Chap2 As 1 Disclosure of Accounting Policies

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Accounting Standard 1
Disclosure of Accounting Policies
What is the Scope of AS 1?
This statement deals with the disclosure of significant accounting policies followed in
preparing and presenting financial statements.
What is the Objective of AS 1?
1. The purpose of this Statement is
a. to promote better understanding of financial statements by establishing through
an accounting standard the disclosure of significant accounting policies and
b. the manner in which accounting policies are disclosed in the financial statements.
2. Such disclosure would also facilitate a more meaningful comparison between financial
statements of different enterprises.
3. Disclosure of significant accounting policies followed is necessary if the view presented
is to be properly appreciated.
What are Fundamental Accounting Assumptions?
Certain fundamental accounting assumptions underlie the preparation and presentation of
financial statements. They are usually not specifically stated because their acceptance and
use 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 Concern
The enterprise is normally viewed as a going concern, that is, as continuing in operation for
the foreseeable future. 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
Revenues and costs are accrued, that is, recognised as they are earned or incurred (and not
as money is received or paid) and recorded in the financial statements of the periods to
which they relate.
What do you understand by Accounting Policies?
The 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
financial statements.
The following are examples of the areas in which different accounting policies may be
adopted by different enterprises.
Methods of depreciation, depletion and amortisation
Treatment of expenditure during construction
IDEAL FLEXICLASS / FINAL C.A. / ACCOUNTING STANDARDS
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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 the
financial statements prepared and 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.
For this purpose, the major considerations governing the selection and application of
accounting policies are:
Prudence
Substance over Form
Materiality
Prudence
In view of the uncertainty attached to future events, profits are not anticipated but
recognised only when realised though not necessarily in cash. Provision is made for all
known liabilities and losses even though the amount cannot be determined with certainty
and represents only a best estimate in the light of available information.
Substance over Form
The accounting treatment and presentation in financial statements of transactions and
events 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 which
might 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 significant
accounting policies adopted in the preparation and presentation of financial statements
should be disclosed. Such disclosure should form part of the financial statements. It would
be helpful to the reader of financial statements if they are all disclosed as such in one place
instead of being scattered over several statements, schedules and notes.
Any change in an accounting policy which has a material effect should be disclosed. 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 a change is made in the accounting policies
which has no material effect on the financial statements for the current period but which is
reasonably expected to have a material effect in later periods, the fact of such change
should be appropriately disclosed in the period in which the change is adopted.
Disclosure of accounting policies or of changes therein cannot remedy a wrong or
inappropriate treatment of the item in the accounts.
IDEAL FLEXICLASS / FINAL C.A. / ACCOUNTING STANDARDS
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What are the requirements of AS 1?
1. All significant accounting policies adopted in the preparation and presentation 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 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.
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.
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 accounting
policies? (CA Final, Nov. 1992)
Q. 4. State the duties of an auditor on AS-1 becoming mandatory for the accounting year
commencing 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 2
nd
April- two days after the
year end closure of account. The loss is estimated at Rs. 20 crores out of which Rs. 12
crores will be recoverable from the insurers. Explain briefly how the loss should be treated
in the final accounts for the previous year.

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