Chapter 1: Introduction to Accounting Standards - Test 1: answer key

Question 1 · 2 marks · Chapter 1: Introduction to Accounting Standards · hard

Scenario. Meridian Alloys Ltd is an unlisted public company with net worth of ₹180 crore as at 31 March 2026. It is not covered by the Ind AS roadmap and prepares its statutory financial statements under Accounting Standards notified by the MCA. On 15 January 2026, the Accounting Standards Board (ASB) issued an exposure draft proposing a change in the measurement of certain inventories. Meridian's CFO submitted comments to the ASB on 5 February 2026. On 20 February 2026, the board, relying on the exposure draft, approved a change from weighted average cost to the proposed measurement method with effect from 1 April 2025, although the draft had not been notified. The change increased profit before tax by ₹42 lakh. The statutory auditor objected, noting that the exposure draft was not law and that Schedule III Division I also required a particular presentation. The CFO argued that Accounting Standards are principle-based, so the board could apply the spirit of the draft early. The audit committee asked whether the ASB or the MCA would approve the final standard and whether NFRA had any role. The company also received a lender covenant requiring IFRS-based figures; the CFO wants to label the statutory statements as IFRS-compliant. You are asked to advise on the authority, status and hierarchy of the standard-setting process as on 31 March 2026.

In respect of Meridian Alloys Ltd, which authority has the power to prescribe or notify Accounting Standards for companies under the Companies Act, 2013?

1. The Council of the ICAI, because the ASB functions under the ICAI and its standards are automatically binding on all companies.
2. SEBI, because Meridian is a public company and its financial statements are used by investors.
3. The Central Government (MCA), after recommendation by ICAI and consultation with/examination by NFRA, by notification under Section 133. (correct answer)
4. The ASB itself, because it is independent in the formulation of Accounting Standards and issues exposure drafts.

Answer: C — The Central Government (MCA), after recommendation by ICAI and consultation with/examination by NFRA, by notification under Section 133.

Explanation. Under Section 133, the Central Government may prescribe accounting standards recommended by ICAI, in consultation with and after examination by NFRA. For companies, the MCA notifies the Accounting Standards; the ASB formulates and issues exposure drafts but does not itself notify standards for companies. Therefore the statutory power lies with the MCA after the prescribed consultative process.

Where it goes wrong. Students often assume that because ASB formulates AS, ASB's approval itself makes the standard binding on companies.

Authority. Section 133 of the Companies Act, 2013; Companies (Accounting Standards) Rules, 2021

Question 2 · 2 marks · Chapter 1: Introduction to Accounting Standards · hard

Can Meridian Alloys Ltd apply the proposed inventory measurement method in its statutory financial statements for 2025-26 merely because the ASB exposure draft supports it?

1. Yes, because an exposure draft reflects the ASB's technical view and can be applied early if it increases comparability.
2. No, because an exposure draft has no mandatory status until the standard is notified; Meridian must apply extant notified Accounting Standards. (correct answer)
3. Yes, provided the change is disclosed in the notes as a voluntary early adoption of an impending standard.
4. No, unless the statutory auditor issues a separate report confirming that the exposure draft is substantially final.

Answer: B — No, because an exposure draft has no mandatory status until the standard is notified; Meridian must apply extant notified Accounting Standards.

Explanation. An exposure draft is issued for public comments and does not have mandatory force. Companies must comply with the Accounting Standards notified under the Companies (Accounting Standards) Rules, 2021. Early application of an un-notified draft, even if described as voluntary, is not a valid basis for statutory recognition and measurement unless a notified standard or law permits it.

Where it goes wrong. The distractor that disclosure of voluntary early adoption cures the problem is wrong because disclosure cannot confer statutory authority on an un-notified draft.

Authority. Section 133 of the Companies Act, 2013; Companies (Accounting Standards) Rules, 2021

Question 3 · 2 marks · Chapter 1: Introduction to Accounting Standards · hard

In the ASB standard-setting procedure, after the exposure draft has been issued and public comments have been received, what is the immediate next step?

1. The draft is straightaway notified by the MCA without further consideration.
2. The draft is circulated to specified outside bodies for the first time.
3. A fresh study group is constituted to replace the earlier study group.
4. The ASB considers the comments, finalises the draft standard and submits it to the ICAI Council for consideration and approval. (correct answer)

Answer: D — The ASB considers the comments, finalises the draft standard and submits it to the ICAI Council for consideration and approval.

