Corporate Knowledge

AS 1: Disclosure of Accounting Policies

Contents Meaning of Accounting Policy Introduction- Why need this Standard Fundamental Accounting Assumptions and

Disclosure requirement relating to these assumptions

How to select Accounting policies i.e. Considerations in selection of Accounting Policies

Disclosure Requirements

Accounting PolicyAccounting Policy refers to the specific accounting principles and methods of applying those principle adopted by the enterprise in the preparation and presentation of Financial statements.

Accounting Policy

Specific Accounting Principle and Methods

Adopted

In the preparation and presentation of FS

Introduction- Need of AS-1

This AS do not deal with any accounting treatment of any

event or transaction!SO Why there is need of This AS

Introduction- Need of AS-1 As we know, main objective of Accounting

standard is to standardise the diverse accounting policies to make the FS comparable.

BUT AS can not and do not cover all possible areas

of accounting therefore there should be freedom for entity to select suitable accounting policy for those areas

Since, because of diverse situation, it is not possible to develop the single set of policies for all the enterprise for all time, AS permit more than one accounting policy.

Thank God!We are allowed to use

Suitable accounting policy

But, what about the comparability?

If every entity use its own policy, then how will FSs shall be understand and compared?

This AS requires enterprise to disclose the accounting policies actually adopted in the preparation of FS. Such disclosure allow the users to understand the FS of different entities and to make comparison among them for decision making

Ohhh!To make FS comparable and understandable we need AS-

1

Basic Accounting Assumption

Going ConcernConsistency

Accrual

Going Concern ConceptThe enterprise is normally viewed as going concern, i.e. as continuing business operation for the foreseeable future. It is assumed that the enterprise has neither the intention nor the necessity of liquidation or curtailing, materially its scale of operations.

Accrual ConceptRevenue and cost are recorded as they are accrued, i.e. revenue items are recognised as they are earned or incurred in the financial statement of the period to which they relate even though payment and receipt of actual cash has not been taken place

Cash Basis

ConsistencyIt is assumed that accounting policies are consistent from one period to another.

20152014 2016

C O N S I S T E N C Y

Straight Line

Method

Straight Line

Method

Straight Line

Method

How to Select Accounting Policy

WDV Method

Weighted Average

Inventory Valuation

?

FIFO Method

LIFO Method

Original Cost

Method

Simple Average

How to Select Accounting Policy

Select those policy which Gives True and Fair view of the affairs

of the enterprise as at the balance sheet date and of the

profit or loss for the period ended on that date

Primary Consideration

How to Select Accounting Policy

To ensure the true and fair

consideration, we must follow

following while selecting

accounting policyPrudence

Substance over form

Materiality True and Fair View

Materiality

Substance over form

Prudence

PrudencePrudence means recognizing all losses immediately but ignoring

anticipated profits

Do not book anticipated Profit

Recognize all possible losses

Substance Over FormThe Accounting treatment and

presentation in FS of transaction and events should

be governed by their substance and not merely by the legal form

MaterialityFS should disclose all “Material items”. Material items are those

items whose knowledge might influence the decisions of the

users of FS

But It does not means that we should not disclose immaterial items. Disclosure of material items are mandatory but disclosure of immaterial items are

discretionary of enterprise

Change in accounting policy One cannot change accounting policy But Change in accounting policy is

allowed if When such change is allowed by statue If change in accounting policy present

more true picture of FS

Disclosure Requirement under AS -2 All significant accounting policy adopted in

preparation and presentation of FS Disclosure should be as such as part of FS Disclosure should be at one place If any accounting policy is changed

A note should be given by the company in its annual accounts regarding the change

Also the amount of difference is to be disclosed after all changes have been incorporated in FS