COM12032 By- Mr.R.

Kajananthan

Chapter-01 Introduction to Lanka Accounting Standards

Lanka Accounting Standards

Lanka Accounting Standards are statements which dictates, as to how specific transactions and other incidents should be disclosed in accounting statements. It is absolutely necessary to comply with accounting statements produce a true and fair representation of underlying transactions/incidents

By-Mr.R.Kajananthan

How Lanka Accounting Standards are formulated in Sri Lanka

Sri Lanka Accounting and Auditing Act. No 15 of 1995
Appointment of a committee for formulation of Accounting Standards Consisting of 12 members. They include
Members of the Institute of Chartered Accountants (including its President). Members nominated by the Sri Lanka Branch of the CIMA. Register of the Companies. Director General of Securities and Exchange Commission. Persons nominated by the Governor of the Central bank of Sri Lanka. Persons nominated from the commercial and Industrial Boards.

By-Mr.R.Kajananthan

What has to be necessarily done by the Institute of Chartered Accountants from time to time
Formulation of accounting standards from time to

time as required Publication of the Standards to intimate the general public

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Certain specified business entities should prepare accounts in compliance with accounting standards given below are such entities
Listed Companies Government corporation engaged in sale of goods and

services Specified business entities Banks Insurance Companies Unit trust management companies Share market brokering Companies Certain non- listed companies, who exceed certain specified limits (Sales, Equity, Gross Assets, Borrowing from banks and other Institutions, number of employees etc).
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Specified limits are

Total expenditure exceeding LKR 750 million
Share holder's equity at the end of previous year had

been LKR 150 million or more Gross Assets at the end of last year had been LKR 450 Million or more Liabilities towards banks and other finance companies at the end of last year had been LKR 150 million Having Staff of more than 1 ,000

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Setting up an accounting and auditing review committee to ensure compliance with accounting and auditing standards. Powers of this committee are,
Calling for copies of accounting statements from

specified undertakings Require information to be furnished in aspect of specified Call any officer, director or the auditor and question him Observation and inquiring into related matter

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If found guilty and convicted in a court of law, would be liable to one of the following
Fine not exceeding five hundred thousand.
Imprisonment for a period not exceeding 5 years

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The overall objective of accounting standards

The overall objective of accounting standards is to identify

proper accounting practices for the preparation of financial statements. Accounting standards create a common understanding between users and preparers on how particular items, for example the valuation of property, are treated. Financial statements should therefore comply with all applicable accounting standards. In Sri lanka, Institute of Chartered Accountants of Sri Lanka is the authorized entity for issuing Lanka Accounting Standards which is mandatory as per the Sri Lanka Accounting and Auditing Standards Act, No. 15 of 1995. Sri lanka Accounting and Auditing Standard Monitoring Board was established to regulate the strict adherence.
By-Mr.R.Kajananthan

Role of Accounting Standards.

The content of Financial Statements is often defined by

national laws prescribing what, how, and when disclosures should be made. Such requirements, however, are often high- level with little, if any, detailed guidance on how the requirements should be implemented in practice. The role of accounting standards is therefore to translate high-level principles into reasoned procedures that an entity can apply in practice. Accounting standards may be based either on what are commonly referred to as the "rulesbased approach" or the "Principles -based approach"
By-Mr.R.Kajananthan

Rules-based approach
A rules-based approach is exactly as its name suggests detailed rules on

a subject. The rules are developed to cover every possible eventuality. If an item or transaction is not covered by detailed rule, discretion is granted as to how to account for it in the financial statements. This leads in practice to long and often convoluted standards and can encourage a process best described as "loop holing" where preparers of financial statements attempt to find loopholes in the rules which enable them to ignore the accounting requirements. The standard setters as a rules are forced to issue more rules to plug the loopholes, as and so on. The US standard setting body, the Financial Accounting Standards board (FASB) has historically issued standards using rules based approach.

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Principles- based approach

A principles- based approach involves explaining the

general principles that an accounting standard is based on and then providing practical guidance and explanation on how an entity might meet those principles. While containing many detailed rules, IFRS are set on a principles -based approach.

By-Mr.R.Kajananthan

International and National Accounting Standards

An entity is normally required to comply with the accounting requirements for the country in which it is registered. However, many entities are large

multinational groups and they may list their shares on a number of stock exchanges around the world. Where accounting requirements are different in each country in which an entity is listed, the entity may be required to prepare its financial statements on a number of different bases. requirements for the country in which it is registered, but include a list of differences that arise as a result of applying a different set of national standards. There has been increased pressure in recent years for the adoption of a single set of goal accounting standards.

In practice an entity will generally prepare its financial statements using the

Indeed the use of IFRS is already widespread and the number of different set of

accounting standards being used is reducing. The US countries to operate own accounting standards although the F ASB and the International Accounting Statutory Board (lASB) have entered a "memorandum of understanding" stating that they will work together on projects in order to try to coverage their accounting standards in the future.
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Financial Reporting
Financial

Reporting is the provision of financial information about an entity to external users that is useful to them in making economic decisions and for assessing the stewardship of the entity's management. This information is made available annually or half- yearly and is presented in formats laid down by the relevant legislations. By contrast management accounting or reporting is internal reporting for the use of the management of a business itself. Internal Management information can be tailored to management's own needs and provided in whatever details and whatever frequency management decided
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