Explanation. After the exposure draft is issued and comments are received, the ASB considers those comments and finalises the draft standard for submission to the ICAI Council. Circulation to specified outside bodies and ascertainment of their views occur earlier in the process. MCA notification comes only after the standard-setting process is completed for corporate entities.

Where it goes wrong. Students often reverse the order and treat MCA notification as the step immediately after exposure-draft comments.

Authority. ASB standard-setting process, Step VI; Section 133 of the Companies Act, 2013

Question 4 · 2 marks · Chapter 1: Introduction to Accounting Standards · hard

If a notified Accounting Standard's treatment appears inconsistent with a requirement of Schedule III Division I, how should Meridian Alloys Ltd proceed?

1. Follow Schedule III Division I format strictly; Accounting Standards cannot modify statutory presentation requirements.
2. Follow the notified Accounting Standard, because General Instruction 1 of Schedule III Division I provides that the requirements of Schedule III stand modified to comply with Accounting Standards. (correct answer)
3. Follow the exposure draft, because it represents the latest technical thinking of the ASB.
4. Apply either treatment, provided the company discloses the choice as an accounting policy.

Answer: B — Follow the notified Accounting Standard, because General Instruction 1 of Schedule III Division I provides that the requirements of Schedule III stand modified to comply with Accounting Standards.

Explanation. Under General Instruction 1 of Schedule III Division I to the Companies Act, 2013, where compliance with the requirements of the Act including Accounting Standards as applicable to the company requires any change in treatment or disclosure, the requirements of Schedule III stand modified accordingly. Therefore, notified Accounting Standards prevail over Schedule III presentation formats.

Where it goes wrong. Students often confuse substantive statutory provisions of the Companies Act (which prevail over AS) with Schedule III disclosure formats (which stand modified to comply with AS).

Authority. Section 133 of the Companies Act, 2013; Schedule III, Division I, Companies Act, 2013

Question 5 · 2 marks · Chapter 1: Introduction to Accounting Standards · medium

Scenario. Vardhan Chemicals Ltd is an unlisted public company with net worth of ₹190 crore as at 31 March 2026. It is not covered by the Ind AS roadmap and currently applies Accounting Standards notified under the Companies (Accounting Standards) Rules, 2021. A foreign lender has stipulated that the annual financial statements submitted for covenant testing must be prepared using IFRS as issued by the IASB. The CFO proposes to prepare the statutory financial statements under IFRS as issued by the IASB and to describe them as IFRS-compliant. The auditor explains that India has converged with IFRS rather than adopted IFRS, and that Ind AS contains carve-outs and carve-ins. The CFO asks whether IFRS includes only standards issued by the IASB, or also older IAS and interpretations. The audit committee also wants to know whether additional guidance in Ind AS over IFRS has a specific name. Finally, the lender has indicated that it will accept a supplementary reconciliation from the statutory figures to IFRS-based figures for covenant purposes. You are required to advise on the permissible statutory basis, the composition of IFRS, the meaning of carve-outs and carve-ins, and how to deal with the lender's request.

What is the permissible statutory basis for Vardhan Chemicals Ltd's financial statements for 2025-26?

1. IFRS as issued by the IASB, because the foreign lender has stipulated IFRS-based statements.
2. Accounting Standards notified under the Companies (Accounting Standards) Rules, 2021, because Vardhan is not covered by the Ind AS roadmap. (correct answer)
3. Ind AS, because every unlisted public company with net worth above ₹100 crore must apply Ind AS.
4. Either IFRS or Ind AS, at the company's option, since convergence permits a choice.

Answer: B — Accounting Standards notified under the Companies (Accounting Standards) Rules, 2021, because Vardhan is not covered by the Ind AS roadmap.

Explanation. A company not covered by the Ind AS roadmap continues to apply Accounting Standards notified under the Companies (Accounting Standards) Rules, 2021. India has converged with IFRS and has not adopted IFRS as issued by the IASB for statutory reporting. A lender's covenant does not change the statutory reporting framework.

Where it goes wrong. Students often let a contractual lender requirement override the statutory reporting framework.

Authority. Companies (Accounting Standards) Rules, 2021; Section 133 of the Companies Act, 2013

Question 6 · 2 marks · Chapter 1: Introduction to Accounting Standards · hard

Which of the following correctly describes the term IFRS?

