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Accounting Standard 1Disclosure of Accounting Policies

What is the Scope of AS 1?This statement deals with the disclosure of significant accounting policies followed inpreparing and presenting financial statements.

What is the Objective of AS 1?

1. The purpose of this Statement isa. to promote better understanding of financial statements by establishing through

an accounting standard the disclosure of significant accounting policies andb. the manner in which accounting policies are disclosed in the financial statements.

2. Such disclosure would also facilitate a more meaningful comparison between financialstatements of different enterprises.

3. Disclosure of significant accounting policies followed is necessary if the view presentedis to be properly appreciated.

What are “Fundamental Accounting Assumptions”?

Certain fundamental accounting assumptions underlie the preparation and presentation offinancial statements. They are usually not specifically stated because their acceptance anduse are assumed. Disclosure is necessary if they are not followed.

The following have been generally accepted as fundamental accounting assumptions:

Going Concern

Consistency

Accrual

Going ConcernThe enterprise is normally viewed as a going concern, that is, as continuing in operation forthe foreseeable future. It is assumed that the enterprise has neither the intention nor thenecessity of liquidation or of curtailing materially the scale of the operations.

ConsistencyIt is assumed that accounting policies are consistent from one period to another.

AccrualRevenues and costs are accrued, that is, recognised as they are earned or incurred (and notas money is received or paid) and recorded in the financial statements of the periods towhich they relate.

What do you understand by Accounting Policies?

The accounting policies refer to the specific accounting principles and the methods ofapplying those principles adopted by the enterprise in the preparation and presentation offinancial statements.

The following are examples of the areas in which different accounting policies may beadopted by different enterprises.

Methods of depreciation, depletion and amortisation

Treatment of expenditure during construction

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Conversion or translation of foreign currency items

Valuation of inventories

Treatment of goodwill

Valuation of investments

Treatment of retirement benefits

Recognition of profit on long-term contracts

Valuation of fixed assets

Treatment of contingent liabilities.

What factors should be considered in the Selection of Accounting Policies?

The primary consideration in the selection of accounting policies by an enterprise is that thefinancial statements prepared and presented on the basis of such accounting policies shouldrepresent a true and fair view of the state of affairs of the enterprise as at the balance sheetdate and of the profit or loss for the period ended on that date.

For this purpose, the major considerations governing the selection and application ofaccounting policies are:

Prudence

Substance over Form

Materiality

Prudence

In view of the uncertainty attached to future events, profits are not anticipated butrecognised only when realised though not necessarily in cash. Provision is made for allknown liabilities and losses even though the amount cannot be determined with certaintyand represents only a best estimate in the light of available information.

Substance over Form

The accounting treatment and presentation in financial statements of transactions andevents should be governed by their substance and not merely by the legal form.

Materiality

Financial statements should disclose all “material” items, i.e. items the knowledge of whichmight influence the decisions of the user of the financial statements.

What are the objectives of Disclosure of Accounting Policies?

To ensure proper understanding of financial statements, it is necessary that all significantaccounting policies adopted in the preparation and presentation of financial statementsshould be disclosed. Such disclosure should form part of the financial statements. It wouldbe helpful to the reader of financial statements if they are all disclosed as such in one placeinstead of being scattered over several statements, schedules and notes.

Any change in an accounting policy which has a material effect should be disclosed. Theamount by which any item in the financial statements is affected by such change shouldalso be disclosed to the extent ascertainable. Where such amount is not ascertainable,wholly or in part, the fact should be indicated. If a change is made in the accounting policieswhich has no material effect on the financial statements for the current period but which isreasonably expected to have a material effect in later periods, the fact of such changeshould be appropriately disclosed in the period in which the change is adopted.

Disclosure of accounting policies or of changes therein cannot remedy a wrong orinappropriate treatment of the item in the accounts.

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What are the requirements of AS 1?

1. All significant accounting policies adopted in the preparation and presentation offinancial statements should be disclosed.

2. The disclosure of the significant accounting policies as such should form part of thefinancial statements and the significant accounting policies should normally bedisclosed in one place.

3. Any change in the accounting policies which has a material effect in the current periodor which is reasonably expected to have a material effect in later periods should bedisclosed. In the case of a change in accounting policies which has a material effect inthe current period, the amount by which any item in the financial statements isaffected by such change should also be disclosed to the extent ascertainable. Wheresuch amount is not ascertainable, wholly or in part, the fact should be indicated.

4. If the fundamental accounting assumptions, viz. Going Concern, Consistency andAccrual are followed in financial statements, specific disclosure is not required. If afundamental accounting assumption is not followed, the fact should be disclosed.

Home – Work Section

Q. 1. Describe briefly the term “Accounting Policy”. (CA Final, May 1991)

Q. 2. Enumerate various areas of accounting in which different policies could be adopted.(CA Final, May 1992)

Q.3. What are the major considerations, which govern the selection and application of accountingpolicies? (CA Final, Nov. 1992)

Q. 4. State the duties of an auditor on AS-1 becoming mandatory for the accounting yearcommencing on or after 1-4-91. (CA Final, May 1992)

Q. 5. Write short notes on Fundamental accounting assumptions.

Q. 6. Write short notes on Materiality.

Q.7. A major fire has damaged the assets in a factory of a limited on 2nd April- two days after theyear end closure of account. The loss is estimated at Rs. 20 crores out of which Rs. 12crores will be recoverable from the insurers. Explain briefly how the loss should be treatedin the final accounts for the previous year.