Purpose of Accounting Standards

Standards are meant to ensure uniformity and quality in performing a function. Accounting standards provide a basic minimum standard in accounting so that various quality parameters relating to accounting and disclosure are fulfilled.

“Accounting standards specify how transactions and other events are to be recognized, measured, presented and disclosed in financial statements. Their objective is to provide financial information to investors, lenders, creditors, contributors, and others that is useful in making decisions about providing resources to the entity”²

ICAI has developed the ASLBs based on International Public Sector Accounting Standards (IPSASs) normalising them to Indian conditions and requirements. ASLBs provide a consistent framework for financial reporting that can be used to improve transparency, accountability, and comparability of financial information of local bodies.

Accounting Standards in Local Governments

According to IFAC, many governments have started moving to accrual accounting and are applying the IPSAS.⁴ The results paint a positive picture of accrual adoption efforts globally, with 30% of jurisdictions reporting on accrual in 2020 – up 6% since 2018.⁵ With every such migration to accrual accounting, the use of accounting standards becomes essential. To catalyse the transition process, IPSAS Board has also issued a cash basis accounting standard, on the basis of which ICAI has also issued a similar Standard.

Depending on the setup of the governmental system and hierarchy, countries have two or three-tier systems of governance. In India, it is a three-tier system with Central, State, and Local Governments. In all three tiers accounting takes place and there is a need for accounting standards. In India, like most other countries, the Central and the State governments follow the cash basis of accounting, however, in the third tier ULBs have migrated to accrual accounting.

The Preface to the Accounting Standards for Local Bodies defines ‘Local Body’ as local self-government at the third tier of governance in an administrative and geographical vicinity, e.g., a municipal corporation, a municipality or a panchayat. The preface also gives an inclusive definition of the term to include bodies to whom the local bodies delegate their functions, whether the local bodies control them or not e.g. development authorities, boards, and parastatals.

Significance of IPSAS

The International Public Sector Accounting Standards Board (IPSASB) is an independent standard-setting board that develops and promotes high-quality financial reporting standards for governments. IPSASB develops International Public Sector Accounting Standards (IPSASs) which are designed to improve the quality and comparability of financial reporting by Governments, including local governments. The IPSASs provide a comprehensive set of financial reporting requirements that cover areas such as presentation of financial statements, recognition and measurement of assets and liabilities, and inclusion of budget information in financial reporting. By adopting IPSASs, local governments can improve their financial management, and enhance their ability to attract investment.

Need for ASLBs

The ICAI believes that the adoption of the ASLBs, together with disclosure of compliance with them will lead to a significant improvement in the quality of general-purpose financial reporting by Local Bodies, thereby increasing transparency and accountability. Moreover, there are specific benefits that would accrue to local bodies by the adoption of the ASLBs:

• Accountability: ASLBs provide a framework for transparent and accurate financial reporting, which is essential for local governments to demonstrate accountability and credibility to their stakeholders, including taxpayers, citizens, and bondholders.
• Consistency: Without ASLBs, each local government may use different accounting methods, making it difficult to compare the financial statements of different local governments. Accounting standards provide a consistent set of rules and procedures that enable comparability.
• Efficiency: ASLBs can simplify the financial reporting process, reducing the time and resources needed to produce financial statements. This can lead to more efficient use of resources and improved financial management.
• Compliance: ASLBs ensure that local governments comply with relevant laws and regulations, including generally accepted accounting principles and other reporting requirements. Compliance with these standards can help local governments avoid regulatory action and financial penalties.
• Budgeting: ASLBs help local governments to prepare and manage their budgets effectively. By providing clear rules and guidelines for financial reporting, accounting standards enable local governments to accurately project their revenue and expenses and make informed decisions about resource allocation.
• Investment decisions: ASLBs provide investors (e.g. municipal bond subscribers, lenders) with reliable and transparent financial information about local governments, which can help them make informed decisions. This can lead to more efficient capital markets and lower borrowing costs for local governments.
• Oversight: ASLBs provide a framework for oversight and accountability, enabling regulators and auditors to monitor local governments and ensure compliance with relevant laws and regulations.
• Clarity during the transition to accrual: During the process of transition from cash basis to accrual accounting, following the ASLBs will provide clarity to the local governments to formulate accounting policies, a basis for formulating accounting entries, and disclosure methods.

Applicability of ASLBs

The Accounting Standards for Local Bodies are intended to apply only to items which are material. Any limitations with regard to the applicability of a specific Accounting Standard will be made clear by the ICAI from time to time. The Committee on Public and Government Financial Management (CPGFM)⁶ of ICAI addresses various issues that may arise from time to time with regard to ASLBs and their implementation.