1. Only the standards issued by the IASB after 1 April 2001; IAS and interpretations are not part of IFRS.
2. Only the standards and interpretations issued by the IFRS Interpretations Committee.
3. IFRS issued by the IASB, IAS issued by the IASC and adopted by the IASB, and interpretations issued by the SIC and the IFRS Interpretations Committee. (correct answer)
4. Indian Accounting Standards issued by the MCA, because Ind AS are IFRS-converged standards.

Answer: C — IFRS issued by the IASB, IAS issued by the IASC and adopted by the IASB, and interpretations issued by the SIC and the IFRS Interpretations Committee.

Explanation. The term IFRS comprises IFRS issued by the IASB, IAS issued by the IASC and adopted by the IASB, interpretations issued by the SIC, and interpretations issued by the IFRS Interpretations Committee. It is not limited to standards issued after 2001, nor to Ind AS.

Where it goes wrong. The distractor that IFRS means only post-2001 IASB standards ignores the continuing status of IAS and interpretations.

Authority. IASB pronouncements: IFRS, IAS, SIC and IFRIC interpretations; Section 133 of the Companies Act, 2013

Question 7 · 2 marks · Chapter 1: Introduction to Accounting Standards · medium

Additional guidance given in Ind AS over and above the corresponding IFRS is commonly described as:

1. A carve-out, because it removes an IFRS option.
2. A convergence adjustment, because it eliminates all differences with IFRS.
3. A statutory override, because the Companies Act prevails over IFRS.
4. A carve-in, because it adds guidance that is not present in the corresponding IFRS. (correct answer)

Answer: D — A carve-in, because it adds guidance that is not present in the corresponding IFRS.

Explanation. A carve-in represents additional guidance given in Ind AS over and above the corresponding IFRS. In contrast, a carve-out represents a deviation or departure from IFRS principles to address India-specific economic conditions.

Where it goes wrong. Students often use carve-out for any difference from IFRS, including extra guidance.

Authority. Concept of carve-outs and carve-ins in Ind AS; Section 133 of the Companies Act, 2013

Question 8 · 2 marks · Chapter 1: Introduction to Accounting Standards · hard

How should Vardhan Chemicals Ltd deal with the lender's request for IFRS-based covenant figures?

1. Prepare statutory financial statements under notified AS and, if required by the lender, provide a supplementary reconciliation to IFRS-based figures for covenant purposes. (correct answer)
2. Replace the statutory financial statements with IFRS as issued by the IASB statements and label them as statutory statements.
3. Apply Ind AS in the statutory financial statements even though the company is not covered by the Ind AS roadmap.
4. Apply IFRS only to the notes to accounts and retain AS for the primary statements, without any reconciliation.

Answer: A — Prepare statutory financial statements under notified AS and, if required by the lender, provide a supplementary reconciliation to IFRS-based figures for covenant purposes.

Explanation. The statutory financial statements must follow the notified AS applicable to Vardhan. A lender may separately require IFRS-based covenant calculations; these can be provided as supplementary information or a reconciliation without changing the statutory basis. Labelling statutory AS financial statements as IFRS-compliant would be misleading.

Where it goes wrong. The option of applying IFRS only in notes without reconciliation is a common attempt to satisfy a covenant while avoiding a proper reconciliation.

Authority. Companies (Accounting Standards) Rules, 2021; Section 133 of the Companies Act, 2013

Question 9 · 2 marks · Chapter 1: Introduction to Accounting Standards · medium

Scenario. The Accounting Standards Board (ASB) of the Institute of Chartered Accountants of India (ICAI) was constituted in April 1977 to formulate Accounting Standards for Indian enterprises. The standard-setting procedure follows an exhaustive, transparent, and democratic due process involving identification of priority areas, constitution of study groups representing industry, regulators, and academics, consideration of study group drafts, issuance of exposure drafts for broad public commentary, holding interactive open-house forums, consideration of received comments, and submission of the finalized standard to the ICAI Council. Meridian Alloys Ltd. is reviewing this standard-setting architecture and statutory compliance requirements under the Companies Act, 2013.

Which statement about the Accounting Standards Board (ASB) is correct?

1. It is constituted by the MCA and is chaired by the NFRA Chairperson.
2. It is constituted by the Council of the ICAI and is independent in the formulation of Accounting Standards. (correct answer)
3. It directly notifies Accounting Standards for companies under Section 133.
4. Its standards require prior approval of SEBI before they can be issued to non-corporate entities.

