AS-1: Disclosure Of Accounting Policies

Accounting Standard 1 Disclosure of Accounting Policies tells about the disclosure of significant accounting policies and fundamental accounting assumptions used in the preparation of financial statements. Every entity should disclose all significant accounting policies in notes on accounts of the financial statements. 

Accounting policies are specific accounting principles and methods adopted by the entity in preparation and presentation of Financial Statements. Number of accounting policies are available for measurement of each item in the financial statements. Management of the entity should select suitable accounting policies considering the nature of business, legal requirements, Accounting Standards requirements, etc. Like FIFO, Weighted Average cost, etc are used. For valuation of fixed assets, policies like historical cost, market value, etc are used.

Disclosure of accounting policies helps the users in better understanding of financial statements and to have a meaningful comparison of financial statements among the other entities in the industry. Selection of accounting policies is the responsibility of the management. In the selection of accounting policies management should consider the following: 

1. Primary Consideration 

Policies selected should give true and fair view to Financial Statements that means it should not lead to over or under valuation of assets or liabilities. 

2. Other Major Considerations 

a. Prudence

This means management should be aware and they should apply knowledge while selecting accounting policies. That means they should consider the entity’s nature of business, legal requirements, accounting standards, etc. as said earlier in the selection of policies. In case of revenue recognition, it is to be noted that profits are recognized only when they are realizable, that is it should be recorded only when the entity establishes the right to receive revenue and it does not mean actual receipt of cash. Provision should be made for all known liabilities and losses even though the amount of loss is not certain and it should be determined by the best estimate based on the available information but provisions are recognized only when present obligation is arising from past activity and outflow of future economic benefits is probable. 

b. Substance Over Form 

An entity should select the accounting policies which help to present a complete, relevant and accurate view of financial statements rather than legality. Here the situation of Reality over Legality comes. 

c. Materiality 

Financial statements should disclose all material items. It means that no material item should be omitted from the financial statements. If any item is not entered or wrongly entered which could influence the economic decisions of users then it is called Material Items. Generally the materiality depends on the size and nature of the item. As per the Revised Schedule VI of The Companies Act 2013, any item or expenditure which exceeds 1% of the Revenue from Operations or Rs.1,00,000, whichever is higher should be disclosed separately. If it is less than Rs.1,00,000 then it can be clubbed under miscellaneous items. 

Disclosure of Accounting Policies: 

• Accounting policies should be a part of the financial statements. 

• Disclose all the policies at one place and it should not be spread over financial statements. 

• Disclosure is not a remedy for wrong or inappropriate accounting. 

Fundamental Accounting Assumptions: 

There are certain fundamental assumptions in the preparation and presentation of financial statements. These are assumed by the users while using financial statements. Disclosure of fundamental accounting assumptions is not necessary when the entity is following the assumptions. Disclosure is necessary if the entity does not follow. 

Those fundamental accounting assumptions are  

Going Concern 

It is assumed that an entity continues its business in the foreseeable future. It means the entity has neither intention nor the necessity of closing its operations or liquidating its assets in the near future. In general an entity is assumed to be a going concern unless there is significant information to the contrary. Going concern is not clearly explained anywhere in AS 1 but those are explained in Ind AS 1 and IAS 1. As per IAS 1 in assessing whether the going concern assumption is appropriate if management takes into account all available information about the future, which is at least twelve months from the end of the balance sheet date. If the entity may no longer be a going concern then it should value its assets at NRV or on a liquidation basis but not on historical cost. It should disclose the basis of preparation of financials and the difference between the carrying amount and NRV should be taken to P&L a/c. The facts for not being a going concern should be disclosed if they certainly exist.    

Consistency 

It is assumed that accounting policies followed during the current year are the same as the previous years. If there is any change in accounting policies which has material effects the entity should disclose which is changed and its effect on financial statements with its quantity of effect. If not able to quantify wholly or partly, it should be disclosed. If there is no effect in the current year but affects future financials, then the year in which the effect is there should be disclosed.   

Accrual 

It is generally assumed that an entity follows an accrual method of accounting. As per this expenses incurred or income earned in a specific accounting period are to be recorded in the same period irrespective of cash transaction. 

Section 128 of the Companies Act 2013, requires the accrual basis of accounting and no option of cash basis accounting is available. 

Accounting Standard 1 vs. Ind AS 1 vs. IAS 1.  

• As per the AS 1 no statements of changes in equity are present but movements in share capital, retained earnings, reserves will be shown in notes to accounts. But as per Ind AS 1 and IAS 1 there will be a statement of changes in equity with total income for the period with its effect on equity and a reconciliation of it are included. 

• Extraordinary items are disclosed separately in the P&L Statement as per AS 1 but it is prohibited as per Ind AS 1 and IAS 1. 

• Under AS 1 a disclosure is made in financial statements that comparative amounts have been reclassified to conform to the current period presentation without additional disclosures. Under Ind AS1 and IAS 1, nature, amount and reason for reclassification are disclosed. 

• AS 1 does not require the disclosure of judgements taken by management but Ind AS 1 and IAS 1 requires disclosing the critical judgements taken by management. 

• AS 1 does not require an entity to disclose managing capital for users and assumptions made for the future and major sources of estimation but Ind AS 1 and IAS 1 requires doing so.