ICAI Notes- Unit 1: Presentation & Disclosures Based Accounting Standards | Advanced Accounting for CA Intermediate PDF Download

 Page 1


 
1.1 
 
 
 
LEARNING OUTCOMES 
a
    
 
CHAPTER 
4 
 
 
 
 
 
 PRESENTATION & 
 DISCLOSURES BASED 
 ACCOUNTING 
 STANDARDS 
 
 
UNIT 1: ACCOUNTING STANDARD  1  
DISCLOSURE OF ACCOUNTING POLICIES 
 
 
After studying this chapter, you would be able to Comprehend the- 
? Fundamental Accounting Assumptions  
? Nature of Accounting Policies  
? Areas in Which Different Accounting Policies are Encountered. 
? Considerations in the Selection of Accounting Policies. 
© The Institute of Chartered Accountants of India
Page 2


 
1.1 
 
 
 
LEARNING OUTCOMES 
a
    
 
CHAPTER 
4 
 
 
 
 
 
 PRESENTATION & 
 DISCLOSURES BASED 
 ACCOUNTING 
 STANDARDS 
 
 
UNIT 1: ACCOUNTING STANDARD  1  
DISCLOSURE OF ACCOUNTING POLICIES 
 
 
After studying this chapter, you would be able to Comprehend the- 
? Fundamental Accounting Assumptions  
? Nature of Accounting Policies  
? Areas in Which Different Accounting Policies are Encountered. 
? Considerations in the Selection of Accounting Policies. 
© The Institute of Chartered Accountants of India
 
 
 
4.2 
ADVANCED ACCOUNTING 
 
 1.1 INTRODUCTION 
Irrespective of extent of standardization, diversity in accounting policies is 
unavoidable for two reasons. First, accounting standards cannot and do not cover 
all possible areas of accounting and enterprises have the freedom of adopting any 
reasonable accounting policy in areas not covered by a standard.  
Second, since enterprises operate in diverse situations, it is impossible to develop 
a single set of policies applicable to all enterprises for all time.  
The accounting standards, therefore, permit more than one policy even in areas 
covered by it. Differences in accounting policies lead to differences in reported 
information even if underlying transactions are same. The qualitative characteristic 
of comparability of financial statements, therefore, suffers due to diversity of 
accounting policies. Since uniformity is impossible, and accounting standards 
permit more than one alternative in many cases, it is not enough to say that all 
standards have been complied with. For these reasons, Accounting Standard 1 
requires enterprises to disclose significant accounting policies actually adopted by 
them in preparation of their financial statements. Such disclosures allow the users 
of financial statements to take the differences in accounting policies into 
consideration and to make necessary adjustments in their analysis of such financial 
statements. 
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. As explained in the preceding 
paragraph, such disclosures facilitate more meaningful comparison between 
financial statements of different enterprises for same accounting period. The 
standard also requires disclosure of changes in accounting policies such that the 
users can compare financial statements of same enterprise for different accounting 
periods. 
This Accounting Standard applies to all enterprises. 
© The Institute of Chartered Accountants of India
Page 3


 
1.1 
 
 
 
LEARNING OUTCOMES 
a
    
 
CHAPTER 
4 
 
 
 
 
 
 PRESENTATION & 
 DISCLOSURES BASED 
 ACCOUNTING 
 STANDARDS 
 
 
UNIT 1: ACCOUNTING STANDARD  1  
DISCLOSURE OF ACCOUNTING POLICIES 
 
 
After studying this chapter, you would be able to Comprehend the- 
? Fundamental Accounting Assumptions  
? Nature of Accounting Policies  
? Areas in Which Different Accounting Policies are Encountered. 
? Considerations in the Selection of Accounting Policies. 
© The Institute of Chartered Accountants of India
 
 
 
