Accounting Standard (AS) 1, Disclosure of Accounting Policies
This standard deals with disclosure of significant accounting policies followed in the preparation and presentation of the financial statements and is mandatory in nature.
The accounting policies refer to the specific accounting principles adopted by the enterprise.
Proper disclosure would ensure meaningful comparison both inter/intra enterprise and also enable the users to properly appreciate the financial statements.
Financial statements are intended to present a fair reflection of the financial position financial performance and cash flows of an enterprise.
Areas involving different accounting policies by different enterprises are
- Methods of depreciation, depletion and amortization
- Treatment of expenditure during construction
- Treatment of foreign currency conversion/translation, Valuation of inventories
- Treatment of intangible assets
- Valuation of investments
- Treatment of retirement benefits
- Recognition of profit on long-term contracts Valuation of fixed assets
- Treatment of contingent liabilities
Factors governing the selection and application of accounting policies are
1. Prudence: Prudence means making of estimates, which is required under conditions of uncertainty. Profits are not anticipated till certain for realization, while provisions are made for all known liabilities ascertainable or based on estimates (e.g. warranty expenses).
2. Substance over form: It means that transaction should be accounted for in accordance with actual happening and economic reality of the transactions, i.e. events governed by substance and not merely by the legal form
(a) As to the disclosure of all material items, individually or in aggregate in the context of fair presentation of financial statements as a whole if its omission or misstatement could influence the economic or financial decision of the user relying upon the financial statements
(b) Depends on the size of the items or errors judged in the particular circumstances of its omissions or misstatements.
(c) Is a cutoff point rather than being a primary qualitative characteristic which information must have.
(d) This is a matter of judgment, varies from one entity to another and over one period to another.
AS-1 requires that all “significant” (i.e. only accounting policy that is useful for an understanding by the user of the financial statements) accounting policies adopted in the preparation and presentation of financial statements, should be disclosed by way of ‘Note in one place as the note No I (this is the basis of the preparation of financial statements.)
Changes in Accounting Policies:
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 the later period should be disclosed.
In the case of a change in accounting policies, having 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 as ascertainable, otherwise the fact that the effect is not (wholly or partially) ascertainable, should be disclosed.
The following are not considered as changes in accounting policies:
(a) Accounting policies adopted for events or transactions that differ in substance at present (introducing Group Gratuity Scheme for employees in place of adhoc ex-gratia payment earlier followed.)
(b) Accounting policies pertains to events or transactions which did not occur previously or that were immaterial.
Fundamental Accounting Assumptions
Certain basic assumptions, in the preparation of financial statements are accepted and their use are assumed, no separate disclosure is required except for noncompliance in respect of-
1. Going Concern: continuing operation in the foreseeable future and no interim necessity of liquidation or winding’ up or reducing scale of operation.
2. Consistency: accounting policies are consistent from one period to another
(i) Revenues and costs are accrued i.e. they are earned or incurred (not actually received or paid) and recorded in the financial statements
(ii) Extends to matching revenue against relevant costs.