Answer: B — It is constituted by the Council of the ICAI and is independent in the formulation of Accounting Standards.

Explanation. The ASB is constituted by the Council of the ICAI and is independent in formulating Accounting Standards. It does not directly notify standards for companies; the MCA notifies corporate standards under Section 133 after the prescribed process and NFRA consultation/examination.

Where it goes wrong. The option that ASB directly notifies corporate standards confuses formulation with statutory notification.

Authority. ASB constitution and standard-setting process; Section 133 of the Companies Act, 2013

Question 10 · 2 marks · Chapter 1: Introduction to Accounting Standards · medium

Scenario. As at November 2026, how many Accounting Standards are effectively in force for the CA Intermediate syllabus, after considering withdrawals?

Under the ICAI Accounting Standards framework applicable for the May 2027 examination, how many Accounting Standards are effectively in force for non-Ind AS entities?

1. 32 Accounting Standards
2. 29 Accounting Standards
3. 27 Accounting Standards (correct answer)
4. 28 Accounting Standards

Answer: C — 27 Accounting Standards

Explanation. ICAI originally issued 29 Accounting Standards (AS 1 to AS 29). Subsequently, AS 6 (Depreciation Accounting) was withdrawn and integrated into AS 10 (Property, Plant and Equipment), and AS 8 (Research and Development) was withdrawn and superseded by AS 26 (Intangible Assets). Hence, 27 Accounting Standards (29 minus 2) are currently in force.

Where it goes wrong. Forgetting that AS 6 and AS 8 were withdrawn upon the issuance/revision of AS 10 and AS 26.

Authority. ICAI Accounting Standards list; Companies (Accounting Standards) Rules, 2021

Question 11 · 2 marks · Chapter 1: Introduction to Accounting Standards · hard

Scenario. In the standard-setting process, which of the following is the correct immediate sequence after the exposure draft is finalised and issued for public comments?

In the formulation of Accounting Standards by the ASB, what role do Study Groups play?

1. They are constituted by the ASB to assist in the initial examination of specific subjects and formulation of preliminary draft standards. (correct answer)
2. They notify the final Accounting Standards in the Official Gazette on behalf of the Central Government.
3. They hear disciplinary appeals from aggrieved members regarding non-compliance with standards.
4. They audit the financial statements of non-corporate entities availing MSME exemptions.

Answer: A — They are constituted by the ASB to assist in the initial examination of specific subjects and formulation of preliminary draft standards.

Explanation. In formulating Accounting Standards, the ASB constitutes Study Groups comprising members of the Institute and representatives from industry, regulators, and academic bodies to examine subjects in depth and prepare initial working drafts for the ASB's consideration.

Where it goes wrong. Confusing preliminary Study Groups with the regulatory bodies (ICAI Council or Central Government/NFRA) that formally approve and notify standards.

Authority. ASB standard-setting process, Steps V-VII; Section 133 of the Companies Act, 2013

Question 12 · 2 marks · Chapter 1: Introduction to Accounting Standards · hard

Scenario. The Accounting Standards Board (ASB) of the Institute of Chartered Accountants of India (ICAI) was constituted in April 1977 to formulate Accounting Standards for Indian enterprises. The standard-setting procedure follows an exhaustive, transparent, and democratic due process involving identification of priority areas, constitution of study groups representing industry, regulators, and academics, consideration of study group drafts, issuance of exposure drafts for broad public commentary, holding interactive open-house forums, consideration of received comments, and submission of the finalized standard to the ICAI Council. Meridian Alloys Ltd. is reviewing this standard-setting architecture and statutory compliance requirements under the Companies Act, 2013.

Under Section 132 of the Companies Act, 2013, what is the role of the National Financial Reporting Authority (NFRA) in the standard-setting process?

1. It unilaterally drafts accounting standards without consulting the ICAI.
2. It examines accounting standards recommended by the ICAI and advises the Central Government on their prescription. (correct answer)
3. It conducts academic examinations for chartered accountancy students.
4. It determines tax depreciation rates under the Income-tax Act.

Answer: B — It examines accounting standards recommended by the ICAI and advises the Central Government on their prescription.

Explanation. Under Section 132(2)(a) and Section 133 of the Companies Act, 2013, the Central Government prescribes accounting standards as recommended by ICAI, in consultation with and after examination of recommendations by the National Financial Reporting Authority (NFRA).

