind AS extend the benefit of this exemption to all such
assets acquired before the transition date. This is a major relief to all
transitioning companies
The final Ind AS defer the application of guidance on accounting for
embedded leases and service concession arrangements. While guidance on
accounting for such arrangements has been included as part of the Ind AS,
the effective date for the application of these principles is not the transition
date, and will be notified separately. This deferral would impact infrastructure
and power companies
Similarly, the Ind AS that governs accounting for exploration and evaluation
of mineral resources will be applied (with potential modification) from a date
to be notified later.
Even though the transition date for adoption of Ind AS has not been notified, the
notification of the final Ind AS affirms Indias commitment for convergence to IFRS.
However, as discussed above, there are several important steps that need to be
implemented by the regulators to fully operationalize the adoption of Ind AS.
It is now clear that while Ind AS financial statements presented for the first
transition period cannot be fully compliant with IFRS (since comparatives would not
be presented), Ind AS financial statements for subsequent years can be made fully
compliant with IFRS, if a company chooses optimal accounting policies and does not
adopt the diluted alternatives available under Ind AS. This is assuming that a
company is not impacted by the mandatory deviations.
With the issuance of final Ind AS, it is now up to each company to finalize its
preparations for the eventual transition. Any additional time that may be available
due to the deferral of the transition date, should be used to further embed Ind AS
reporting into the financial reporting systems and processes.
http://pib.nic.in/newsite/erelease.aspx?relid=70248
Indian Accounting Standards Converged with IFRS Notified
Reliable, consistent and uniform financial reporting is important part of good
corporate governance practices worldwide in order to enhance the credibility of the
businesses in the eyes of investors to take informed investment decisions. In
pursuance of G-20 commitment given by India, the process of convergence of
Indian Accounting Standards with IFRS has been carried out in Ministry of Corporate
Affairs through wide ranging consultative exercise with all the stakeholders. Thirty
five Indian Accounting Standards converged with International Financial Reporting
Standards (henceforth called IND AS) are being notified by the Ministry and placed
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on the website. . These are: IND ASs 1, 2, 7, 8, 10, 11, 12, 16, 17, 18, 19, 20, 21, 23,
24, 27, 28, 29, 31, 32, 33, 34, 36, 37, 38, 39, 40, 101, 102, 103, 104, 105, 106, 107
and 108. The Ministry of Corporate Affairs will implement the IFRS converged Indian
Accounting Standards in a phased manner after various issues including tax related
issues are resolved with the concerned Departments. It would be ensured that the
implementation of the converged standards in a phased manner is smooth for thestakeholders. The date of implementation of the IND AS will be notified by the
Ministry at a later date.
Reference
http://220.227.161.86/9548Indian%20Accounting%20Standards.pdf
http://www.saralaccounts.com/resources/accounting-std.php
2. IFRS and Indian GAAP
India, in 2011, joins the global accounting revolution: International
Financial Reporting Standards. Convergence with IFRS is not just aboutswitching over from one set of accounting & reporting standards toanother. It takes the description of a revolution because conceptualdifferences are expected, as evidenced in this publication.
Convergence is more about a complete business and financial strategyto adopt international standards which is expected to be a long drawnprocess involving investment of time and resources.
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3. Difference between financial accounting and management accounting
Management accounting or managerial accounting is concerned with the
provisions and use ofaccounting information to managers within organizations,
to provide them with the basis to make informed business decisions that will
allow them to be better equipped in their management and control functions.
In contrast to financial accountancy information, management accounting
information is:
forward-looking, instead of historical;
model based with a degree of abstraction to support decision making
generically, instead of case based;
designed and intended for use by managers within the organization, instead
of being intended for use by shareholders, creditors, and public regulators;
usually confidential and used by management, instead of publicly reported;
computed by reference to the needs of managers, often using management
information systems, instead of by reference to general financial accounting
standards.
According to the Chartered Institute of Management Accountants (CIMA), Management
Accounting is "the process of identification, measurement, accumulation, analysis,
preparation, interpretation and communication of information used by management toplan, evaluate and control within an entity and to assure appropriate use of and
accountability for its resources. Management accounting also comprises the preparation
of financial reports for non-management groups such as shareholders, creditors,regulatory agencies and tax authorities" (CIMA Official Terminology).
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The Institute of Management Accountants(IMA)[1] recently updated its definition as
follows: "management accounting is a profession that involves partnering in management
decision making, devising planning and performance management systems,and providingexpertise in financial reporting and control to assist management in the formulation and
implementation of an organizations strategy."
