AS-1

Disclosure of CMA S. Baskaran

Accounting
Policies
Significance of AS-1
 Accounting policies affect the financial statements: The accounting policy varies from
enterprise to enterprise. The choice of an accounting policy affects the measurement of
financial performance as well as financial position. Hence, there is need for the disclosure
of accounting policy.
 Legal requirements: Sometimes laws such as Companies Act, 2013, GST and Income Tax Act
requires the disclosure of accounting policies followed in the preparation of financial
statements.
 Recommendation by ICAI: The Institute of Chartered Accountants of India at times
recommends the disclosure of certain accounting policies, for instance, translation of
foreign currency items.
 Variation in the nature and degree of disclosure: There is significant variation in the nature
and degree of disclosure of accounting policies between corporate and non-corporate sector
and also among units in the same sector.
 Manner of disclosure: While some enterprises disclose the accounting policies a separate
statement of accounting policies, while others give it as a supplementary information as
Notes on accounts.
 The purpose of this standard is to promote better understanding of financial statements
through disclosure of accounting policies so that the financial statements are comparable.
VVV College for Women 03-07-2019 3
Fundamental Accounting Assumptions

Going Concern:
Financial statements are prepared on the assumption that the business will continue
to operate over foreseeable future period. It assumes that the enterprise has neither
the intension nor the necessity of liquidation or curtailing the scale of operation.
Only under this assumption, depreciation is charged on fixed assets. Otherwise, all
expenses incurred will be recognized in the current period itself.
Consistency:
Once a business chooses to use a specific accounting policy, it should be applied for
a relatively longer period of time. This is necessary for making comparison of
financial statements prepared over a period of time
Accrual:
Under this concept, revenues are recognized when earned, and expenses are
recognized when incurred and not on the basis of cash received or paid. Auditors will
only certify the financial statements of a business that have been prepared under
the accruals concept.
Nature of accounting policies

Accounting policies refer to specific accounting principles and methods of applying

these principles in the preparation and presentation of financial statements by an
enterprise.
 Accounting policies are based on accounting concepts, principles and
conventions.
 There is no single list of accounting policies which are always applicable to all
enterprises because of the diverse and complex environmental situations. For
example, different accounting policies are followed in valuation of inventory,
valuation of investments, method of depreciation, etc.
 Different accounting policies are needed because enterprises operate in a
diverse and complex economic activity.
 The choice of an appropriate accounting policy depends on the judgement of the
management.
 Guidance Notes and Accounting Standards have been issued by ICAI to reduce the
number of acceptable accounting policies.
Areas in which Significant Accounting
Policies are encountered
Examples of areas in which different accounting policies are encountered:
(a) Methods of depreciation, depletion and amortisation
(b) Treatment of expenditure during construction
(c) Conversion or translation of foreign currency items
(d) Valuation of inventories
(e) Treatment of goodwill
(f) Valuation of investments
(g) Treatment of retirement benefits
(h) Recognition of profit on long-term contracts
(i) Valuation of fixed assets
(j) Treatment of contingent liabilities
Considerations in the selection of
Accounting Policies
The choice of an accounting policy affects the measurement of financial
performance as well as financial position. The following factors should be considered
while choosing an accounting policy:
 True and Fair View: The primary consideration in the selection of an accounting
policy is that the financial statements prepared should reflect the true and fair
view of the state of affairs at the balance sheet date and of profit.
 Prudence: While future losses are considered, possible gains are not taken into
account. Provision is made for all known liabilities and profits are recognized
only when realized though not necessarily in cash
 Substance over form: Importance is given to the substance and not the form of
presentation
 Materiality: Immaterial aspects are ignored in selection of an accounting policy.
Disclosure
18. All significant accounting policies adopted in the preparation and
presentation of financial statements should be disclosed.
19. Disclosures should be part of the financial statements
20. Disclosures should be made preferably at one place instead of scattering
over several statements, schedules and notes.
21. Disclosure of accounting policies is required in areas specified in para 14.
The list is not exhaustive.
22. Any change in accounting policy which has material effect should be
disclosed. The amount involved also should be disclosed. If the amount is not
ascertainable, the fact should be indicated. Any change in accounting policy
which has material effect on later periods only, should be disclosed in the
period in which the change in adopted.
23. Disclosure of accounting policies cannot remedy a wrong or inappropriate
treatment.
Main Principles
24. All significant accounting policies adopted in the preparation and
presentation of financial statements should be disclosed.
25. The disclosure of the significant accounting policies as such should form
part of the financial statements and the significant accounting policies should
normally be disclosed in one place.
26. Any change in the accounting policies which has a material effect in the
current period or which is reasonably expected to have a material effect in
later periods should be disclosed. In the case of a change in accounting
policies which has a material effect in the current period, the amount by
which any item in the financial statements is affected by such change should
also be disclosed to the extent ascertainable. Where such amount is not
ascertainable, wholly or in part, the fact should be indicated.
27. If the fundamental accounting assumptions, viz. Going Concern, Consistency
and Accrual are followed in financial statements, specific disclosure is not
required. If a fundamental accounting assumption is not followed, the fact
should be disclosed.
Review Questions
1.What is an accounting policy?
Specific accounting principles and methods of applying these principles in the preparation and
presentation of financial statements by an enterprise
2. State the fundamental accounting assumptions.
Going concern, Consistency and Accrual
4. Why different accounting polices are justified?
Different accounting policies are justified because of the diverse and complex environmental
situations
5. How is the choice of an accounting policy made?
The choice of an accounting policy depends on the judgement of management
6. How do we reduce the number of accounting policies?
Accounting standards and guidance notes help to reduce the number of accounting policies
7. Can disclosure of an accounting policy remedy a wrong treatment?
No. Disclosure cannot remedy a wrong treatment.
8. What are the important considerations in the selection of accounting policies?
1.T rue and fair view 2. Substance over form 3. Prudence 4. Materiality
Review Questions
9.What are the disclosure requirements when there is a significant change in an
accounting policy?
Any change in accounting policy which has material effect should be disclosed.
The amount involved also should be disclosed.
If the amount is not ascertainable, the fact should be indicated.
Any change in accounting policy which has material effect on later periods only,
should be disclosed in the period in which the change in adopted.
10. State the nature of accounting policies.
1. No single list of accounting policy
2. Choice depends on the judgement
3. Different accounting policies are needed because of diverse and complex
economic environment.
4. Accounting standards reduce the no. of accounting policies.