AS-1 of the ICAI requires disclosure of all essential accounting policies in the financial statement. AS-1 defines accounting policies as the principles/methods/rules used to prepare and present financial statements.
The diverse guidelines that are set by the Institute of Chartered Accountants of India and the efforts of Government along with other regulatory bodies have limited the range of alternatives that are acceptable in recent times, especially for corporate entities. While efforts to improve this area in the coming years will likely reduce the amount of accounting treatment options however, the possibility of using alternatives accounting principles isn’t likely to disappear completely considering the various conditions faced by companies.
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. Therefore, first we need to understand the ‘nature’ of accounting polices, only then we can understand the ‘disclosure requirements’ in respect thereof:
Nature of Accounting Policies
As per AS-1 of the ICAI, the accounting policies refers to the specific accounting principles/ methods/ rules adopted or followed by an enterprise in preparation and presentation of the financial statements.
There is no single list of accounting policies which are applicable to all circumstances. The differing circumstances in which enterprises operate in a situation of diverse and complex economic activity make alternative accounting principles and methods of applying those principles acceptable.
The choice of the appropriate accounting principles and the methods of applying those principles in the specific circumstances of each enterprise calls for considerable judgement by the management of the enterprise.
Disclosure of Accounting Policies
Further, AS-1 of the ICAI states that 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, by way of notes forming part of the financial statements.
It would be helpful to the reader of financial statements if disclosure of the accounting policies is made at one place, instead of being scattered over several statements, schedules and notes.
Any change in an accounting policy which 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 which 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.
Disclosure of accounting policies or of changes therein cannot remedy a wrong or inappropriate treatment of the item in the accounts.
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