THE Institute of Chartered Accountants of India (ICAI) has issued an auditing standard that will help enterprises assess the fair value estimates of financial transactions with greater clarity. Accounting estimate is an approximation of a monetary amount in the absence of precise means of measurement. The standard will avert the risk of material misstatement of accounting data.
The standard, which becomes applicable for financial statement audits made on or after April 1, 2009 will act as a guideline for auditors. The standard gives specific instructions on how to value complex financial instruments which are not traded in open markets.
This will mean that financial statement audits in the next fiscal should see incorporation of the principles of fair value. Fair value is a marketbased measure of assets and liabilities of an entity and is based on mark-to-market valuations.
ICAI, which cleared the auditing standard in its recent council meeting, has also approved three other standards that relate to audit sampling and identifying risks of material mis-statements by companies. These will lend timely guidance to the auditors to reach at fair value estimates of complex transactions, a move considered essential at times of market uncertainty. The guideline will come as an aid to the accounting standard on complex financial instruments, which the ICAI had issued earlier this year and is now pending with the government’s expert group on accounting. The auditing standards will act as internal guidelines for companies in their efforts to a more transparent and globally compliant accounting format.
Fair value accounting forms a pre-requisite towards convergence with International Financial Reporting Standards (IFRS), to which India has already announced its commitment.
India which has to converge its accounting format in line with International Financial Reporting Standards by April 2011, have taken a number of steps towards the convergence, including regulatory changes and transitional preparedness. ICAI president Ved Jain had earlier emphasised on the institute’s aim to bring the Indian auditing standards at par with internationally followed norms.
Auditing standards, which are likely to get a statutory status under the proposed Companies Act, are now pending before a Parliamentary Standing Committee. While accounting standards are mandatory for companies to comply with, auditing standards till now are recommendatory and act as best practices code for them.
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