Accounting Standard (AS) 1 was issued in 1979 by the Institute of Chartered Accountants of India to establish the disclosure of significant accounting policies and the manner in which they are disclosed in financial statements. This standard applies to all enterprises, whether corporate or non-corporate, and promotes better understanding of financial statements. In this article, we will discuss the key points of AS 1 in detail.
The purpose of AS 1 is to ensure that significant accounting policies adopted by an enterprise in the preparation and presentation of financial statements are disclosed. Accounting policies significantly affect the view presented in financial statements, and hence their disclosure is necessary for proper appreciation. Disclosure of some accounting policies is required by law in some cases. AS 1 promotes better understanding of financial statements and facilitates a more meaningful comparison between financial statements of different enterprises.
ICAI’s AS-1: Disclosure of Accounting Policies (as on 01/02/2022)
Fundamental Accounting Assumptions
Certain fundamental accounting assumptions underlie the preparation and presentation of financial statements. These assumptions are usually not specifically stated because their acceptance and use are assumed. Disclosure is necessary if these assumptions are not followed. The following are the generally accepted fundamental accounting assumptions:
An enterprise is viewed as a going concern and is assumed to continue in operation for the foreseeable future. It is assumed that the enterprise has neither the intention nor the necessity of liquidation or of curtailing materially the scale of operations.
Accounting policies are assumed to be consistent from one period to another.
Revenues and costs are recognized as they are earned or incurred (and not as money is received or paid) and recorded in the financial statements of the periods to which they relate.
Nature of Accounting Policies
Accounting policies refer to specific accounting principles and methods of applying those principles adopted by an enterprise in the preparation and presentation of financial statements. There is no single list of accounting policies that are applicable to all circumstances. The choice of appropriate accounting policies and methods of applying those policies in the specific circumstances of each enterprise calls for considerable judgment by the management of the enterprise.
Areas in Which Differing Accounting Policies are Encountered
Different accounting policies may be adopted by different enterprises in several areas. Examples of such areas are:
i) Methods of depreciation, depletion and amortization;
ii) Treatment of expenditure during construction;
iii) Conversion or translation of foreign currency items;
iv) Valuation of inventories;
v) Treatment of goodwill;
vi) Valuation of investments;
vii) Treatment of retirement benefits;
viii) Recognition of profit on long-term contracts;
ix) Valuation of fixed assets; and so on.
Considerations in the Selection of Accounting Policies
The primary consideration in the selection of accounting policies is that the financial statements should represent a true and fair view of the state of affairs of the enterprise as at the balance sheet date and of the profit or loss for the period ended on that date. The major considerations governing the selection and application of accounting policies are prudence, substance over form, and materiality.
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 should be disclosed. Such disclosure should form part of the financial statements and should be in one place if possible. Examples of matters in respect of which disclosure of accounting policies adopted will be required are contained in paragraph 14 of AS 1.
Any change in accounting policy that has a material 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 ascertainable. Where such amount is not ascertainable, wholly or in part, the fact should be indicated. If a change is made in the accounting policies that has no material effect on the financial statements for the current period but which is reasonably 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. It is important to note that disclosure of accounting policies or changes therein cannot remedy a wrong or inappropriate treatment of an item in the accounts.
AS 1 plays a crucial role in promoting transparency and comparability of financial statements. By disclosing significant accounting policies, enterprises can ensure proper understanding of their financial statements, which in turn builds investor confidence. It is the responsibility of management to choose appropriate accounting policies that best represent the true and fair view of the enterprise and to disclose them as required by AS 1. Proper disclosure will help stakeholders to make informed decisions and provide a more meaningful comparison of financial statements of different enterprises.
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