AS 1

Accounting Standard (AS) 1
(issued 1979)

Disclosure of Accounting Policies Contents
INTRODUCTION Paragraphs
EXPLANATION
Fundamental Accounting Assumptions
Nature of Accounting Policies
Areas in Which Different Accounting Policies are Encountered
Considerations in the Selection of Accounting Policies
Disclosures of Accounting Policies
MAIN PRINCIPLES

Disclosure of Accounting Policies
[This Accounting Standard includes paragraphs set in bold italic type and plain type, which have equal authority. Paragraphs in bold italic type indicate the main principles. This Accounting Standard should be read in the contextof the Preface to the Statements of Accounting Standards1 and the‘Applicability of Accounting Standards to Various Entities’ (See Appendix 1to this Compendium).]

Introduction

1. This Standard 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 itsstate 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.

  1. 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.

  2. The Institute of Chartered Accountants of India has, in Standards issued by it, recommended the disclosure of certain accounting policies, e.g.,translation policies in respect of foreign currency items.

  3. 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.

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. 36 AS 1 (issued 1979)

  1. 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.

  2. 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.

  3. The purpose of this Standard 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
  4. 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.
  5. 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.
    Disclosure of Accounting Policies 41
    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
  6. 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.
  7. 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.
  8. The various standards 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
  9. The following are examples of the areas in which different accounting
    policies may be adopted by different enterprises.
    (a) Methods of depreciation, depletion and amortisation
    (b) Treatment of expenditure during construction
    (c) Conversion or translation of foreign currency items
    42 AS 1 (issued 1979)
    (d) Valuation of inventories
    (e) Treatment of goodwill
    (f) Valuation of investments
    (g) Treatment of retirement benefits
    (h) Recognition of profit on long-term contracts
    (i) Valuation of fixed assets
    (j) Treatment of contingent liabilities.
  10. The above list of examples is not intended to be exhaustive.
    Considerations in the Selection of Accounting Policies
  11. 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.
  12. 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.
    Disclosure of Accounting Policies 43
    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
  13. 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.
  14. 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.
  15. 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.
  16. 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.
  17. Disclosure of accounting policies or of changes therein cannot remedy
    a wrong or inappropriate treatment of the item in the accounts.
    Main Principles
  18. All significant accounting policies adopted in the preparation and
    presentation of financial statements should be disclosed.
    44 AS 1 (issued 1979)
  19. 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.
  20. 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.
  21. 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.