AS 1 - Disclosure of Accounting Policies

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.

Purpose

• to facilitate better understanding of financial statements
• to facilitate meaningful comparison between financial statements of different enterprises.

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 Policies

The primary consideration is that, the financial statements prepared & presented on the basis of such accounting policies should represent a true and fair view of the state of affairs of the enterprise as at the Balance Sheet date and of the profit or loss for the period ended on that date.

Besides, other considerations are:

1. Prudence: Anticipate no gains, provide for all losses.
2. Substance over form: The accounting treatment & presentation of transactions and events should be governed by their substance and not merely by the legal form.
3. Materiality: Financial statements should disclose all "material" items.

Fundamental Accounting Assumptions

The following are the three fundamental accounting assumptions which govern the preparation and presentation of financial statement.

1. 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.
2. Consistency: It is assumed that accounting policies are consistent from one period to another.
3. 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

1. All significant accounting policies adopted in the preparation of financial statements should be disclosed.
2. 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.
3. 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.
4. 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.