Accounting Standard 1 - Disclosure of Accounting Policies

 Accounting Standard 1 (AS 1) - Disclosure of Accounting Policies

Objective:

AS 1 aims to ensure that the significant accounting policies adopted in the preparation and presentation of financial statements are disclosed appropriately. This enhances the understandability and comparability of financial statements.

Scope:

This standard applies to all enterprises.

Key Points:

1. Fundamental Accounting Assumptions:
• Going Concern: The financial statements are prepared assuming that the enterprise will continue its operations in the foreseeable future.
• Consistency: The accounting policies are consistently applied from one period to another.
• Accrual: Revenues and costs are recognized as they are earned or incurred, not as money is received or paid.
2. Selection and Application of Accounting Policies:
• Policies should be selected based on the requirements of AS, accounting principles, and practices prevailing in India.
• If there is no specific AS, policies should ensure the financial statements provide true and fair view.
3. Disclosure of Accounting Policies:
• All significant accounting policies should be disclosed in one place as a part of the financial statements.
• The disclosure should be at the beginning of the notes to the financial statements or in a separate section preceding the notes.
• Any change in accounting policy should be disclosed, along with the impact of such change.
4. Considerations in Selection of Accounting Policies:
• Prudence: Exercising caution when making judgments under conditions of uncertainty.
• Substance Over Form: Transactions and events should be accounted for and presented in accordance with their substance and economic reality.
• Materiality: The significance of an item should be considered in relation to the financial information being reported.
5. Change in Accounting Policies:
• Changes are permitted only if required by statute, an accounting standard, or if the change will result in a more appropriate presentation of the financial statements.
• The effect of such changes should be quantified and disclosed.
6. Unusual or Extraordinary Items:
• Significant items that are extraordinary or of non-recurring nature should be disclosed separately.

Disclosure:

• The disclosure of accounting policies should be comprehensive and cover all significant policies followed.
• Any change in an accounting policy, its impact, and reasons for the change should be disclosed.

Questions from Previous CA Exams, Revision Test Papers, and Solved Case Studies:

May 2018:

Question: Explain the fundamental accounting assumptions mentioned in AS 1.

Answer: The fundamental accounting assumptions are:

1. Going Concern: This assumption presumes that the enterprise will continue its operations for the foreseeable future and has neither the intention nor the necessity of liquidation or of curtailing material operations.
2. Consistency: This assumption states that accounting policies are applied consistently from one period to another. Any changes and their impact are disclosed.
3. Accrual: Under this assumption, transactions are recorded in the books of accounts as and when they occur, rather than when the cash or cash equivalents are received or paid. This ensures that the financial statements present a more accurate picture of the financial position of the enterprise.

November 2017:

Question: What are the considerations in the selection of accounting policies according to AS 1?

Answer: The considerations in the selection of accounting policies according to AS 1 are:

1. Prudence: Policies should be selected with caution to ensure that assets and income are not overstated and liabilities and expenses are not understated.
2. Substance Over Form: Transactions and other events should be accounted for and presented according to their substance and financial reality, not merely their legal form.
3. Materiality: Information is considered material if its omission or misstatement could influence the economic decisions of users taken based on the financial statements.

May 2016:

Question: Discuss the disclosure requirements of AS 1.

Answer: AS 1 requires that all significant accounting policies adopted in the preparation and presentation of financial statements should be disclosed. The disclosure should:

1. Be at one place and normally form part of the financial statements.
2. Include all significant policies adopted.
3. Include any change in the accounting policy, the impact of the change, and reasons for the change.

Revision Test Paper (RTP) May 2019:

Question: ABC Ltd. changed its inventory valuation method from FIFO to weighted average. How should the company disclose this change as per AS 1?

Answer: According to AS 1, ABC Ltd. should disclose the change in its inventory valuation method from FIFO to weighted average in the following manner:

1. The nature of the change in accounting policy.
2. The reason for the change.
3. The financial effect of the change on the financial statements.
4. A statement that the change is in compliance with the requirements of an accounting standard or that it results in a more appropriate presentation of financial statements.

Solved Case Study:

Question: A company capitalized borrowing costs in previous years which should have been expensed as per their accounting policy. How should this be corrected and disclosed under AS 1?

Answer: The company should correct this error by:

1. Restating the financial statements for prior periods to reflect the correct treatment of borrowing costs.
2. Disclosing the nature of the error.
3. Providing a statement of the financial impact of the correction on prior periods.
4. Disclosing the adjusted figures for prior periods to present a true and fair view.

November 2015:

Question: Define and explain the term "going concern" and its implications in financial statements as per AS 1.

Answer: The term "going concern" refers to the assumption that an enterprise will continue its operations for the foreseeable future and has neither the intention nor the necessity of liquidation or ceasing operations. The implications in financial statements are:

1. Assets and liabilities are recorded on the basis that the entity will realize its assets and settle its liabilities in the normal course of business.
2. If there are significant uncertainties about the entity's ability to continue as a going concern, these should be disclosed in the financial statements.

May 2014:

Question: What is meant by 'substance over form'? How does AS 1 address this concept?

Answer: 'Substance over form' means that the financial statements and accounting treatments should reflect the economic reality of transactions rather than their legal form. AS 1 addresses this concept by requiring that transactions and events are accounted for and presented in accordance with their substance and financial reality, ensuring that the financial statements provide a true and fair view.

November 2013:

Question: How should a company disclose the adoption of a new accounting policy as mandated by a new accounting standard?

Answer: When a company adopts a new accounting policy as mandated by a new accounting standard, it should disclose:

1. The nature of the change in accounting policy.
2. The reasons for the change.
3. The financial impact of the change on the financial statements.
4. A statement confirming that the change is in compliance with the new accounting standard.