The CPGFM has made it clear that in the formulation of ASLBs, the emphasis would be on laying down accounting principles and not detailed rules for application and implementation thereof. This provides flexibility for practitioners to adapt the ASLBs to the requirements of the ULBs without compromising on the overarching principles laid out.

The ASLBs are not yet mandatory for ULBs, hence there is no obligation on their part to implement them. ASLBs will become mandatory from the date specified in this regard by the State Government concerned. The ULBs in India are required to follow the accounting manuals prescribed by the State Government based on the National Municipal Accounting Manual (NMAM) which came out in 2005. But increasingly chartered accountants are being engaged for certification or audit of the ULB financial statements. Hence, when an ICAI member certifies the financial statements of ULBs, he would be required to report on compliance with these standards, particularly ASLB 2 and ASLB 5.

Adoption and Implementation of ASLBs

The implementation of the ASLBs is ideally taken up in three phases:

• Phase 1: When creating the opening balance sheet and implementing the accrual accounting until the accounting system stabilises along with adopting a few ASLBs. This could take about two to three years considering various operational factors at the ULBs.
• Phase 2: Follows after Phase 1, once the ULB staff get comfortable with the basic ASLBs.
• Phase 3: Advanced ASLBs are implemented once the ULB gains organizational and systems maturity.

The ASLB adoption matrix given in Table A has been suggested for a ULB that has already adopted accrual accounting with software like Tally. There could be other ULBs which are still in manual operations without the use of technology or those larger ULBs which have migrated to ERP or are in the process of doing the same. So accordingly the adoption matrix needs to be reworked.

Table A – ASLB Adoption Matrix

Implementation of ASLBs – Key Issues & Strategies

Several issues can arise in the implementation of accounting standards in local governments. Some of the key issues and the strategies to handle them include:

1. Lack of Capacity and Resources: Local governments may not have the necessary resources, including trained personnel, to implement ASLBs effectively. This can result in inaccurate or incomplete financial reporting and may impact the ability of local governments to make informed financial decisions.
   Strategy: Local governments can invest in building the capacity of their personnel to implement accounting standards effectively. This can involve a combination of providing training, engaging professionals, recruiting experienced personnel, and leveraging technology to simplify financial reporting processes.
2. The Complexity of ASLBs: ASLBs can be complex, and local governments may find it difficult to understand and implement them effectively. This can result in errors or misrepresentations in financial reporting, which may impact the accuracy and reliability of financial information.
   Strategy: ASLBs could be simplified to make them more understandable and easier to implement. Local governments can work with ICAI to advocate for the simplification of accounting standards. Providing implementation checklists and using ICAI members in the implementation can demystify the seemingly complex ASLBs.
3. Limited Stakeholder Engagement: Local governments may not engage effectively with stakeholders, such as citizens, civil society organizations, auditors, governments, and other interested parties, in the implementation of ASLBs. This can result in a lack of transparency and accountability in financial reporting and may impact public trust in local government.
   Strategy: Local governments need to engage extensively with stakeholders (accounting staff, auditors, ICAI, and so on) to promote transparency and accountability in the implementation process.
4. Limited Enforcement Mechanisms: Local governments may not have effective enforcement mechanisms in place to ensure compliance with ASLBs. This can result in non-compliance or incomplete compliance, which may impact the accuracy and reliability of financial reporting.
   Strategy: While it is expected the audit would identify any ASLB-related non-compliance, it may be advisable to take this process as a project at the state level so that expected benefits are obtained within a planned time. Enforcement mechanisms can involve establishing deterrents for non-compliance, providing incentives for compliance, and conducting regular reviews to detect and deter improper implementation of ASLBs.

Conclusion

In the last two decades, ICAI has undertaken enormous efforts to develop ASLBs. This is a positive move towards the 74th Constitutional Amendment Act’s goals of establishing ULBs as autonomous self-reliant local governance institutions. Although the ICAI has issued over 31 ASLBs, they are yet to be mandated for ULBs by the State government. This paper is an attempt to sensitize the reader to some of the implementation issues in this regard. The approach to adopting the ASLBs in phases needs to be understood by the implementers and specific strategies to handle the key issues highlighted need to be formulated.

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References

• ASB, C. (2023, April 5). Retrieved from https://www.frascanada.ca/en/acsb/about/what-are-accounting-standards
• IFAC. (n.d.). Retrieved from https://www.ifac.org/knowledge-gateway/supporting-international-standards/discussion/international-public-sector-financial-accountability-index-2020
• ICAI. (n.d.). Retrieved from https://resource.cdn.icai.org/8574announ862.pdf

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Author may be reached at: eboard@icai.in