Accounting Standards formulated by the ICAI do not override the statute/ law that govern the preparation and presentation of general purpose financial statements of a particular Local Body. Accounting Standards (ASs) already issued by ICAI apply to those enterprises as stated in paragraph 3.3 of the ‘Preface to the Statements of Accounting Standards’. These Accounting Standards are not designed to apply to Local Bodies. However, since these Accounting Standards lay down wholesome principles of accounting, Local Bodies may follow these Standards during the transitional period, until the Accounting Standards for Local Bodies (ASLBs) are issued by the ICAI. Thus, once an ASLB is issued, the Local Bodies should follow the ASLB and not the corresponding Accounting Standard issued by the ICAI.
Ensuring compliance with the Accounting Standards for Local Bodies is the responsibility of the appropriate authority which approves the financial statements of the Local Body for the purpose of issuance thereof. Having issued the Accounting Standard for Local Bodies, various State Governments may require Local Bodies to follow the Accounting Standards for Local Bodies issued by the Institute of Chartered Accountants of India. Thus, an Accounting Standard for Local Bodies becomes mandatory for Local Bodies in a State from the date specified in this regard by the State Government concerned.
Financial statements cannot be described as complying with the Accounting Standards for Local Bodies unless they comply with all the requirements of each applicable Standard.
So far, the Committee on Accounting Standards for Local Bodies (CASLB) of ICAI has issued 13 ASLBs, including one cash based ASLB, that will facilitate transitioning from cash to accrual basis of accounting. The purpose of ASLBs is to ensure that the financial reporting by local bodies reflects how efficiently and effectively Local Bodies have discharged their responsibilities in using public funds.
Moving forward in this direction, the Council of the Institute of Chartered Accountants of India (ICAI) has recently approved and issued Accounting Standard for Local Bodies (ASLB) 2, ‘Cash Flow Statements’.
Application of ASLB 2 will be useful for the Local Bodies to identify their sources of cash inflows, cash outflows, and the cash balance as at the reporting date which will provide users of financial statements with information for both accountability and decision-making purposes. A Cash Flow Statement, when used in conjunction with the other Financial Statements, provides information that enables users to evaluate the historical changes in cash and cash equivalents, changes in net assets/equity of an entity, its financial structure (including its liquidity and solvency), and its ability to affect the amount and timing of cash flows.
ASLB 2 covers all aspects with respect to preparation and presentation of Statement of Cash Flow in more detail than the existing municipal accrual accounting framework available for use by Local Bodies. ASLB 2 also prescribes various additional disclosures with regard to the entities controlled by local bodies which would be very useful as local bodies are also entering into joint ventures/ joint arrangements for their various projects. The enhanced disclosures as prescribed in ASLB 2 would lead to improved and better transparency in the financial operations of local bodies in the larger public interest.
ASLBs are based on the internationally accepted Accounting Standards for Government, i.e., International Public Sector Accounting Standards (IPSASs) and also take into account the India’s unique governance and demographic features. The implementation of the ASLBs which are being issued in dynamic environment, will help in improving the financial reporting of local bodies which will help in augmenting more financial resources to local bodies enabling smooth implementation of smart cities mission of Government of India.