AS 1 – Disclosure of Accounting Policies | Advanced Accounting for CA Intermediate PDF Download

Fundamental Accounting Assumptions

• Going Concern: This assumption implies that an organization will continue its operations in the foreseeable future without any intention of closure or significant scale reduction. For example, a company is assumed to be a going concern unless there is significant evidence to the contrary.
• Consistency: It is assumed that accounting policies remain consistent from one period to another, without frequent changes. For instance, if a company uses a specific method for inventory valuation in one year, it should continue to use the same method in subsequent years.
• Accrual: This assumption dictates that revenues and expenses should be recorded when they are earned or incurred, not necessarily when cash is exchanged. For instance, revenue from services rendered should be recognized when the service is provided, regardless of when payment is received.

Nature of Accounting Policies

• Accounting policies encompass the principles and methods used by organizations to prepare their financial statements. There is no universal list of accounting policies due to varying operational circumstances. For example, different companies may use different methods for revenue recognition based on their industry.
• The Institute of Chartered Accountants of India standards, along with regulatory efforts, have reduced the number of acceptable accounting alternatives. However, the diversity of accounting principles persists due to the unique situations organizations face.

Areas with Differing Accounting Policies

• Organizations may adopt different accounting policies in various areas, such as methods of depreciation, treatment of inventories, and valuation of investments. For instance, one company may use the straight-line method of depreciation while another uses the double-declining balance method.
• The list of examples provided is not exhaustive, indicating the potential for further divergence in accounting practices.

Considerations in Accounting Policy Selection

• Prudence: Profits are recognized only when earned, and provisions are made for known liabilities and losses. For example, a company may set aside funds for potential warranty claims based on historical data.
• Substance over Form: Transactions should be recorded based on their economic substance rather than just their legal form. For instance, a lease that transfers ownership rights should be treated as a purchase rather than a rental agreement.
• Materiality: Financial statements should disclose material items that could influence user decisions. For example, significant pending lawsuits should be disclosed in the financial statements.

Disclosure of Accounting Policies

• Full disclosure of significant accounting policies in financial statements is essential for user understanding. Any changes in accounting policies with a material impact should be disclosed. For instance, if a company changes its method of inventory valuation, this change should be clearly communicated in the financial statements.
• Consolidating all accounting policies in one place enhances clarity for readers. Moreover, changes in policies that do not affect the current period but impact future periods should also be disclosed.