Accounting Standard (AS) 1 (Issued 1979) : Disclosure of Accounting Policies

Accounting Standard (AS) 1 (issued 1979)
Disclosure of Accounting Policies
Paragraphs
INTRODUCTION 1-8
EXPLANATION 9-23
• Fundamental Accounting Assumptions 9-10
• Nature of Accounting Policies 11-13
• Areas in Which Different Accounting Policies are Encountered 14-15
• Considerations in the Selection of Accounting Policies 16-17
• Disclosures of Accounting Policies 18-23
ACCOUNTING STANDARD 24-27
(This Accounting Standard includes paragraphs 24-27 set in bold italic type and paragraphs
1-23 set in plain type, which have equal authority. Paragraphs in bold italic type indicate the
main principles. This Accounting Standard should be read in the context of the Preface to the
Statements of Accounting Standards1.)
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
Introduction
1. This statement deals with the disclosure of significant accounting policies followed in
preparing and presenting financial statements.
2. The view presented in the financial statements of an enterprise of its state of affairs and
of the profit or loss can be significantly affected by the accounting policies followed in
the preparation and presentation of the financial statements. The accounting policies
followed vary from enterprise to enterprise. Disclosure of significant accounting policies
followed is necessary if the view presented is to be properly appreciated.
3. The disclosure of some of the accounting policies followed in the preparation and
presentation of the financial statements is required by law in some cases.
4. The Institute of Chartered Accountants of India has, in Statements issued by it,
recommended the disclosure of certain accounting policies, e.g., translation policies in
respect of foreign currency items.
5. In recent years, a few enterprises in India have adopted the practice of including in their
annual reports to shareholders a separate statement of accounting policies followed in
preparing and presenting the financial statements.
6. In general, however, accounting policies are not at present regularly and fully disclosed
in all financial statements. Many enterprises include in the Notes on the Accounts,
descriptions of some of the significant accounting policies. But the nature and degree of
disclosure vary considerably between the corporate and the non-corporate sectors and
between units in the same sector.
7. Even among the few enterprises that presently include in their annual reports a separate
statement of accounting policies, considerable variation exists. The statement of
accounting policies forms part of accounts in some cases while in others it is given as
supplementary information.
8. The purpose of this Statement is to promote better understanding of financial
statements by establishing through an accounting standard the disclosure of significant
accounting policies and the manner in which accounting policies are disclosed in the
financial statements. Such disclosure would also facilitate a more meaningful
comparison between financial statements of different enterprises.
Explanation
Fundamental Accounting Assumptions

9. 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.
10. 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 Statement.)
Nature of Accounting Policies

11. 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.
12. There is no single list of accounting policies which are applicable to all circumstances.
The differing circumstances in which enterprises operate in a situation of diverse and
complex economic activity make alternative accounting principles and methods of
applying those principles acceptable. The choice of the appropriate accounting principles
and the methods of applying those principles in the specific circumstances of each
enterprise calls for considerable judgement by the management of the enterprise.
13. The various statements of the Institute of Chartered Accountants of India combined with
the efforts of government and other regulatory agencies and progressive managements
have reduced in recent years the number of acceptable alternatives particularly in the
case of corporate enterprises. While continuing efforts in this regard in future are likely
to reduce the number still further, the availability of alternative accounting principles
and methods of applying those principles is not likely to be eliminated altogether in view
of the differing circumstances faced by the enterprises.
Areas in Which Differing Accounting Policies are Encountered

14. 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.

15. The above list of examples is not intended to be exhaustive.
Considerations in the Selection of Accounting Policies

16. 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.
17. For this purpose, the major considerations governing the selection and application of
accounting policies are:-
a. 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.
b. 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.
c. 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.
Disclosure of Accounting Policies

18. 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.
19. Such disclosure should form part of the financial statements.
20 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.
21. 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.
22. 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.
23. Disclosure of accounting policies or of changes therein cannot remedy a wrong or
inappropriate treatment of the item in the accounts.
Accounting Standard
24. All significant accounting policies adopted in the preparation and presentation
of financial statements should be disclosed.
25. 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.
26. 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.
27. 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.
1
Attention is specifically drawn to paragraph 4.3 of the Preface, according to which Accounting Standards
are intended to apply only to items which are material.
2
It may be noted that this Accounting Standard is now mandatory. Reference may be made to the
section titled 'Announcements of the Council regarding status of various documents issued by the
Institute of Chartered Accountants of India' appearing at the beginning of this Compendium for a detailed
discussion on the implications of the mandatory status of an accounting standard.

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Accounting Standard (AS) 1 (issued 1979)

Disclosure of Accounting Policies

• Fundamental Accounting Assumptions 9-10

• Nature of Accounting Policies 11-13

• Areas in Which Different Accounting Policies are Encountered 14-15

• Considerations in the Selection of Accounting Policies 16-17

• Disclosures of Accounting Policies 18-23

ACCOUNTING STANDARD 24-27

Fundamental Accounting Assumptions

Nature of Accounting Policies

Areas in Which Differing Accounting Policies are Encountered

• Methods of depreciation, depletion and amortisation

• Conversion or translation of foreign currency items

• 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

Disclosure of Accounting Policies

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