ACCOUNTING STANDARD-1: Some Salient Features: Considerations in The Selection of Accounting Policies

ACCOUNTING STANDARD-1: Some Salient Features
The following is the text of the Accounting Standard (AS) 1 issued by the Accounting Standards
Board, the Institute of Chartered Accountants of India on 'Disclosure of Accounting Policies'. The
Standard deals with the disclosure of significant accounting policies followed in preparing and
presenting financial statements.
In the initial years, this accounting standard will be recommendatory in character. During this
period, this standard is recommended for use by companies listed on a recognised stock exchange
and other large commercial, industrial and business enterprises in the public and private sectors. 2
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

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.
Considerations 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
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 the 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.
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.
Examples of matters in respect of which disclosure of accounting policies adopted will be required
are contained in paragraph 14. This list of examples is not, however, intended to be exhaustive.
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.
Business Decisions and Financial Statements
Recap:
Every BD will involve FI and FI will appear in FS
FS are governed by GAAP
FS can be explained through AE
AE = Sources = Assets
Sources = Capital, Profit, Debt
Assets = Cash and Others
Capital + Retained Profit + Debt = Assets
Equity + Debt = Assets
Equity = Assets Debt (at Book Value)
Financial Statements
2
o BS: Financial Position of a company on a particular date

Sources = Assets
o IS: Financial performance of a company for a particular period
Income Expenses = Profit
o CFS: Changes in cash during the period
Receipts -Payments = Cash in hand
Profit is generally not equal to CIH
Accrual principle
Matching principle
All income are not receipts
All payments are not expenses
Other Relevant Issues
Depreciation: Part of the cost of the Asset used during the period
Decrease in asset
No out flow of cash
Stock and COGS
Stock: Asset
COGS: Expenses
Depreciation :
Cost of the assets apportioned over the life. Apportioned cost

is called Depreciation
Dep is an expense. Is non cash item
Expenses
o If payment is less than expense: Liability
o If payment is more than expense: Assets
Retained profit:
o Opening RP + Profit for the period Dividend = Closing
Retained Profit
Dividend: Profit distributed among the shareholders :

o Dividend is calculated on the Capital
o Dividend is not an expense
o Dividend is distribution of profit
o Profit less dividend = Retained profit

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ACCOUNTING STANDARD-1: Some Salient Features

Methods of depreciation, depletion and amortisation

Treatment of expenditure during construction

Considerations in the Selection of Accounting Policies

Substance over the form

To ensure proper understanding of financial statements, it is necessary that all significant

Business Decisions and Financial Statements

Every BD will involve FI and FI will appear in FS

FS are governed by GAAP

FS can be explained through AE

Sources = Capital, Profit, Debt

Assets = Cash and Others

Capital + Retained Profit + Debt = Assets

Equity + Debt = Assets

Equity = Assets Debt (at Book Value)

o BS: Financial Position of a company on a particular date

Profit is generally not equal to CIH

Other Relevant Issues

Cost of the assets apportioned over the life. Apportioned cost

o If payment is more than expense: Assets

Dividend: Profit distributed among the shareholders :

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