Where it goes wrong. Believing that NFRA replaces ICAI in formulating standards, whereas NFRA examines and advises on ICAI's recommendations.

Authority. Section 133 of the Companies Act, 2013; Section 132 of the Companies Act, 2013

Question 13 · 2 marks · Chapter 1: Introduction to Accounting Standards · medium

Scenario. Under the Companies (Accounting Standards) Amendment Rules, 2016, later superseded by the Companies (Accounting Standards) Rules, 2021, which of the following Accounting Standards was not revised to align with the corresponding Ind AS?

Under the Companies (Accounting Standards) Amendment Rules, 2016, later superseded by the Companies (Accounting Standards) Rules, 2021, which of the following Accounting Standards was not revised to align with the corresponding Ind AS?

1. AS 2 Valuation of Inventories
2. AS 3 Cash Flow Statement (correct answer)
3. AS 14 Accounting for Amalgamations
4. AS 29 Provisions, Contingent Liabilities and Contingent Assets

Answer: B — AS 3 Cash Flow Statement

Explanation. Under the Companies (Accounting Standards) Amendment Rules, 2016, seven standards—AS 2, AS 4, AS 10, AS 13, AS 14, AS 21, and AS 29—were substantially revised to align non-Ind AS requirements with global accounting developments. AS 3 was not among those revised in that notification.

Where it goes wrong. Students may assume every AS was revised for Ind AS alignment; the list of revised standards is selective.

Authority. Companies (Accounting Standards) Rules, 2021; MCA notification dated 23 June 2021

Question 14 · 2 marks · Chapter 1: Introduction to Accounting Standards · hard

Scenario. A company's proposed accounting treatment is permitted by a notified Accounting Standard but is contrary to an explicit statutory requirement in the Companies Act, 2013. Which should prevail?

A company's proposed accounting treatment is permitted by a notified Accounting Standard but is contrary to an explicit statutory requirement in the Companies Act, 2013. Which should prevail?

1. The Accounting Standard, because it is notified under Section 133 and is therefore a special law.
2. The treatment that increases comparability, because Accounting Standards are principle-based.
3. The statutory requirement, because Accounting Standards cannot override the law; the statute prevails in case of conflict. (correct answer)
4. Either treatment, because a company may choose the more appropriate accounting policy and disclose it.

Answer: C — The statutory requirement, because Accounting Standards cannot override the law; the statute prevails in case of conflict.

Explanation. Accounting Standards are mandatory in their applicable sphere, but they are not statutes and cannot override the Companies Act. Where a notified AS conflicts with an explicit legal requirement, the statute prevails. Disclosure of an alternative policy cannot cure a statutory violation.

Where it goes wrong. The option treating Section 133 as making AS a special law over the Companies Act misunderstands the legal hierarchy.

Authority. Section 133 of the Companies Act, 2013; Accounting Standards mandatory status and legal hierarchy

Question 15 · 2 marks · Chapter 1: Introduction to Accounting Standards · medium

Scenario. The Accounting Standards Board (ASB) of the Institute of Chartered Accountants of India (ICAI) was constituted in April 1977 to formulate Accounting Standards for Indian enterprises. The standard-setting procedure follows an exhaustive, transparent, and democratic due process involving identification of priority areas, constitution of study groups representing industry, regulators, and academics, consideration of study group drafts, issuance of exposure drafts for broad public commentary, holding interactive open-house forums, consideration of received comments, and submission of the finalized standard to the ICAI Council. Meridian Alloys Ltd. is reviewing this standard-setting architecture and statutory compliance requirements under the Companies Act, 2013.

Which of the following is not one of the aspects dealt with by Accounting Standards?

1. Management compensation strategy and HR appraisal policy (correct answer)
2. Recognition of events and transactions in financial statements
3. Measurement of transactions and events
4. Presentation and disclosure requirements in financial statements

Answer: A — Management compensation strategy and HR appraisal policy

Explanation. Accounting Standards deal with recognition, measurement, presentation and disclosure of accounting transactions and events in financial statements. Management compensation strategy and HR appraisal policy are managerial matters and are not one of the four accounting-standard aspects.

Where it goes wrong. Students may over-extend the scope of AS to all management policies because AS are principle-based.

Authority. Accounting Standards: recognition, measurement, presentation and disclosure; Section 133 of the Companies Act, 2013