Financial accounting reports are prepared for the use of external parties such as
shareholders and creditors, whereas managerial accounting reports are prepared
for managers inside the organization.
This contrast in basic orientation results in a number of major differences
between financial and managerial accounting, even though both financial and
managerial accounting often rely on the same underlying financial data. In
addition to the to the differences in who the reports are prepared for, financial
and managerial accounting also differ in their emphasis between the past and
the future, in the type of data provided to users, and in several other ways.
These differences are discussed in the following paragraphs.
Emphasis on the Future:
Since planning is such an important part of the manager's job, managerial
accounting has a strong future orientation. In contrast, financial accounting
primarily provides summaries of past financial transactions. These summaries
may be useful in planning, but only to a point. The future is not simply a
reflection of what has happened in the past. Changes are constantly taking place
in economic conditions, and so on. All of these changes demand that the
manager's planning be based in large part on estimates of what will happen
rather than on summaries of what has already happened.
Relevance of Data:
Financial accounting data are expected to be objective and verifiable. However,
for internal use the manager wants information that is relevant even if it is not
completely objective or verifiable. By relevant, we mean appropriate for the
problem at hand. For example, it is difficult to verify estimated sales volumes for
a proposed new store at good Vibrations, Inc., but this is exactly the type of
information that is most useful to managers in their decision making. The
managerial accounting information system should be flexible enough to provide
whatever data are relevant for a particular decision.
Less Emphasis on Precision:
Timeliness is often more important than precision to managers. If a decision
must be made, a manager would rather have a good estimate now than wait a
week for a more precise answer. A decision involving tens of millions of dollars
does not have to be based on estimates that are precise down to the penny, or
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even to the dollar. In fact, one authoritative source recommends that, "as a
general rule, no one needs more than three significant digits., this means, for
example, that if a company's sales are in the hundreds of millions of dollars,
than nothing on an income statement needs to be more accurate than the
nearest million dollars. Estimates that accurate to the nearest million dollars
may be precise enough to make a good decision. Since precision is costly interms of both time and resources, managerial accounting places less emphasis
on precision than does financial accounting. In addition, managerial accounting
places considerable weight on non monitory data, for example, information
about customer satisfaction is tremendous importance even though it would be
difficult to express such data in monitory form.
Segments of an Organization:
Financial accounting is primarily concerned with reporting for the company as a
whole. By contrast, managerial accounting forces much more on the parts, or
segments, of a company. These segments may be product lines, sales territoriesdivisions, departments, or any other categorizations of the company's activities
that management finds useful. Financial accounting does require breakdowns of
revenues and cost by major segments in external reports, but this is secondary
emphasis. In managerial accounting segment reporting is the primary emphasis.
Generally Accepted Accounting Principles (GAAP):
Financial accounting statements prepared for external users must be prepared in
accordance with generally accepted accounting principles (GAAP). External users
must have some assurance that the reports have been prepared in accordance
with some common set of ground rules. These common ground rules enhancecomparability and help reduce fraud and misrepresentations, but they do not
necessarily lead to the type of reports that would be most useful in internal
decision making. For example, GAAP requires that land be stated at its historical
cost on financial reports. However if, management is considering moving a store
to a new location and then selling the land the store currently sits on,
management would like to know the current market value of the land, a vital
piece of information that is ignored under generally accepted accounting
principles (GAAP).
Managerial Accounting Not Mandatory:
Financial accounting is mandatory; that is, it must be done. Various out side
parties such as Securities and exchange commission (SEC) and the tax
authorities require periodic financial statements. Managerial accounting, on the
other hand, is not mandatory. A company is completely free to do as much or as
little as it wishes . No regularity bodies or other outside agencies specify what is
to be done, for that matter, weather anything is to be done at all. Since
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managerial accounting is completely optional, the important question is always,
"Is the information useful?" rather than, "Is the information required?"
Summary:
Financial Accounting Managerial Accounting
Reports to those outside the
organization owners, lenders,
tax authorities and regulators.
Reports to those inside the
organization for planning, directing
and motivating, controlling and
performance evaluation.
Emphasis is on summaries of
financial consequences of past
activities.
Emphasis is on decisions affecting the
future.
Objectivity and verifiability of
data are emphasized.
Relevance of items relating to
decision making is emphasized. Precision of information is
required.
Timeliness of information is required.
Only summarized data for the
entire organization is prepared.
Detailed segment reports about
departments, products, customers,
and employees are prepared.
Must follow Generally Accepted
Accounting Principles (GAAP).
Need not follow Generally Accepted
Accounting Principles (GAAP).
