AS 1 – Disclosure of Accounting Policies

The information presented in the financial statements of an organisation is of its financial position. The profit or loss can be affected to a large degree by the accounting policies followed. The accounting policies followed vary from organisation to organisation. 
It is important to disclose significant accounting policies followed to make the financial statements understandable. The disclosure is required by law in certain cases. In recent years, organisations in India have adopted the practice of including a separate statement of accounting policies followed in their annual reports to shareholders. 

Many organisations list the accounting policies followed by them in the notes to their financial statements, but there is no consistency in the disclosures among organisations. 
In other words, the disclosure forms part of accounts in some cases, while in others it is given as supplementary information. The purpose of this standard is to promote a 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 that 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.

The various standards of the Institute of Chartered Accountants of India, combined with the efforts of the Government and other regulatory agencies have reduced the number of acceptable alternatives in recent years, particularly in case of corporates. While continuing efforts in this regard in the future are likely to reduce the number still further, the availability of alternative accounting principles is not likely to be eliminated altogether keeping in mind the different circumstances faced by the organisations.

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

The above list of examples is not exhaustive.

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. Disclosure of accounting policies or of the changes is not a remedy for any wrong or inappropriate treatment of items in the accounts.

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.