Accounting Standards Setting Process in India Explained

Accounting Standards do not appear overnight, nor are they framed by a single individual or authority. In India, the process of setting Accounting Standards follows a structured, consultative, and transparent framework that balances professional expertise, regulatory oversight, and legal requirements.

Understanding the Accounting Standards setting process in India is crucial for students, accounting professionals, auditors, and anyone interested in how financial reporting rules are developed and enforced. This blog explains the entire step-by-step process, the institutions involved, and why such a detailed procedure is necessary.

Why a Formal Standard-Setting Process Is Necessary

Financial reporting affects a wide range of stakeholders—investors, lenders, regulators, management, and the public at large. If Accounting Standards were framed without consultation or due process, they could:

• Ignore practical business realities
• Conflict with existing laws
• Create confusion instead of clarity
• Reduce confidence in financial statements

To avoid these issues, India follows a well-defined standard-setting mechanism that ensures Accounting Standards are technically sound, legally compliant, and practically applicable.

Key Institutions Involved in Standard Setting

Before understanding the steps, it is important to know the main institutions involved in the Accounting Standards setting process in India:

• Institute of Chartered Accountants of India (ICAI) – Technical drafting and professional expertise
• Accounting Standards Board (ASB) – Dedicated body for framing standards
• National Financial Reporting Authority (NFRA) – Regulatory review and recommendation
• Ministry of Corporate Affairs (MCA) – Legal notification and enforcement

Each institution plays a specific role, ensuring checks and balances at every stage.

Role of the Accounting Standards Board (ASB)

The Accounting Standards Board (ASB) is a committee constituted by ICAI specifically for developing Accounting Standards. Although ASB functions under ICAI, it operates with a significant degree of independence in technical matters.

The ASB includes representatives from:

• Industry bodies
• Regulatory authorities
• Government departments
• Academicians
• Accounting professionals

This diverse composition ensures that multiple perspectives are considered while framing standards.

Step-by-Step Accounting Standards Setting Process in India

The Accounting Standards setting process in India follows a logical sequence of steps, each designed to ensure quality, transparency, and acceptability.

Step 1: Identification of Areas Requiring Standards

The process begins with the identification of accounting areas where standards are required. These areas may arise due to:

• New types of business transactions
• Changes in economic or business environment
• International developments in accounting
• Ambiguity or inconsistency in existing practices

The ASB identifies such areas based on feedback from stakeholders, regulators, and global accounting developments.

Step 2: Constitution of Study Groups

Once an area is identified, the ASB constitutes a study group. These study groups consist of experts from relevant fields, including:

• Practicing chartered accountants
• Industry professionals
• Academicians
• Regulatory representatives

The study group’s role is to conduct in-depth research and prepare a preliminary draft of the proposed Accounting Standard.

Step 3: Preparation of Preliminary Draft

The study group prepares a preliminary draft that generally includes:

• Objective and scope of the standard
• Definitions of key terms
• Recognition principles
• Measurement guidelines
• Presentation and disclosure requirements

At this stage, international standards such as IFRS are carefully studied and adapted to Indian conditions where appropriate.

Step 4: Review by the Accounting Standards Board

The preliminary draft prepared by the study group is reviewed by the ASB. The board:

• Discusses technical issues
• Evaluates practical implications
• Suggests modifications where necessary

This step ensures that the draft is aligned with Indian laws, business practices, and accounting principles.

Step 5: Circulation of Draft to Stakeholders

After ASB approval, the draft Accounting Standard is circulated to key stakeholders for comments. These typically include:

• Ministry of Corporate Affairs (MCA)
• National Financial Reporting Authority (NFRA)
• Securities and Exchange Board of India (SEBI)
• Reserve Bank of India (RBI)
• Industry associations
• Tax authorities

The objective is to gather diverse viewpoints and identify potential implementation challenges.

Step 6: Consideration of Stakeholder Feedback

The feedback received from various bodies is carefully examined. Meetings may be held with representatives of these organizations to clarify concerns and discuss suggested changes.

This step reflects the consultative nature of the standard-setting process and ensures that standards are not framed in isolation.