Mandatory for external reports. Not mandatory
Introduction
Financial accounting means Recording of events (transactions)
Financial management means Planning of events (transactions)
Managerial accounting is used primarily by those within a company or
organization. Reports can be generated for any period of time such as daily,
weekly or monthly. Reports are considered to be "future looking" and have
forecasting value to those within the company.
Financial accounting is used primarily by those outside of a company or
organization. Financial reports are usually created for a set period of time, such
as a fiscal year or period. Financial reports are historically factual and have
predictive value to those who wish to make financial decisions or investments in
a company. Management Accounting is the branch of Accounting that deals
primarily with confidential financial reports for the exclusive use of top
management within an organization. These reports are prepared utilizing
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scientific and statistical methods to arrive at certain monetary values which are
then used for decision making. Such reports may include:
Sales Forecasting reports
Budget analysis and comparative analysis
Feasibility studies
Merger and consolidation reports
Financial Accounting, on the other hand, concentrates on the production of
financial reports, including the basic reporting requirements of profitability,
liquidity, solvency and stability. Reports of this nature can be accessed by
internal and external users such as the shareholders, the banks and the
creditors.
[edit] Regulation and standardization
While financial accountants follow Generally Accepted Accounting Principles set
by professional bodies in each country, managerial accountants make use of
procedures and processes that are not regulated by a standard-setting bodies.
However, multinational companies prefer to employ managerial accountants
who have passed the Certified Management Accountant certification. The CMA is
an examination given by the Institute of Management Accountant, a professional
organization of Accounting professionals. This certification is different.
[edit] Time Period
Managerial Accounting provides top management with reports that are future-
oriented, while Financial Accounting provides reports based on historical
information. There is no time span for producing managerial accounting
statements but financial accounting statements are generally required to be
produced for the period of 12 previous months.
[edit] Other differences
There is no legal requirement for an organization to use management
accounting but publicly-traded firms (limited companies or whose shares are
bought and sold on an open market) must, by law, prepare financial account
statements.
In management accounting systems there is no requirement for an
independent external review but financial accounting annual statements
must be audited by an independent CPA firm.
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In management accounting systems, management may be concerned about
how reports will affect employees behavior whereas management concerns
are about the adequacy of disclosure in financial statements. (BAC)
There are two broad types of accounting information:
Financial Accounts: geared toward external users of accounting information Management Accounts: aimed more at internal users of accounting information
Although there is a difference in the type of information presented in financial andmanagement accounts, the underlying objective is the same - to satisfy the information
needs of the user.
Financial Accounts Management Accounts
Financial accounts describe the
performance of a business over a specificperiod and the state of affairs at the end of
that period. The specific period is often
referred to as the "Trading Period" and is
usually one year long. The period-end dateas the "Balance Sheet Date"
Management accounts are used to help management
record, plan and control the activities of a businessand to assist in the decision-making process. They
can be prepared for any period (for example, many
retailers prepare daily management information on
sales, margins and stock levels).
Companies that are incorporated under the
Companies Act 1989 are required by law to
prepare and publish financial accounts. Thelevel of detail required in these accounts
reflects the size of the business with smaller
companies being required to prepare onlybrief accounts.
There is no legal requirement to prepare management
accounts, although few (if any) well-run businesses
can survive without them.
The format of published financial accounts
is determined by several differentregulatory elements:
Company Law
Accounting Standards
Stock Exchange
There is no pre-determined format for management
accounts. They can be as detailed or brief asmanagement wish.
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Financial Accounts Management Accounts
Financial accounts concentrate on the
business as a whole rather than analysing
the component parts of the business. For
example, sales are aggregated to provide afigure for total sales rather than publish a
detailed analysis of sales by product, marketetc.
Management accounts can focus on specific areas of
a business' activities. For example, they can provide
insights into performance of:
Products
Separate business locations (e.g. shops)
Departments / divisions
Most financial accounting information is of
a monetary nature
Management accounts usually include a wide variety
of non-financial information. For example,
management accounts often include analysis of:
- Employees (number, costs, productivity etc.)
- Sales volumes (units sold etc.)
Customer transactions (e.g. number of calls received
into a call centre)
By definition, financial accounts present ahistoric perspective on the financial
performance of the business
Management accounts largely focus on analysinghistorical performance. However, they also usually
include some forward-looking elements - e.g. a sales
budget; cash-flow forecast.
