As1 Ca

AS 1 – Disclosure of Accounting Policies
This standard deals with the disclosure of significant accounting policies followed in preparing and presenting
financial statements.
• Introduction
• Fundamental Accounting Assumptions
• Nature of Accounting Policies
• Areas in which differing Accounting Policies are possible
• Considerations in the Selection of Accounting Policies
• Disclosure of Accounting Policies
• Points to remember
The purpose of this standard is to promote better understanding of financial statements by establishing the
practice of disclosure of significant accounting policies followed and the manner in which they are disclosed
in the financial statements. Such disclosure would also facilitate a more meaningful comparison between
financial statements of different organisations.
Fundamental Accounting Assumptions

Certain assumptions are used in the preparation of financial statements. They are usually not specifically stated
because they are assumed to be followed. Disclosure is necessary only if they are not followed.
The following have been generally accepted as fundamental accounting assumptions:
Going Concern
The organisation is normally viewed as a going concern, that is to say, it will be in continuing operations for the
foreseeable future. It is assumed that the organisation has neither the
intention, nor the necessity of shutting down or reducing the scale of operations.
Consistency
It is assumed that accounting policies are consistently followed from one period to another. No frequent changes are
expected.
Accrual
Revenues and costs are recorded when they are earned or incurred (and not as money is received or paid) in the
periods to which they relate.
Nature of Accounting Policies

Accounting policies refer to accounting principles and the methods of applying these principles adopted by the
organisation in the preparation of their financial statements.
There is no single list of accounting policies which are applicable in all circumstances. The different circumstances in
which organisations operate make alternative accounting principles acceptable. The choice of the appropriate
accounting principles calls for a large degree of judgement by the management of the organisation.
Areas in which differing Accounting Policies are possible

The following are examples of areas in which different accounting policies may be adopted by organisations.
1. Methods of depreciation, depletion and amortisation

2. Treatment of expenditure during construction
3. Conversion or translation of foreign currency items
4. Valuation of inventories
5. Treatment of goodwill
6. Valuation of investments
7. Treatment of retirement benefits
8. Recognition of profit on long-term contracts
9. Valuation of fixed assets
10. Treatment of contingent liabilities
G.N Joshi classes

Considerations in the Selection of Accounting Policies
The primary consideration in the selection of accounting policies by an organisation is that the financial statements
should represent a true and fair picture of the financial position for the period.
For this purpose, the major considerations governing the selection and application of accounting policies are:
Prudence
In view of the uncertainty of future events, profits are not anticipated but recognised only when earned, though not
necessarily in cash. However, provision is made for all known liabilities and losses even though the amount cannot
be determined with certainty and represents only an estimate.
Substance over Form
The accounting treatment and presentation of transactions and events in financial statements 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.
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 must 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 in one place instead of being
scattered over several statements, schedules and notes.
Any change in an accounting policy which has a significant 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 it can be
calculated. Where such amount is not ascertainable, wholly or in part, the fact should be disclosed. If a change is
made in the accounting policies which has no material effect on the financial statements for the current period but is
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.
Points to remember
• All significant accounting policies used in the preparation and presentation of financial statements
should be disclosed.
• The disclosure should form part of the financial statements, normally in one place.
• Any change in the accounting policies which has a material effect in the current period or is
expected to have a material effect in later periods should be disclosed.
In 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 should also be disclosed to the
extent it can be calculated. Where such amount is not ascertainable, wholly or in part, the fact
should be indicated.
• If the fundamental accounting assumptions of 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.
Question to be solved
a. What are the three fundamental accounting assumptions recognised by AS 1 ? briefly

describe each of them.
b. Mention few areas in which different accounting policies are followed by companies.
G.N Joshi classes

As1 Ca

Uploaded by

Copyright:

Available Formats

As1 Ca

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

As1 Ca

Uploaded by

Copyright:

Available Formats

AS 1 – Disclosure of Accounting Policies

Fundamental Accounting Assumptions

Nature of Accounting Policies

Areas in which differing Accounting Policies are possible

1. Methods of depreciation, depletion and amortisation

G.N Joshi classes

Disclosure of Accounting Policies

a. What are the three fundamental accounting assumptions recognised by AS 1 ? briefly

G.N Joshi classes

You might also like