The Supreme Court has upheld the revised accounting standards AS 22 issued by the Institute of Chartered Accountants of India which has been made mandatory for all the companies listed in the stock exchanges since the financial year 2001-02. Dismissing the appeals of a large number of companies that opposed the new policy, the bench headed by Justice SH Kapadia said AS 22 sought to arrive at the true accounting income.

“In the age of globalisation, the attempt is to reconcile the accounts of the Indian companies with their joint venture partners abroad,” the 220-page judgment said, and added: “The aim is to harmonise Indian accounting standards with international standards.”

The main challenge of the companies was to the new concept of deferred tax accounting. They argued that it was inconsistent with the provisions of the Companies Act, the Income Tax Act and the Constitution.

Rejecting this contention, the court said that deferred tax was nothing but accrual of tax due to the divergence between accounting profit and tax profit. This difference arose on two accounts — different treatment of items of revenue or expense according to the profit and loss account and according to the tax law.

It also arose on account of the difference between the amount of revenue or expense according to profit and loss account and the corresponding amount considered for the tax purpose, the judgment explained.

The accounting standard, framed by the institute, established rules relating to recognition, measurement and disclosures thereby ensuring that all the enterprises that followed them were comparable and their financial statements were true, fair and transparent.

They are based on matching principle and fair value principle, among others. The new concept aimed at a paradigm shift from matching to fair value principle.

Defending the new concept, the Supreme Court stated that the convergence of accounting standards was aimed at removing international barriers in the flow of financial information and capital.

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