4.2 
ADVANCED ACCOUNTING 
 
 1.1 INTRODUCTION 
Irrespective of extent of standardization, diversity in accounting policies is 
unavoidable for two reasons. First, accounting standards cannot and do not cover 
all possible areas of accounting and enterprises have the freedom of adopting any 
reasonable accounting policy in areas not covered by a standard.  
Second, since enterprises operate in diverse situations, it is impossible to develop 
a single set of policies applicable to all enterprises for all time.  
The accounting standards, therefore, permit more than one policy even in areas 
covered by it. Differences in accounting policies lead to differences in reported 
information even if underlying transactions are same. The qualitative characteristic 
of comparability of financial statements, therefore, suffers due to diversity of 
accounting policies. Since uniformity is impossible, and accounting standards 
permit more than one alternative in many cases, it is not enough to say that all 
standards have been complied with. For these reasons, Accounting Standard 1 
requires enterprises to disclose significant accounting policies actually adopted by 
them in preparation of their financial statements. Such disclosures allow the users 
of financial statements to take the differences in accounting policies into 
consideration and to make necessary adjustments in their analysis of such financial 
statements. 
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. As explained in the preceding 
paragraph, such disclosures facilitate more meaningful comparison between 
financial statements of different enterprises for same accounting period. The 
standard also requires disclosure of changes in accounting policies such that the 
users can compare financial statements of same enterprise for different accounting 
periods. 
This Accounting Standard applies to all enterprises. 
© The Institute of Chartered Accountants of India
 
 
PRESENTATION & DISCLOSURES BASED 
ACCOUNTING STANDARDS 
 
    
v 
 
4.3 
 
 1.2 FUNDAMENTAL ACCOUNTING ASSUMPTIONS 
 
 
Going Concern: The financial statements are normally prepared on the assumption 
that an enterprise will continue its operations in the foreseeable future and neither 
there is intention, nor there is need to materially curtail the scale of operations. 
Financial statements prepared on 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 liabilities.  
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. 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.  
Accrual basis of accounting: 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 
Fundamental Accounting 
Assumptions
Going concern Consistency Accrual
Fundamental Accounting 
Assumptions
If followed
Not required to be disclosed
If not followed
Disclosure required in financial 
statements
© The Institute of Chartered Accountants of India
Page 4


 
1.1 
 
 
 
LEARNING OUTCOMES 
a
    
 
CHAPTER 
4 
 
 
 
 
 
 PRESENTATION & 
 DISCLOSURES BASED 
 ACCOUNTING 
 STANDARDS 
 
 
UNIT 1: ACCOUNTING STANDARD  1  
DISCLOSURE OF ACCOUNTING POLICIES 
 
 
After studying this chapter, you would be able to Comprehend the- 
? Fundamental Accounting Assumptions  
? Nature of Accounting Policies  
? Areas in Which Different Accounting Policies are Encountered. 
? Considerations in the Selection of Accounting Policies. 
© The Institute of Chartered Accountants of India
 
 
 
4.2 
ADVANCED ACCOUNTING 
 
 1.1 INTRODUCTION 
Irrespective of extent of standardization, diversity in accounting policies is 
unavoidable for two reasons. First, accounting standards cannot and do not cover 
all possible areas of accounting and enterprises have the freedom of adopting any 
reasonable accounting policy in areas not covered by a standard.  
Second, since enterprises operate in diverse situations, it is impossible to develop 
a single set of policies applicable to all enterprises for all time.  
The accounting standards, therefore, permit more than one policy even in areas 
covered by it. Differences in accounting policies lead to differences in reported 
information even if underlying transactions are same. The qualitative characteristic 
of comparability of financial statements, therefore, suffers due to diversity of 
accounting policies. Since uniformity is impossible, and accounting standards 
permit more than one alternative in many cases, it is not enough to say that all 
standards have been complied with. For these reasons, Accounting Standard 1 
requires enterprises to disclose significant accounting policies actually adopted by 
them in preparation of their financial statements. Such disclosures allow the users 
of financial statements to take the differences in accounting policies into 
consideration and to make necessary adjustments in their analysis of such financial 
statements. 
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. As explained in the preceding 
paragraph, such disclosures facilitate more meaningful comparison between 
financial statements of different enterprises for same accounting period. The 
standard also requires disclosure of changes in accounting policies such that the 
users can compare financial statements of same enterprise for different accounting 
periods. 
This Accounting Standard applies to all enterprises. 
© The Institute of Chartered Accountants of India
 
