Introduction
This standard deals with disclosure of significant accounting policies followed in the preparation and presentation of the financial statements and is mandatory in nature.
Diversity in accounting policies is unavoidable because-
1] Accounting standards cannot and do not cover all possible areas of accounting and Enterprises have the freedom of adopting any reasonable accounting policies in areas not covered by a standard.
2] Enterprises operate in diverse situations. It is impossible to develop a single set of policies applicable to all Enterprises for all time.
The purpose of accounting standard 1, disclosure of accounting policies, is to promote better understanding of financial statements by requiring disclosure of significant accounting policies in an orderly manner.
Enterprises to disclose significant accounting policies actually adopted by them in preparation of their financial statements. such disclosures facilitate more meaningful comparison between financial statements of different Enterprises for the same accounting period.
The standard also requires disclosures of changes in accounting policy such that the user can compare financial statements of the same enterprises for different accounting periods.
Important
✔ Accounting standards permit more than one alternative in many cases so uniformity is impossible.
✔ Differences in accounting policy lead to differences in reported information even if underlying transactions are the same.
Areas involving different accounting policies by different enterprises are:
✔ Methods of depreciation, depletion and amortisation
✔ Treatment of expenditure during construction
✔ Treatment of foreign currency conversion/translation.
✔ Valuation of inventories
✔ Treatment of intangible assets
✔ Valuation of investments
✔ Treatment of retirement benefits
✔ Recognition of profit on long-term contracts
✔ Valuation of fixed assets
✔ Treatment of contingent liabilities
Fundamental Accounting Assumptions
1] Going Concern
The financial statements are normally prepared on the assumption that an enterprise will continue its operations in the foreseeable future and no interim necessity of liquidation or winding up or reducing scale of operation.
Financial statement prepared on a Going Concern basis recognise among other things the need for sufficient retention of profit to replace assets consumed in operation and for making adequate provision for settlement of its liability.
2] Consistency
The principle of consistency refers to the practice of using same accounting policies for similar transactions in all accounting periods.
The consistency improves comparability of financial statements through time. (consistent from one period to another).
An accounting policy can be changed if the change is required (i) by a statute (ii) by an accounting standard (iii) for more appropriate presentation of financial statements.
3] Accrual
Under this basis of accounting, transactions are recognised as soon as they occur, whether or not cash or cash equivalent is actually received or paid.
Accrual basis ensures better matching between revenue and cost and profit/loss obtained on this basis reflects activities of the enterprise during an accounting period, rather than cash flows generated by it.
Despite the possibility of distribution of profit not actually earned, accrual basis of accounting is generally followed because of its logical superiority over cash basis of accounting.
Section 128(1) of the Companies Act, 2013 makes it mandatory for companies to maintain accounts on accrual basis only. It is not necessary to expressly state that accrual basis of accounting has been followed in preparation of a financial statement. In case, any income/expense is recognised on cash basis, the fact should be stated.
DISCLOSURE OF DEVIATIONS FROM FUNDAMENTAL ACCOUNTING ASSUMPTIONS
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.
Factors governing the selection and application of accounting policies are:
Prudence :
Generally maker of financial statement has to face uncertainties at the time of preparation of financial statement. These uncertainties may be regarding collectability of receivables, number of warranty claims that may occur. Prudence means making of estimates, which is required under conditions of uncertainty.
In view of uncertainty associated with future events, profits are not anticipated, but losses are provided for as a matter of conservatism. The exercise of prudence in selection of accounting policies ensure that (i) profits are not overstated (ii) losses are not understated (iii) assets are not overstated and (iv) liabilities are not understated
Substance over form :
It means that transaction should be accounted for in accordance with actual happening and economic reality of the transactions not by its legal form.
Example: if the assets are purchased on hire purchase by the hire purchaser the assets are shown in the books of hire purchaser in spite of the fact that the hire purchaser is not the legal owner of the assets purchased. Under the purchase the purchaser, becomes the owner only on the payment of last instalment. Therefore the legal form of the transaction is ignored and the transaction is accounted as per as substance.
Materiality :
Financial Statement should disclose all the items and facts which are sufficient enough to influence the decisions of reader or /user of financial statement.
(a) As to the disclosure of all material items, individually or in aggregate in the context of fair presentation of financial statements as a whole if its omission or misstatement could influence the economic or financial decision of the user relying upon the financial statements.
(b) Depends on the size of the items or errors judged in the particular circumstances of its omissions or misstatements.
(c) Is a cutoff point rather than being a primary qualitative characteristic which information must have.
(d) This is a matter of judgment, varies from one entity to another and over one period to another.
MANNER OF DISCLOSURE :
AS 1 requires that all “significant” (i.e. only accounting policy that is useful for an understanding by the user of the financial statements) accounting policies adopted in the preparation and presentation of financial statements, should be disclosed by way of Note in one place as the note No. I (this is the basis of the preparation of financial statements.)
DISCLOSURE OF CHANGES IN ACCOUNTING POLICIES
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 a later period should be disclosed.
In the case of a change in accounting policies, which has a material effect in the current period,
(1) Where the amount by which any item in the financial statements is affected by such change should also be disclosed to the extent ascertainable.
(2) Where such amount is not ascertainable, wholly or in part, the fact should be disclosed.
In the case of a change in accounting policies, which has Not material in current period but ascertainable in later periods Fact of such change in later period to be disclosed in current period.
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