NFRA writes to ICAI on Regulatory Impact Assessment for revision of existing Accounting Standards

The National Financial Reporting Authority (NFRA) wrote a letter to the Secretary of the  Institute of Chartered Accountants of India (ICAI) on Regulatory Impact Assessment for the revision of existing Accounting Standards.

The ICAI has submitted to the NFRA an Approach Paper for revision of existing Accounting Standards of Companies that are not required to follow Indian Accounting Standards (Ind ASs). Along with the Approach Paper, the proposed texts of 18 revised Accounting Standards (ASs) out of a total of 32 revised ASs expected to be prescribed upon completion of this AS revision project was submitted by ICAI.

“This Revised ASs will be applicable for Companies to whom the Ind ASs are not mandatory. As a result, this Revised ASs will be mandatory to a large number of Micro, Small, and Medium-sized Companies (MSMEs) and will replace the existing ASs notified under Companies (Accounting Standards) Rules 2006 notified under the erstwhile Companies Act, 1956 and which were recently re-notified as Companies (Accounting Standards) Rules 2021 under Companies Act, 2013. The Revised ASs are planned to be implemented in two phases starting from the accounting year 2023-24. As mentioned in the Revised Approach Paper 2020, the population of companies to which this Revised ASs will be applicable is likely to be very large and more importantly, it will be a diverse set of companies ranging from tiny Companies with a net worth of only a few lakhs to medium­ size Companies with Net Worth upto Rs.250 Crores,” the NFRA in the letter said.

NFRA noted that most of the companies to which this proposed revised ASs will apply are Private Limited Companies. Many of the companies are of very small net worth or turnover or indebtedness or a combination of these. They would be mostly owned by small families, sometimes along with a small circle of friends and relatives. Therefore, public interest in the General Purpose Financial Statements (GPFSs) of these Companies would most likely be minimal. There are a number of Revised ASs that are very large and complex and may not be relevant and useful to the limited users of GPFSs of these Companies. The expected standard audit cost to perform a reasonably good quality audit, performed in compliance with the letter and spirit of the Standards on Auditing (SAs) is significantly more than the presently reported audit fee ranges i.e. a very large percentage of AS Companies have reported Payment to Auditors of less than Rs.25 thousand.

NFRA has recommended to the ICAI that a Regulatory Impact Assessment be conducted of this revision proposal, duly including all the standard features of such a process in particular, to take actions namely the Approach Paper should be developed in a transparent manner after extensive nation-wide consultation with the primary stakeholders i.e., the Preparers – MSMCs (Micro, Small and Medium-size Companies) and Auditors – MSMPs (Micro, Small and Medium-size Practitioners); ICAI is requested to send NFRA the analysis of the public comments on the Approach Paper if the ICAI had performed any such public consultation in the past; Comprehensive study and research should be undertaken on the costs to the Preparers of compliance with these Revised ASs and their technical resource capacity, which should be evaluated against the likely benefits to all the stakeholders of AS Companies; ICAI should reconsider the Structure, Form and Contents of Revised ASs for AS Companies and align the same to the nature, size and complexity of the ASs, to their commercial needs, business size, capacity to comply with the prescribed standards, and relevance to their primary users.

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