4. Limited Liability Partnership
A limited liability partnership (LLP) is a partnership in which some or all partners (depending
on the jurisdiction) have limited liability. It therefore exhibits elements ofpartnershipsand
corporations.[1] In an LLP one partner is not responsible or liable for another partner's misconductor negligence. This is an important difference from that of an unlimited partnership. In an LLP,
some partners have a form oflimited liability similar to that of the shareholders of a corporation.[2] In some countries, an LLP must also have at least one "general partner" with unlimited
liability. Unlike corporate shareholders, the partners have the right to manage the businessdirectly. In contrast, corporate shareholders have to elect a board of directors under the laws of
various state charters. The board organizes itself (also under the laws of the various state
charters) and hires corporate officers who then have as "corporate" individuals the legalresponsibility to manage the corporation in the corporation's best interest. An LLP also contains
a different level of tax liability from that of a corporation.
Limited liability partnerships are distinct from limited partnerships in some countries, which may
allow all LLP partners to have limited liability, while a limited partnership may require at least
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one unlimited partner and allow others to assume the role of a passive and limited liability
investor. As a result, in these countries the LLP is more suited for businesses where all investors
wish to take an active role in management.
There is considerable confusion between LLPs as constituted in the U.S. and that introduced in
the UK in 2001 and adopted elsewhere - see below - since the UK LLP is, despite the name,specifically legislated as a Corporate body rather than aPartnership.
India
The Limited Liability Partnership Act 2008 was published in the official Gazette of India onJanuary 9, 2009 and has been notified with effect from 31 March 2009. However, the Act, has
been notified with limited sections only.[4] The rules have been notified in the official gazette on
April 1, 2009. The first LLP was incorporated in the first week of April 2009.
In India for all purposes of taxation, an LLP is treated like any other partnership firm.
The salient features of the LLP Act, 2008 are as under:-
1. The LLP has an alternative corporate business vehicle that would give the benefits of limited
liability but allows its members the flexibility of organizing their internal structure as a
partnership based on an agreement.
2. The LLP Act does not restrict the benefit of LLP structure to certain classes of professionalsonly and would be available for use by any enterprise which fulfills the requirements of the Act.
3. While the LLP has a separate legal entity, liable to the full extent of its assets, the liability of
the partners would be limited to their agreed contribution in the LLP. Further, no partner wouldbe liable on account of the independent or unauthorized actions of other partners, thus allowing
individual partners to be shielded from joint liability created by another partners wrongful
business decisions or misconduct.
4. LLP shall be a body corporate and a legal entity separate from its partners. It will haveperpetual succession. Indian Partnership Act, 1932 shall not be applicable to LLPs and there
shall not be any upper limit on number of partners in an LLP unlike an ordinary partnership firm
where the maximum number of partners can not exceed 20, LLP Act makes a mandatory
statement where one of the partner to the LLP should be an Indian.
5. Provisions have been made for corporate actions like mergers, amalgamations etc.
6. While enabling provisions in respect of winding up and dissolutions of LLPs have been made,
detailed provisions in this regard would be provided by way of rules under the Act.
7. The Act also provides for conversion of existing partnership firm, private limited companyand unlisted public company into a LLP by registering the same with the Registrar of Companies
(ROC)
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8. Nothing Contained in the Partnership Act 1932 shall effect an LLP.
9. The Registrar of Companies (Roc) shall register and control LLPs also.
10. The governance of LLPs shall be in electronic mode based on the successful model of the
present Ministry of Corporate Affairs Portal. Visit LLP Portal to register a new LLP.
Limited Liability Partnership (LLP) in India All you need to know about
By Sharda Balaji on 12, May, 2009 | Topic: Legal Resources for startups
LLP, a legal form available world-wide is now introduced in India and is governed by the
Limited Liability Partnership Act 2008, with effect from April 1, 2009. link (pdf) .
LLP combines the advantages of ease of running a Partnership and separate legal entity statusand limited liability aspect of a Company.
Here are some of the main features of a LLP
LLP is a separate legal entity separate from its partners, can own assets in its name, sue
and be sued.
Unlike corporate shareholders, the partners have the right to manage the business directly
One partner is not responsible or liable for another partners misconduct or negligence.
Minimum of 2 partners and no maximum.
Should be for profit business.
Perpetual succession.
The rights and duties of partners in LLP, will be governed by the agreement between
partners and the partners have the flexibility to devise the agreement as per their choice.The duties and obligations of Designated Partners shall be as provided in the law.
Liability of the partners is limited to the extent of his contribution in the LLP. No
exposure of personal assets of the partner, except in cases of fraud.
LLP shall maintain annual accounts. However, audit of the accounts is required only ifthe contribution exceeds Rs. 25 lakhs or annual turnover exceeds Rs.40 lakhs.