Step 7: Issuance of Exposure Draft

After incorporating necessary changes, the ASB finalizes an Exposure Draft (ED). The Exposure Draft is issued publicly and placed in the public domain.

The ED invites comments from:

• Professionals
• Corporates
• Academicians
• General public

This step promotes transparency and allows real-world users of financial statements to contribute to the process.

Step 8: Review of Public Comments

All comments received on the Exposure Draft are reviewed by the ASB. This stage is crucial because it highlights:

• Practical difficulties in implementation
• Industry-specific concerns
• Ambiguities in language or interpretation

Based on this feedback, further refinements are made to the draft standard.

Step 9: Finalization by ICAI Council

The revised draft is submitted to the Council of ICAI for final consideration. The Council may:

• Approve the standard
• Suggest modifications
• Return it to ASB for further review

Once approved, the standard is ready for recommendation to the government.

Step 10: Recommendation to NFRA and MCA

For corporate entities, the finalized standard is forwarded to NFRA, which examines it from a regulatory and public interest perspective.

After NFRA’s recommendation, the standard is submitted to the Ministry of Corporate Affairs (MCA).

Step 11: Notification by the Ministry of Corporate Affairs

The MCA notifies the Accounting Standard under the relevant provisions of the Companies Act. Once notified:

• The standard acquires legal authority
• Compliance becomes mandatory for applicable entities
• Effective dates and applicability are specified

This final step completes the Accounting Standards setting process.

Difference Between Standards for Corporate and Non-Corporate Entities

• Non-corporate entities: Standards are issued directly by ICAI
• Corporate entities: Standards are notified by MCA after ICAI and NFRA recommendations

This distinction ensures appropriate legal backing for different types of entities.

Harmonisation with International Standards

While setting Accounting Standards, Indian authorities also consider international developments. However, India follows a convergence approach rather than full adoption.

This means:

• International principles are adapted
• Indian economic and legal conditions are considered
• Necessary modifications are introduced

This balanced approach ensures global relevance without compromising domestic requirements.

Importance of a Structured Standard-Setting Process

The detailed standard-setting process ensures that Accounting Standards in India are:

• Technically sound
• Legally compliant
• Practically implementable
• Widely accepted

It also enhances trust in financial reporting and strengthens the overall accounting framework.

Challenges in the Standard-Setting Process

Despite its robustness, the process faces challenges such as:

• Lengthy timelines
• Diverse stakeholder interests
• Rapid changes in business models
• Need for continuous updates

However, these challenges are inherent in any system that prioritizes quality and inclusiveness.

Conclusion

The Accounting Standards setting process in India is a carefully designed, multi-stage procedure involving professional bodies, regulators, and the government. From identifying accounting issues to legal notification, every step ensures that standards are developed through consultation, expertise, and public interest.

This structured approach explains why Indian Accounting Standards enjoy credibility and acceptance both domestically and internationally. Understanding this process helps professionals appreciate not just what the standards are, but why they exist and how they evolve.

FAQs

1: What is the Accounting Standards setting process in India?

The Accounting Standards setting process in India is a structured procedure involving ICAI, the Accounting Standards Board, NFRA, and the Ministry of Corporate Affairs to develop and enforce accounting rules.

2: Who initiates the Accounting Standards in India?

The process is initiated by the Accounting Standards Board (ASB) under ICAI, which identifies areas requiring new or revised accounting standards.

3: What is the role of the Accounting Standards Board (ASB)?

ASB drafts Accounting Standards, forms study groups, reviews feedback, and prepares exposure drafts before finalizing standards.

4: Why are Exposure Drafts issued?

Exposure Drafts are issued to invite public and stakeholder feedback, ensuring transparency and practical applicability of Accounting Standards.

5: What role does NFRA play in the standard-setting process?

NFRA reviews Accounting Standards from a regulatory perspective and recommends them to the Ministry of Corporate Affairs.

6: When do Accounting Standards become legally binding?

Accounting Standards become legally binding only after they are notified by the Ministry of Corporate Affairs under the Companies Act.

7: Are international standards considered while framing Indian standards?

Yes, international standards are considered, but India follows a convergence approach to adapt them to domestic legal and economic conditions.