The lack of uniformity among accounting practices have made it difficult to compare the financial results of different companies. It means that there should not be too much discretion to companies and their accountants to present financial information the way they like. In other words, the information contained in financial statements should conform to carefully considered standards. Obviously, accounting standards are needed to :
a) provide a basic framework for preparing financial statements to be uniformly followed by all business enterprises,
b) make the financial statements of one firm comparable with the other firm and the financial statements of one period with the financial statements of another period of the same firm,
c) make the financial statements credible and reliable, and
d) create general sense of confidence among the outside users of financial statements.
A mandatory accounting standard, if not followed, requires the auditors, who are members of ICAI, to qualify their audit reports, failing which they will be guilty of professional misconduct. Both the SEB1 and Companies Act require auditors to qualify the audit reports that do not conform to mandatory accounting standards. Section 217 (2M) of the Companies Act also casts a responsibility on the Board of Directors to comply with mandatory accounting standards.
Under the Section 211 of the Companies Act, where the financial statements do not comply with the accounting standards, such companies shall disclose the following:
(a) the deviation from the accounting standards
(b) the reasons for such a deviation
(c) the financial effects, if any, arising out of such a deviation
Accounting standard is mandatory for the following:
(i) Enterprises, whose equity or the debt securities are listed on a recognised stock exchange in India, and those enterprises, that are in the process of issuing equity or debt securities that will be listed on a recognised stock exchange in India.
(ii) All other commercial, industrial and business reporting enterprises, whose turnover for the accounting period exceeds Rs. fifty crores.