 
PRESENTATION & DISCLOSURES BASED 
ACCOUNTING STANDARDS 
 
    
v 
 
4.3 
 
 1.2 FUNDAMENTAL ACCOUNTING ASSUMPTIONS 
 
 
Going Concern: The financial statements are normally prepared on the assumption 
that an enterprise will continue its operations in the foreseeable future and neither 
there is intention, nor there is need to materially curtail the scale of operations. 
Financial statements prepared on 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 liabilities.  
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. 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.  
Accrual basis of accounting: 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 
Fundamental Accounting 
Assumptions
Going concern Consistency Accrual
Fundamental Accounting 
Assumptions
If followed
Not required to be disclosed
If not followed
Disclosure required in financial 
statements
© The Institute of Chartered Accountants of India
 
 
 
4.4 
ADVANCED ACCOUNTING 
 
and profit/loss obtained on this basis reflects activities of the enterprise during an 
accounting period, rather than cash flows generated by it. 
While accrual basis is a more logical approach to profit determination than the cash 
basis of accounting, it exposes an enterprise to the risk of recognising an income 
before actual receipt. The accrual basis can, therefore, overstate the divisible profits 
and dividend decisions based on such overstated profit lead to erosion of capital. 
For this reason, accounting standards require that no revenue should be recognised 
unless the amount of consideration and actual realisation of the consideration is 
reasonably certain.  
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. 
1.3 ACCOUNTING POLICIES 
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. 
Accountant has to make decisions from various options for recording or disclosing 
items in the books of accounts e.g. 
Items to be disclosed Method of disclosure or valuation 
Inventories FIFO, Weighted Average etc. 
Cash Flow Statement Direct Method, Indirect Method 
This list is not exhaustive i.e. endless. For every item right from valuation of assets 
and liabilities to recognition of revenue, providing for expected losses, for each 
event, accountant need to form principles and evolve a method to adopt those 
principles. This method of forming and applying accounting principles is known as 
accounting policies. 
© The Institute of Chartered Accountants of India
Page 5


 
1.1 
 
 
 
LEARNING OUTCOMES 
a
    
 
CHAPTER 
4 
 
 
 
 
 
 PRESENTATION & 
 DISCLOSURES BASED 
 ACCOUNTING 
 STANDARDS 
 
 
UNIT 1: ACCOUNTING STANDARD  1  
DISCLOSURE OF ACCOUNTING POLICIES 
 
 
After studying this chapter, you would be able to Comprehend the- 
? Fundamental Accounting Assumptions  
? Nature of Accounting Policies  
? Areas in Which Different Accounting Policies are Encountered. 
? Considerations in the Selection of Accounting Policies. 
© The Institute of Chartered Accountants of India
 
 
 
4.2 
ADVANCED ACCOUNTING 
 
 1.1 INTRODUCTION 
Irrespective of extent of standardization, diversity in accounting policies is 
unavoidable for two reasons. First, accounting standards cannot and do not cover 
all possible areas of accounting and enterprises have the freedom of adopting any 
reasonable accounting policy in areas not covered by a standard.  
Second, since enterprises operate in diverse situations, it is impossible to develop 
a single set of policies applicable to all enterprises for all time.  
The accounting standards, therefore, permit more than one policy even in areas 
covered by it. Differences in accounting policies lead to differences in reported 
information even if underlying transactions are same. The qualitative characteristic 
of comparability of financial statements, therefore, suffers due to diversity of 
accounting policies. Since uniformity is impossible, and accounting standards 
permit more than one alternative in many cases, it is not enough to say that all 
standards have been complied with. For these reasons, Accounting Standard 1 
requires enterprises to disclose significant accounting policies actually adopted by 
them in preparation of their financial statements. Such disclosures allow the users 
of financial statements to take the differences in accounting policies into 
consideration and to make necessary adjustments in their analysis of such financial 
statements. 
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. As explained in the preceding 
paragraph, such disclosures facilitate more meaningful comparison between 
financial statements of different enterprises for same accounting period. The 
standard also requires disclosure of changes in accounting policies such that the 
users can compare financial statements of same enterprise for different accounting 
periods. 
This Accounting Standard applies to all enterprises. 
© The Institute of Chartered Accountants of India
 
