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AS 1- DISCLOSURE OF ACCOUNTING POLICIES
Accounting Policies are the specific accounting principles and the methods of applying those principles adopted by an enterprise in the preparation and presentation of financial statements. The accounting policies followed vary from organisation to organisation. It is important to disclose significant accounting policies followed to make the financial statements understandable.
Basics
Certain assumptions are used in the preparation of financial statements. They are usually not specifically stated because they are assumed to be followed. Disclosure is necessary only if they are not followed.
Accounting Assumptions
The organisation is normally viewed as a going concern, that is to say, it will be in continuing operations for the foreseeable future. It is assumed that the organisation has neither the intention, nor the necessity of shutting down or reducing the scale of operations.
Going Concern
Consistency
It is assumed that accounting policies are consistently followed from one period to another. No frequent changes are expected.
Revenues and costs are recorded when they are earned or incurred (and not as money is received or paid) in the periods to which they relate.
Accrual
Areas in which differing Accounting Policies are possible
Methods of depreciation, depletion and amortisation
Treatment of expenditure during construction
Conversion or translation of foreign currency items
Valuation of inventories
Treatment of goodwill
Valuation of investments
Treatment of retirement benefits
Recognition of profit on long-term contracts
Valuation of fixed assets
Treatment of contingent liabilities
Areas
The primary consideration in the selection of accounting policies by an organisation is that the financial statements should represent a true and fair picture of the financial position for the period.
For this purpose, the major considerations governing the selection and application of accounting policies are:
Considerations
In view of the uncertainty of future events, profits are not anticipated but recognised only when earned, though not necessarily in cash. However, provision is made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only an estimate.
Prudence
Substance over Form
The accounting treatment and presentation of transactions and events in financial statements should be governed by their substance and not merely by the legal form.
Financial statements should disclose all “material” items, i.e. items, the knowledge of which might influence the decisions of the user of the financial statements.
Materiality
To ensure proper understanding of financial statements, it is necessary that all significant accounting policies adopted in the preparation and presentation of financial statements must be disclosed. Such disclosure should form part of the financial statements.
It would be helpful to the reader of financial statements if they are all disclosed in one place instead of being scattered over several statements, schedules and notes.
Any change in an accounting policy which has a significant 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 it can be calculated.
Where such amount is not ascertainable, wholly or in part, the fact should be disclosed.
Disclosure of accounting policies or of the changes is not a remedy for any wrong or inappropriate treatment of items in the accounts.