Deals with: The requirement of disclosing significant
accounting policies adopted in the preparation of financial statements and the
manner in which they are to be disclosed in the financial statements.
to facilitate better understanding of financial statements
to facilitate meaningful comparison between financial statements of
Meaning of Accounting Policies: Accounting policies refer
to the specific accounting principles and the methods of applying those
principles adopted by the enterprise in the preparation and presentation of
their financial statements.
Areas in which Differing Accounting Policies are
Encountered - Examples
Treatment of Goodwill
Valuation of Inventories
Valuation of Investments
Valuation of Fixed Assets
Methods of Depreciation
Treatment of retirement benefits
Treatment of Contingent Liabilities.
Major considerations in the Selection of Accounting
Prudence: Anticipate no gains, provide for all
Substance over form: The accounting treatment &
presentation of transactions and events should be governed by their substance
and not merely by the legal form.
Materiality: Financial statements should disclose all
Fundamental Accounting Assumptions
The following are the three fundamental accounting
assumptions which govern the preparation and presentation of financial
Going Concern: It is assumed that the enterprise has
neither the intention nor the necessity of liquidation or of curtailing
materially the scale of the operations.
Consistency: It is assumed that accounting policies are
consistent from one period to another.
Accrual: It is assumed that Revenues and costs are
accrued and recognised in the financial statements of the periods to which they
relate and not as money is received and paid.
Generally, these are not specifically stated in the financial statements.
Their acceptance and usage is assumed.
Disclosure of Accounting Policies
All significant accounting policies adopted in the preparation of financial
statements should be disclosed.
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.
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 a
later period 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.
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.