Accounting Standard (AS)

Disclosure of Accounting Policies

Introduction
AS 1 refers to the disclosure of accounting policies. It states that an enterprise needs
to disclose significant accounting policies followed by it to prepare and present its financial
statements.

This is because a business entity’s state of affairs gets significantly impacted by the
accounting policies used in preparing its financial statements.

Typically, every enterprise follows accounting policies appropriate to its own

business as well as industry. Thus, an enterprise mandatorily needs to disclose its significant
accounting policies in order to present a true and fair view of its state of affairs.

Explanation
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 :
—
a. 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.
b. Consistency
It is assumed that accounting policies are consistent from one period to another.
c. 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. (The considerations affecting the process of matching costs with revenues
under the accrual assumption are not dealt with in this Standard)

Nature of Accounting Policies

 Meaning of Accounting Policies

The term ‘accounting policies’ in AS 1 refer to the following while preparing financial
statements an enterprise:
  specific accounting principles
 methods to apply those accounting principles

 No Standardized List of Accounting Policies

There is no standardized list of accounting principles applicable to varied circumstances
experienced by different enterprises.

Thus, varied accounting principles and methods to apply to those principles are followed
by different enterprises. These enterprises operate in a diverse and complex environment of
economic activity.

So, the management of each enterprise has to make considerable amount of judgement at
its own level. This is done in order to choose an appropriate set of accounting principles and
methods to apply those principles in specific circumstances faced by each of them.

Number of Alternative Accounting Policies Reduced

ICAI as well as other regulatory bodies have made efforts to reduce the number of
alternative accounting policies to be followed in preparing financial statements. These efforts
have been made, particularly in the case of corporate enterprises.

However, the possibility to completely eliminate the availability of the alternative

accounting principles and the methods to apply those principles is not likely. This is because
each enterprise has to encounter different circumstances under different conditions.

Areas in which Different Accounting Policies are Encountered

Following are the areas where different accounting policies may be adopted by different
enterprises:

 Methods of depreciation, depletion and amortization

 Treatment of expenditure during construction
 Conversion or translation of foreign currency items
 Valuation of inventories
 Treatment of goodwill
 Valuation of investment
 Treatment of retirement benefits
 Recognition of profit on long-term contracts
 Valuation of fixed assets
 Treatment of contingent liabilities

However, the above list is not an exhaustive list.

Considerations in the Selection of Accounting Policies

The basic consideration while selecting accounting policies to prepare financial
statements is that such policies should represent a true and fair view the company’s affairs.
This also includes presenting true and fair view of the profit or loss earned by a business
enterprise at the closing date.
 Besides this primary consideration, there are a few major considerations to be kept in
mind while selecting accounting policies. These include:

1. Prudence

An enterprise cannot forecast its profits keeping in mind the uncertainty related to the
future events. Instead, it can only recognize the profits when they are realized.

Further, such recognized profits are not necessarily realized in cash. In addition to
this, an enterprise also creates a provision for all known liabilities and losses.

This is despite the fact that the amount of such liabilities and losses cannot be
determined with certainty. Thus, it means that such a provision represents only a best
estimate of such liabilities and losses according to the information available.

2. Substance over Form

As per this consideration, the accounting treatment and presentation of transactions

and events in the financial statements must be governed by their substance.

This means merely the legal form of accounting treatment and presentation of such
events in the financial statements should not be considered.

3. Materiality

The financial statements should disclose all the material items. The material items are
the ones that influence the decisions of the financial statement users once they become aware
of such items.

Disclosure of Accounting Policies

 It is necessary to disclose all the significant accounting policies adopted while

presenting & preparing financial statements. This is done to ensure proper
understanding of financial statements.
 The disclosure of significant accounting policies should form part of the financial
statements.
 Disclosure of accounting policies must be made in one place as it helps the financial
statement users in reading such statements. Such a disclosure should not be made in a
way that it is scattered over several statements, schedules and notes.
 An enterprise should disclose any change in an accounting policy that has a material
effect. Further, the enterprise should also disclose the amount by which any item in
the financial statements is affected by such a material change. Such an amount needs
to be disclosed to the extent ascertainable. However, only the fact of such a material
change needs to be indicated where such amount is not ascertainable wholly or partly.
On the other hand, there might be cases where a change in the accounting policies
does not have a material impact on the current period’s financial statements. But are
reasonably expected to have a material impact in later periods. In such cases, an
 enterprise needs to disclose the fact of such a change in the period in which the
change is adopted.
 A business entity needs to keep in mind that a disclosure of accounting policies or of
changes therein cannot remedy a wrong or inappropriate treatment of the item in the
accounts.