A LLP is indeed advantageous because of comparatively lower cost of formation, lesser
compliance requirements, easy to manage and run and also easy to wind-up and dissolve, no
requirement of minimum capital contributions, partners are not liable for the acts of the otherpartners and importantly no minimum alternate tax (as of date). But, LLP cannot raise money
from the public.
The process for incorporating a LLP is pretty simple. The flow chart here depicts it clearly.
The Registrar of Companies (ROC) is the authority having jurisdiction over the incorporation.The steps required are:
Decide on the Partners and the Designated Partners
http://mca.gov.in/http://llp.gov.in/http://www.pluggd.in/author/sharda/http://www.pluggd.in/category/legal-resources-startups/http://www.pluggd.in/limited-liability-partnership-llp-company-comparison-297/http://www.mca.gov.in/MinistryWebsite/dca/actsbills/pdf/LLP_Act_2008_15jan2009.pdfhttp://www.pluggd.in/limited-liability-partnership-llp-company-comparison-297/http://www.pluggd.in/limited-liability-partnership-llp-company-comparison-297/http://www.llp.gov.in/http://mca.gov.in/http://llp.gov.in/http://www.pluggd.in/author/sharda/http://www.pluggd.in/category/legal-resources-startups/http://www.pluggd.in/limited-liability-partnership-llp-company-comparison-297/http://www.mca.gov.in/MinistryWebsite/dca/actsbills/pdf/LLP_Act_2008_15jan2009.pdfhttp://www.pluggd.in/limited-liability-partnership-llp-company-comparison-297/http://www.pluggd.in/limited-liability-partnership-llp-company-comparison-297/http://www.llp.gov.in/7/29/2019 Indian GAAP
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Obtain Designated Partner Identification Number (DPIN) and a digital signature
certificate.
Decide on the name of the LLP and check whether it is available.
Draft the LLP agreement
File the LLP Agreement, incorporation documents and obtain the Certificate of
Incorporation.
In order to help you decide on which legal form to choose, heres a feature comparison betweenthe LLP, Partnership firm and a Company:
Features Company Partnership firm LLP
Registration Compulsory
registration requiredwith the ROC.
Certificate of
Incorporation is
conclusive evidence.
Not compulsory.
UnregisteredPartnership Firm will
not have the ability to
sue.
Compulsory
registrationrequired with the
ROC
Name Name of a public
company to end with
the word limited
and a privatecompany with the
words private
limited
No guidelines. Name to end with
LLP Limited
Liability
Partnership
Capital contribution Private company
should have a
minimum paid up
capital of Rs. 1 lakhand Rs.5 lakhs for a
public company
Not specified Not specified
Legal entity status Is a separate legal
entity
Not a separate legal
entity
Is a separate legal
entity
Liability Limited to the extent
of unpaid capital.
Unlimited, can
extend to the
personal assets of thepartners
Limited to the
extent of the
contribution to theLLP.
No. of
shareholders /Partners
Minimum of 2. In a
private company,maximum of 50shareholders
2- 20 partners Minimum of 2. No
maximum.
Foreign Nationals
as shareholder /
Partner
Foreign nationals can
be shareholders.
Foreign nationals
cannot form
partnership firm.
Foreign nationals
can be partners.
Taxability The income is taxedat 30% +
The income is taxedat 30% +
Not yet notified.
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surcharge+cess surcharge+cess
Meetings Quarterly Board of
Directors meeting,
annual shareholdingmeeting is mandatory
Not required Not required.
Annual Return Annual Accounts andAnnual Return to be
filed with ROC
No returns to be filedwith the Registrar of
Firms
Annual statementof accounts and
solvency &Annual Return has
to be filed with
ROC
Audit Compulsory,
irrespective of share
capital and turnover
Compulsory Required, if the
contribution is
above Rs.25 lakhs
or if annualturnover is above
Rs. 40 lakhs.
How do the bankers
view
High
creditworthiness, dueto stringent
compliances and
disclosures required
Creditworthiness
depends on goodwilland credit worthiness
of the partners
Perception is
higher comparedto that of a
partnership but
lesser than acompany.
Dissolution Very procedural.
Voluntary or by
Order of National
Company LawTribunal
By agreement of the
partners, insolvency
or by Court Order
Less procedural
compared to
company.
Voluntary or byOrder of National
Company LawTribunal
Whistle blowing No such provision No such provision Protection
provided to
employees andpartners who
provide useful
information duringthe investigation
process.The parliament on 12.12.2008 has passed the limited liability partnership
Act 2008 and the rules under the act have been framed and are made
eff