 
PRESENTATION & DISCLOSURES BASED 
ACCOUNTING STANDARDS 
 
    
v 
 
4.3 
 
 1.2 FUNDAMENTAL ACCOUNTING ASSUMPTIONS 
 
 
Going Concern: The financial statements are normally prepared on the assumption 
that an enterprise will continue its operations in the foreseeable future and neither 
there is intention, nor there is need to materially curtail the scale of operations. 
Financial statements prepared on 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 liabilities.  
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. 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.  
Accrual basis of accounting: 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 
Fundamental Accounting 
Assumptions
Going concern Consistency Accrual
Fundamental Accounting 
Assumptions
If followed
Not required to be disclosed
If not followed
Disclosure required in financial 
statements
© The Institute of Chartered Accountants of India
 
 
 
4.4 
ADVANCED ACCOUNTING 
 
and profit/loss obtained on this basis reflects activities of the enterprise during an 
accounting period, rather than cash flows generated by it. 
While accrual basis is a more logical approach to profit determination than the cash 
basis of accounting, it exposes an enterprise to the risk of recognising an income 
before actual receipt. The accrual basis can, therefore, overstate the divisible profits 
and dividend decisions based on such overstated profit lead to erosion of capital. 
For this reason, accounting standards require that no revenue should be recognised 
unless the amount of consideration and actual realisation of the consideration is 
reasonably certain.  
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. 
1.3 ACCOUNTING POLICIES 
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. 
Accountant has to make decisions from various options for recording or disclosing 
items in the books of accounts e.g. 
Items to be disclosed Method of disclosure or valuation 
Inventories FIFO, Weighted Average etc. 
Cash Flow Statement Direct Method, Indirect Method 
This list is not exhaustive i.e. endless. For every item right from valuation of assets 
and liabilities to recognition of revenue, providing for expected losses, for each 
event, accountant need to form principles and evolve a method to adopt those 
principles. This method of forming and applying accounting principles is known as 
accounting policies. 
© The Institute of Chartered Accountants of India
 
 
PRESENTATION & DISCLOSURES BASED 
ACCOUNTING STANDARDS 
 
    
v 
 
4.5 
 
As we say that accounts is both science and art, it’s a science because we have some 
tested accounting principles, which are applicable universally, but simultaneously 
the application of these principles depends on the personal ability of each 
accountant. Since different accountants may have different approach, we generally 
find that in different enterprises under same industry, different accounting policies 
are followed. Though ICAI along with Government is trying to reduce the number 
of accounting policies followed in India but still it cannot be reduced to one. 
Accounting policy adopted will have considerable effect on the financial results 
disclosed by the financial statements; it makes it almost difficult to compare two 
financial statements. 
 1.4 SELECTION OF ACCOUNTING POLICY  
Financial Statements are prepared to portray a true and fair view of the 
performance and state of affairs of an enterprise. In selecting a policy, alternative 
accounting policies should be evaluated in that light. In particular, major 
considerations that govern selection of a particular policy are: 
Prudence: In view of uncertainty associated with future events, profits are not 
anticipated, but losses are provided for as a matter of conservatism. Provision 
should be created 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. 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.  
Example 1 
The most common example of exercise of prudence in selection of accounting policy 
is the policy of valuing inventory at lower of cost and net realisable value. 
Suppose a trader has purchased 500 units of certain article @ ` 10 per unit. He sold 
400 articles @ ` 15 per unit. If the net realisable value per unit of the unsold article 
is ` 15, the trader should value his stock at ` 10 per unit and thus ignoring the profit 
` 500 that he may earn in next accounting period by selling 100 units of unsold 
articles. If the net realisable value per unit of the unsold article is ` 8, the trader 
should value his stock at `8 per unit and thus recognising possible loss ` 200 that he 
© The Institute of Chartered Accountants of India